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http://web.missouri.edu/~browndo Ways To Reduce Risk For Dairy Farmers Dr. Scott Brown Agricultural Markets and Policy Division of Applied Social Sciences [email protected]
http://web.missouri.edu/~browndo
Ways To Reduce Risk For Dairy
Farmers Dr. Scott Brown
Agricultural Markets and Policy
Division of Applied Social Sciences
There Are Many Causes of Volatility
Input price fluctuations have been difficult for dairy
producers
Energy costs
Feed costs
Milk prices have become more volatile
Government policy
World prices
No volatility reduction in the near term
Producers MUST incorporate a risk reduction plan
Monthly Class III Milk Prices
0
5
10
15
20
25
1970 1975 1980 1985 1990 1995 2000 2005 2010
Dolla
rs p
er
hun
dre
dw
eig
ht
Support MW/Class III
Monthly U.S. All Milk Prices
10
12
14
16
18
20
22
24
1997 1999 2001 2003 2005 2007 2009 2011
$ p
er
cwt
Monthly U.S. Corn Prices
1
2
3
4
5
6
7
8
2001 2003 2005 2007 2009 2011
$ p
er
bus
hel
What’s The Biggest Uncertainty We
Face Today?
Exchange Rate
U.S. Economy Farm Bill
Dairy Demand
What’s The Biggest Uncertainty We
Face Today? WEATHER!
No Single Plan Exists For Everyone
Doing nothing to reduce risk is a strategy
It may not the best one
Each operation must consider which risk is most
problematic for their operation
Have you done a risk profile on your operation?
Let Me Be An Economist…..
I would discuss the industry is very price inelastic
and likely becoming even more inelastic
Let Me Be An Economist…..
Supply side of the industry becoming more
concentrated
650,000 operations – 1970
90,000 operations – 2000s
Let Me Be An Economist…..
There are few substitute products for dairy
Fluid milk is often thought of as one of the most
inelastic agricultural products
Efficiently and Effectively Manage The
Factors Under Your Control
Quantity of milk produced for the least cost mix of inputs
Being one of the most efficient producers is the best risk
management tool in your toolbox
Be prepared to adjust as relative input prices change
A “blinders on” mentality can sometimes be difficult to
change but needed in today’s environment
2001 USDA Estimated Dairy
Distribution
Idaho Dairy: Expense and Revenue
Distributions
Frazer, LLP
Futures Markets Are One Option
Do not think you can always correctly guess market tops
There are many different ways to use futures markets
Direct exchange transactions
Use of LGM-Dairy (limited funds)
Nearly all cooperatives offer market pricing options
You must pick price targets and stick to your plan
Degree of acceptable risk
Combination of input and output targets
Corn Futures – Monthly Continuation
Soybean Meal Futures – Monthly
Continuation
Class III Milk Futures – Monthly
Continuation
Issues Using Futures Markets
Basis risk – Your milk price moves different than
Class III prices
Margin calls and appropriate lines of credit
Must realize this is a risk reduction strategy and not
always will your position result in dollars in your
There are many examples of good and bad
hedging opportunities!
Livestock Gross Margin – Dairy Example,
August 2008
USDA-Provided Forward Contracting
Outcomes
Look To Your Cooperative For These
Types of Tools
Should You Add Other Agricultural
Enterprises?
Many dairies that have a cropping enterprise have
found better financial footing
A big corn crop could change that!
However, that will be good for feed costs
Remember, what worked yesterday may not work
today
Invest outside of agriculture?
2008 Milk Feed Costs
1
3
5
7
9
11
13
15
17
California Missouri
$ p
er
cwt
Purchased Home Grown
2010 Milk Feed Costs
1
3
5
7
9
11
California Missouri
$ p
er
cwt
Purchased Home Grown
There Is Not A Clear Answer To
Enterprise Mix
Make sure both enterprises are operated efficiently
It may provide risk reduction to be involved in the
production of your major input
Is it the best time to buy farmland at record high
prices?
Government Policy Can Reduce Risk
Current policy – Milk Income Loss Contract Program
Production eligible capped – 2.985 million pounds
45% of the price difference covered
Dairy Security Act
More like crop insurance
Producers have buy-up options
More farm bill debate in 2013
Alternative Direct Payment Programs
0.00
0.50
1.00
1.50
2.00
2.50
9.00 9.60 10.20 10.80 11.40 12.00 12.60 13.20
Do
llars
pe
r cw
t
Class III Price
TPDP MILX 130 cows MILX 260 cows
TPDP - Pay 100% of the difference when the class III price falls below $11
MILX – Pre 2008 Farm Bill, 34%, no feed cost adjuster, 2.4 million pound cap
H.R. 6083, Historical Dairy Margin
0
2
4
6
8
10
12
14
16
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Dollars
per
cwt
Note: No adjustment to the historical margin is made to account
for program operation
H.R. 6083 Dairy Provisions
Producer participation is voluntary
Dairy Producer Margin Protection Program (DPMPP)
Base Program – 80% historical base, margin < $4 triggers payments
Supplemental Program – Producer can buy-up margin coverage, up to $8 coverage, lower premiums for the first 4 million pounds, supplemental base adjusts, 25 to 90% annual coverage choice
Dairy Market Stabilization Program (DMSP)
Producer milk marketings capped when margins < $6
U.S. to world price triggers kick out the program
Higher Supplemental Coverage Levels Have
Increased Producer Cost Through Higher Premiums
Supplemental Premium Rate - House
Coverage Level First 4 million lbs Above 4 million lbs
$4.50 $0.010 $0.015
$5.00 $0.025 $0.036
$5.50 $0.040 $0.081
$6.00 $0.065 $0.155
$6.50 $0.090 $0.230
$7.00 $0.434 $0.434
$7.50 $0.590 $0.590
$8.00 $0.922 $0.922
$0.332
$0.075
$0.332
$0.025
Probability of DPMPP Payments
18%
61%
7%
30%
0%
10%
20%
30%
40%
50%
60%
70%
Base Program $6.50 Supplemental Program
Pro
bab
ility
of
Re
ceiv
ing
a P
aym
en
t 2012
2017
Baseline Versus H.R. 6083 Margin
Comparison
Summary
Many tools available for risk reduction today
I would advise an approach that attempts to reduce margin
volatility
The “right” tool to use depends on your level of risk
tolerance
DO NOT look back! Evaluation of strategy is fine, loss of
market highs is not
Know your operation’s margin and critical management
levers
Insurance is never free but can provide financial assurance
