Know Your Market
Take Matters Into Your Own Hands
Jul 16, 2013
Don’t wait for the government to protect your business. Start your own risk management plan.
By Katie Krupa, Rice Dairy
As we all know there has been a lot of discussion in recent years about the government’s role in price protection for dairy producers. Recently most of the discussion has boiled down to the current discussion about margin protection and supply management, and by now many producers have a crick in their neck from watching this discussion go back and forth like a Ping-Pong ball.
I’ve never been one to idly sit as others decide my fate, and from what I know of dairy farmers, they aren’t very good at it either. If you are worried about the future of the milk price, the feed prices, and the milk-feed margin, don’t wait for the government to step in and try to protect your business. Take matters into your own hands and protect your business yourself.
Moving further down the road and assuming the margin protection plan is implemented, many producers are concerned that the potential coverage level will not be high enough to earn a sufficient income. While the market doesn’t always offer an opportunity to hedge a profit, you should be prepared to take advantage of the times it does. Here are some outlets to help you get your own risk management plan started.
Work With a Broker.
As a broker I work with herd sizes from 60 – 10,000 cows, and outside of the herds with less than 50 cows, brokers can provide risk management strategies and advice for what is typically referred to as a ‘smaller’ farm. When working with a broker, your risk management opportunities vary, and are flexible when it comes to adjusting the strategy or exiting a strategy. From fixing your price to simply protecting against a drastic price decline, there are numerous options from which a producer can choose. Because of contract sizes for corn and soybean meal it does get harder for herds with less than 100 cows to hedge feed on the exchange. But still opportunities may exist off the exchange and your broker may be able to guide you to the right sources.
When working with a broker you have many strategies to utilize and can hedge your milk and your feed on the exchange. A broker should be able to guide you through the tedious analysis and tough decisions that go along with risk management implementation. I find many producers enjoy getting the broker’s opinions and advice. It often helps them make the tough decisions that are necessary for the financial security of the business.
Work With Your Cooperative or Milk Plant.
Typically cooperatives or milk plants will have fewer options than working with a broker, but usually the contract size is more flexible. Additionally, the contracts require no cash up front; rather any monetary difference from the contract will be applied directly to the producers milk check for the month of the contract. That makes the contract very easy for producers to implement.
Typically cooperatives and milk plants do not offer advice, but you have the option to work with a broker on a consulting basis for the advice and still implement your hedges through your cooperative. When creating and implementing a risk management strategy you should be reviewing and utilizing all your resources available.
Work With Your Lender.
While your lender does not offer a traditional risk management strategy, you should always be working with your lender so that they can understand your breakeven and your full financial situation. If milk prices should decline, your lender will be aware of the financial strength of your business and be better suited to help you manage through the low milk price cycle. Also your lender can establish a hedge line of credit which can be used to fund your brokerage margin requirements. Currently many lenders are requiring a marketing plan and a hedge line of credit that can be used to help implement the required marketing plan.
Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. If you are interested in learning more, Katie offers monthly webinars on the basics of risk management. You can reach Katie at firstname.lastname@example.org.Visit www.ricedairy.com.