January 4, 2019

What Should Be a Resolution for the New Year?

 |  By: Robin Schmahl

Another year is behind us and there is always hope for the future. Of course the turning of the calendar does not suddenly change things, but a new year is always a time of thankfulness that we have made it another year and it gives us something to look forward to. Last year may have had many times when thought turned to “could have, should have, would have” or “I sure am glad I did”. We all have those thoughts when it comes to hind sight. If we could just turn the clock back, we would all be better off or would we? I think if we could do that the world would be in chaos so it is better that time always moves forward. 

The past year has been very difficult for farmers. Cash prices have not been very profitable, if at all. May dairy farmers have exited the business of milking cows with some out of farming altogether. Those who have sold the cows intending to cash crop grain may find that difficult as well due to prices below cost of production. It may seem as if farming is a dying industry. However, we all know that is not the case as farmers are very important for food production. We have been through these cycles before. Someone will always farm the land and milk the cows or raise beef and hogs and chickens, etc.  

This past few years have again brought forth the importance of hedging for the farming operation. I know some reading this article will feel that that is what I always will say because of my business as a commodity broker. I have been around for numerous of these prices cycles and have experienced the anxiety during periods of low prices and the exhilaration of periods of high prices. I have seen farms go out of business and the pain that goes along with that. I have seen expansions of dairy farms and new facilities as farmers look to the future. But riding the prices cycles and taking the lows in order to be able to capture the highs is no longer an option. 

There has been much blame put on large dairy farms due to the idea that they are responsible for pushing the smaller farms out of business. There certainly are some advantages for larger farms from volume of milk produced and volume of feed purchased as well as possible benefits to goods and services provided. However, smaller farms many times do not have quite the debit load or overhead that larger farms have. As far as using the markets to protect milk prices, all are on a level playing field. Offer prices on the futures market is the same for all. Larger dairies do not have the ability to hedge a better price on the CME than smaller dairies. 

Hedging your milk prices is just as effective for the small farm as it is for the large farm. Milk prices can be protected for farms that produce milk from 45-50 cows on up to thousands of cows using the futures and options market. A milk price of $16.00 is the same for a 50 cow dairy as well as a 2,000 cow dairy. The cost of production might vary and is something that is important to know in order to build a solid marketing plan. Each dairy farm may need to protect a different price level to achieve profitability, but once those are known strategies can be used to protect those levels. 

Farms that have followed a consistent marketing plan using the tools available for price protection are in a better financial position as those who have left themselves open to take what the market provided each month during the past three years. Being consistent at marketing does not mean that hedging is being done each month on 100 percent of production, but it does mean that opportunities are identified and taken, if and when, they are available. 

The Dairy Revenue Protection insurance product now provides better opportunity for smaller farms as well due to the ability to protect prices on smaller amounts of milk production and do it multiple times on different price levels if desired. It is a welcomed addition to the marketing tools available to dairy farmers. 

As we look forward to a new year, we must not only be resolved to do a good job with our business of running a dairy operation, but we much also look to embracing opportunities when they arise. Protecting milk prices should be as high of a priority as any other aspect of the dairy.