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What is the Best Risk Management Approach in 2023?

One glance at the milk futures and it’s hard to be optimistic, especially coming off a record milk market year. Simply stated, the second half of the year presents opportunities that come with bittersweet reviews. On one hand, elevated costs of production cause most dairy producers to view the $19 to $20 market as too low to allow for broad profitability. On the other hand, Mike North, president of Ever.Ag says history suggests that these prices are significant opportunities.

“Since milk prices are born out of prices collected on sales beyond the farmgate, the pressure experienced by today's consumer should be considered with a cautionary tone when considering current prices,” North says. “In fairness to both sides of this story, dairy producers should consider strategies that present flexibility.”

In Elroy, Ariz., dairy producer 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.

“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.”

According to North, Dairy Revenue Protection (DRP) premiums have become more affordable relative to similar offerings last year, making it a much more affordable baseline.

“For Q4 specifically, one must also keep in mind that feed costs will differ from what is currently baked into most budgets,” he says. “A new crop that currently carries a softer market tone may allow for margins to widen or move back closer to break-even status. That said, producers who wish to get more aggressive than what is offered with DRP should consider futures and options strategies that pair with current cash flows or available hedge lines of credit.”

Independent agriculture business financial consultant Gary Sipiorski says that approximately only 10% of dairy producers purchase milk futures, but believes that risk management discussions should be happening on every single farm.

“The top 30% of dairy producers in the U.S. earn $1.25/cwt. more compared to the average producer,” he states.

The first thing that producers should be doing, according to Sipiorski, is taking a hard look at their cost of production to know what the best risk management approach to take moving forward is.

March 9, 2023


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