Volatility road sign.
October 27, 2020

Have A Plan. Execute The Plan.

 |  By: Jim Dickrell

The coming year in the dairy business is not likely to be as tumultuous as the past 6 months, but rising milk production and uncertain consumer demand means there is potentially plenty of market risk in 2021.

Those producers who had a sound business plan last spring were able to react much more quickly to the changing market environment than those farmers who simply looked at their check books at the end of each month and wondered what to do next, says Tim Swenson, senior dairy business consultant with Compeer Financial based in Baldwin, Wis.

“Knowing your cash flow and the production capabilities of your farm allows you to project ahead,” he says. “The biggest thing is that we need to heed the lessons we learned in the last few months.”

You need understand what the various aspects of your business’ cost of production is—such as growing feed, raising heifers and making milk. You also need to understand what your working capital is, what levels of risk you can withstand and then put in place the risk management tools that are right for your operation.

He notes that there are new risk management options available such as Dairy Revenue Protection (DRP) insurance that can be helpful. The industry is still learning how to use that tool, but it does provide risk management opportunities for both large and small producers.

Older tools, such as Livestock Gross Margin-Dairy (LGM-Dairy) insurance, might also work for some operations since it allows you to more finetune feed cost risk exposure. With fewer producers using LGM-Dairy, funding issues are no longer a problem. Plus, LGM-Dairy can offer more flexibility and more precisely fit a farm’s feed cost structure. For some, the program can offer the most coverage for the best value, Swenson says.

(Others are advocating dairy farmers sign up for 2021 Dairy Margin Coverage insurance at their local Farm Service Agency office, since indemnities are likely the first half of 2021 at coverage levels of $9.50/cwt. Sign-up for 2021 DMC coverage ends Dec. 11.)

The key is to work with consultants who are familiar with these tools to determine which might work best for your operation.

“It’s important not to just look at the end product, but to look at the various pieces of your business, and the end product will then come into place,” he says. “It’s sort of a like a puzzle. You start with the first piece, and fill in the holes as you go.”

Swenson made his comments in a 13-minute Compeer Financial “What’s Next” podcast that can be heard here.