Risk management topic at dairy workshop
By Janet Kubat Willette
Date Modified: 03/05/2013 9:18 AM
ROCHESTER, Minn. — Nearly 200 dairy producers attended two Dairy Management Workshops held last week in St. Joseph and Rochester.
The educational workshops, sponsored by Minnesota Milk, covered a variety of topics, including farm management, farm transition and dairy animal production.
Marin Bozic, an assistant professor of dairy foods marketing economics from the University of Minnesota, spoke about managing risk.
Dairy farmers can purchase futures and options on the Chicago Mercantile Exchange or purchase livestock gross margin dairy insurance, which is offered by the USDA Risk Management Agency.
Dairy farmers may also participate in the Milk Income Loss Contract program.
An extension of the Milk Income Loss Contract was included in the extension of the 2008 farm bill. The feed adjustment is more lenient through Sept. 1. The feed adjustment is less lenient for the remaining three months of the year, Bozic said.
Input prices are a challenge for dairy farmers in the wake of the drought.
Margins are compressed for dairy farmers who purchase their feed, he said. Those who grow their own feed and whose crops weren't impacted too severely by the drought are doing OK.
But volatility remains high, with Class 3 prices now around $18 per hundredweight. The average Minnesota dairy producer receives about $20 per hundredweight with premiums.
Cost of production varies from farm to farm.
Bozic recently wrote a paper on hedging early, hedging often. Dairy producers have to go about nine months out to consistently be able to lock in good margins, he said.
"That's the trick, you have to start early," he said.
The paper was published in the December 2012 issue of the Journal of Dairy Science and can be accessed through Bozic's blog, marinbozic.info/blog.
If a farmer had consistently purchased options nine months ahead from 2006 through 2012 they would have a total pay out of $1.59 per hundredweight over the time period. The cost would have been $1.13 per hundredweight, netting 46 cents per hundredweight.
The only problem is cash flowing the purchase of options.
Livestock gross margin insurance for dairy works from a cash flow perspective because it doesn't require money up front. A farmer sets a price and after the time has come the farmer receives the indemnity less premium. If there is no indemnity, a producer receives a bill for the insurance premium.
Livestock gross margin insurance, which is federally subsidized, is not available every month.
Another good source of information on futures and options is Brian Gould's webpage, future.aae.wisc.edu.
There were also informal discussions on robotic milkers, calf feeders, hiring and maintaining employees, achieving compliance with environmental regulations and utilizing conservation assistance.