Yes, risk management still deserves a look
February 9, 2022
Risk management is a broad term that can have many, often complicated, definitions when considering a dairy’s choices on its financial security. A more concise approach was offered by the Center for Dairy Excellence’s Zach Myers during the Pennsylvania Dairy Summit.
“Tools that help you cover your cost of production” was the risk education manager’s definition, and he stressed that this is smart to keep in mind even when milk prices are projected to be higher like they are in 2022. There was a similar optimism at the beginning of 2020, he reminded, and although that situation is probably not going to repeat itself, it’s worth keeping caution in mind. He encouraged all producers to take advantage of Dairy Margin Coverage (DMC), particularly with the supplemental coverage now available to farmers who have expanded production.
Katie Burgess framed risk management in the time of higher milk prices as, “How do you make sure these good prices stick around?” As a commodity risk analyst with Blimling and Associates, she helps run forward contracting for about 10 co-ops and sees firsthand how the predictions of the futures market don’t always pan out.
In addition to DMC, Burgess noted that Dairy Revenue Protection (DRP) should be considered to set a price floor and protect 95% of it. “To compare that to your car insurance, for example, that 5% is your deductible,” she described. Just like that car insurance, you don’t want it to have to pay out, but you know you’re protected if something happens.
She also shared milk price data showing that over recent years, using DRP would’ve resulted in similar average prices but ones that weren’t quite as low. It’s a way of muting the rollercoaster of prices. “You enjoy the peaks and avoid the valleys,” Burgess stated.
Pennsylvania dairy farmer Jared Kurtz described later in the conference that DMC for their 320-cow farm was a no-brainer. He also keeps an eye on historic price data to determine when he wants to engage in the market and utilize DRP. In the last eight years since returning to the farm after college, he said he has learned to “be willing to play ball with risk management, but don’t swing for the fences.”
Sign-ups for 2022 DMC were just extended until March 25, so you can still take advantage of this proactive option to control your price risk. Myers emphasized that risk management is not a reactive tool. “If you wait for milk price to go down, you’ve lost your chance,” he said.