Know Your Market
Risk Management in the Aftermath of a Computer Crash
Nov 20, 2011
Following the debacle of Oct. 28, USDA’s RMA allocated additional subsidy money, so that $7 million was available for the Livestock Gross Margin for Dairy program. This time, $7 million lasted for 51 minutes.
By Marvin Carlson, Dairy Gross Margin, LLC
In the spirit of the upcoming holiday season, here is the Past, Present and Future of Livestock Gross Margin (LGM) for Dairy:
Past: Oct. 28 – The Risk Management Agency (RMA) computer system crashes, resulting in a hodgepodge of frustration, anger and sleeplessness. A quote from Farmshine by Sherry Bunting: “One observer described it like ’Black Friday’ with a line of 200 shoppers waiting for the doors to open at 5 a.m. to buy 20 television sets at Sears, only to learn they were selling since 4:30 a.m.”
Present: Nov. 18 – There was again great demand for LGM-Dairy insurance. Following the debacle of Oct. 28, the RMA allocated additional subsidy money, so that $7 million was available. This time, $7 million lasted for 51 minutes.
Dairy producers have become savvy regarding the value of risk management and have allocated funds to a budget line item to help them accomplish margin management. The increasing popularity and value of the LGM-Dairy product as part of a risk management plan means demand outstrips supply.
Future: Nov. 25 - Go shopping early! Participate in the “real” Black Friday! Help your local retail businesses get in the black for the first time this year and buy milk products for gifts!
The Long-Term Future and status of dairy programs in 2012. You are well aware dairy government program funding has become political. The “Super Committee” budget recommendations will soon be known. Who knows what they will suggest? It also looks like future subsidy funding for LGM products is also political. Contact your Congress-person to make your thoughts known. Do not underestimate the power of a phone call, email or letter.
Hopefully, Congress is receptive to suggestions for reasonable funding allocations for this product. Maybe RMA, with a little nudging from Congress, will remove the pilot project status and make LGM a permanent crop insurance product. A statement from the Nov. 11 Farm News by Bruce Babcock, Iowa State University agricultural economist, gives insight to the current political landscape. “The only rationale for a new federal . . . program . . . is that it seems politically easier to defend than direct payments,” Babcock says.
Now that we know we can’t count on the government to save us from the volatility of this global economy by offering LGM-Dairy every month, we must be diligent in learning and doing our best to maintain our profitability through margin management. Remember, that is what LGM-Dairy offered your operation—a chance to lock in a reasonable margin between your feed costs and your milk revenue.
You’ve heard the strategy, “Sell milk in the top third and buy feed inputs in the bottom third?” If only it was that simple! If only we knew when the market was hitting those thirds! In the absence of the LGM product, you must concentrate on learning about other risk management tools—options, forward contracts, etc., to achieve your goals for margin management.