September 5, 2016

Many Ways to Manage Risk

 |  By: Anna-Lisa Laca

Volatile milk prices have been a part of dairying for generations. Yet according to many analysts, the highs and lows have become more drastic, requiring farmers to have plans in place to weather the inevitable highs and lows intact.

These plans—risk management strategies—come in several forms: Some farmers simply stash cash, others contract milk or feed, and some rely on USDA support programs. In a recent MILK Intelligence survey, 42 dairy farmers across the country shared their own approaches to risk management. More than 59% of those surveyed are enrolled in the Margin Protection Program (MPP) for dairy. The vast majority of those producers, 89%, are enrolled at the $4 “catastrophic coverage” level. At press time in early August, none of the producers surveyed had received an MPP payment in 2016.

Several farmers surveyed said they rely on other risk management strategies in addition to the MPP. “A strong balance sheet is the most effective, lowest cost risk management program,” Missouri farmer Jon Greenwood commented.

More than 14% of the producers surveyed say they still participate in USDA’s Livestock Gross Margin (LGM) support program.

Hedging milk first became an option for dairy farmers in the early 2000s and has spread across the industry ever since. Yet only 28% of the surveyed farmers said they hedge 50% of their milk or more. Most analysts recommend hedging 50% of a farm’s milk production either through a broker or directly through the producer’s co-op. “I now feel the money is better used to contract direct on the futures market,” says David Pyle, a dairy farmer from Pennsylvania. “Although we contract directly through our co-op and not with a broker, we learn and adapt as we have gotten more comfortable for what works for us.” Still, the majority of farmers surveyed said they don’t use marketing to protect milk income. More than 57% said they don’t use milk hedging.

Controlling feed costs through hedging is more common among farmer-respondents. More than 65% of the farmers surveyed said they hedge at least 25% of their feed. While some farmers complain hedging doesn’t make them any money, Michael Sumners, a dairy farmer from Tennessee, reminds producers the No. 1 goal of risk management isn’t income. “Risk management keeps you from losing money,” he says. “It is not a revenue source.”