Risk Management: Not Doing Anything Could Be Very Risky
According to Jim Moriarty, director of dairy at Compeer Financial, not doing anything in terms of risk management can be the decision that could have the highest risk right now.
“We are at a point of high feed cost and the overall cost of production is high, and it will take some time for those costs to come down,” he says. “A drop in milk price to even trend average could result in significant losses for a 6-to-9-month period of time.”
While futures prices are still indicating the potential for profitable margins for 2023, Moriarty says the situation is tenuous with milk prices trending down due to slowing economic growth and feed prices increasing due to lower crop yields.
University of Missouri’s livestock economist, Scott Brown, shared his concerns regarding feed costs with U.S. Farm Report’s host Tyne Morgan during a live taping at World Dairy Expo.
“When you look at where milk prices have gone, we’ve been coming off of the highs that we would have had a few months ago,” Brown said. “All of a sudden, the tightness in what we see on the grain side certainly tells me we’re going to keep the costs high. Dry weather has kept hay and alfalfa prices very high as well. So, it looks like to me like we have more issues, more reasons to be concerned, as we start into 2023.”
In Elroy, Ariz., Craig Caballero shares that risk management is a much-needed discussion and a much-needed ingredient to help manage his 5,200-cow dairy. Since 2007, Caballero has utilized risk management and says he could not imagine dairying without it, especially with all the volatility in the market and world right now.
“Risk management is a tool that we use every single day,” he says. “It’s part of what we do, and I personally could not imagine in the volatility that we live in, not participating in some kind of a plan.”
Caballero believes protecting both sides of the ledger is needed to help manage his dairy.
“I wouldn't call it risk management if you’re not handling both sides of the ledger,” Caballero says. “It’s more like speculating.”
Moriarty says this is a time to be protecting at least some of the profit potential by managing milk, feed and input costs.
“It can be difficult to pick the right price points, so we are encouraging starting by getting 20-30% of milk, feed and inputs priced and then layer in more coverage from there,” he says.
By KAREN BOHNERT
October 21, 2022