November 9, 2018

Keep Dairy Risk Management Options Open Analysts Warn

 |  By: Anna-Lisa Laca

As 2019 rolls around, analysts are calling for milk prices to continue their slow climb higher. However, the key to success is being flexible in your marketing plan next year, analysts warn. 

“The reality of our market right now is that everyone's hoping for better prices, but I think lower prices are still a reality that we could face,” Mike North explained to U.S. Farm Report host Tyne Morgan at the 2018 MILK Business Conference. “So, we have this new dairy revenue protection (Dairy-RP) tool, our firm is offering it and using it as it should be, but it's not the silver bullet and it's not something to use in all applications, but it gives us optionality.”

According to Brain Rice of Rice Dairy, understanding how the Dairy-RP works is the No. 1 thing producers should do right now. 

“Dairy farmers got an amazing new tool in their toolbox, which is a dairy revenue protection insurance program through the USDA,” he said. “There are no volume restrictions on it and it’s extremely flexible to match your risk.”

Scott Brown, an economist at the University of Missouri, encourages producers to take a hard look at input costs too. 

“Although we may think we're pretty low in terms of where feed costs are [there’s] nothing like some dry weather in South America, or here, next summer to get us in a situation where I think crop prices or feed costs could go higher,” he said. “Protecting against that [possibility] might be a very important part of that risk management plan in 2019.”

In addition, Brown said changes to the Margin Protection Program (MPP) in the pending farm bill could also pay off well for producers. 

“If we get a farm bill done, some of the things that I see in the changes to the MPP program (and it won't be called MPP), [make it] worth a second look,” he said. “The first 5 million pounds potentially gets covered at much cheaper premiums and higher levels of coverage. Just don't [avoid] sign[ing] up because of how it worked in 2014. There are some significant differences between the programs that I see being talked about in the next farm bill in the MPP program that was passed in 2014.”

Bottom line, be prepared for markets to move in either direction.

“The reality of our world is that we live in volatile times, things change, and almost overnight, and so, if we're not prepared for different things to happen, then what we're already committed to, we could really be upset with some of our decisions,” he says. “So, create flexibility in a plan that includes futures, options, and dairy revenue protection.”