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Risk management helps avoid bad outcomes

Maggie Gillies, Kansas Dairy Farmer

April 22, 2021

The term risk management has become an integral part of the dairy lexicon in the last decade, and its merits have never been more obvious than during the wild swings caused by the COVID-19 pandemic.

During the April 21 Hoard’s Dairyman DairyLivestream, the University of Wisconsin’s Mark Stephenson described risk management not as a way to make money but rather as an opportunity to avoid having a really bad outcome.

“What I want to always tell a group or audience is that risk management is going to cost you something,” he told the online audience. “Risk management is one of those things that you ought to be looking at on a pretty continuous basis.”

Specifically, Stephenson looks at risk management through a couple of eyeglass lenses. The first is Dairy Margin Coverage. He shared that every dairy should have signed up for that at the Tier 1 level. From there, he said farms should evaluate their options with other risk management including Dairy Revenue Protection (Dairy-RP).

“Dairy-RP is a pretty good program I think, and it offers a lot of flexibility, but remember it’s only for at least one quarter out or beyond,” Stephenson explained. “Most of the volatility we see in prices is in months that are closer than that – in the one to four months out range.”

Short-term risk requires short-term options For this short-term risk, Stephenson suggested considering protection in futures markets in the form of cash forward contracts, put options, and the like.

“We had $20 Class III milk here a week ago in futures markets,” he reminded listeners.

“Not to say you should run out there and put all your milk under a contract for that, but maybe you wanted to tuck a little floor under some of your milk production.”

Fellow webcast panelist John Umhoefer, who is the executive director of the Wisconsin Cheese Makers Association, built on Stephenson’s comments.

“Risk management should flow through the whole process back to the farm,” he said of the dairy processors he works with. “Through the whole system our manufacturers, too, need to look at risk management for the ingredients they buy. There are also people managing risk on the buyers’ side — buying the cheese at the end of the line.”

No matter the stage of the milk production and processing supply chain, protection is of ever-growing importance. This risk management is not meant to make a person money but rather to protect them from major disasters.



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