As milk prices recover this year, virtually every dairy producer I visit with is exhaling a sigh of relief.
Everyone, from producers to vets to equipment dealers, is hoping the worst is over—never to be repeated.
Well, maybe. Perhaps we will never again see a recession spread across the globe as rapidly as the H1N1 pandemic. Perhaps feed prices won't rocket to historic levels. Perhaps both won't occur simultaneously—as they did last year.
But don't bet the farm on it. "Commodity prices will trend higher, but will likely cycle more violently with the global recovery,” says Michael Swanson, an ag economist with Wells Fargo. "All commodities will have greater price volatility moving forward.”
The reason: The global economy is linked more tightly than ever. An oil shock in the Mideast causes ethanol prices to spike, which causes corn prices to explode. A missed payment by Dubai sends financial markets into a tizzy.
As I see it, producers have three options:
1. When the next dairy recession hits, get out sooner rather than later. The hard lesson of 2009 was that cow values held up relatively well the first 30 to 60 days of the crisis, but after that, the only hope of cashing out at even 75¢ on the dollar was the Cooperatives Working Together program.
2. Ensure you have $1,000 to $1,500 per cow in liquidity and/or stored feed to get you through. Lenders in the Midwest report that $100/cow/month losses were common last year; in the West, $150/cow/month. But rebuilding liquidity to the desired levels won't happen overnight. Normally, it would take three to five years.
3. The best option, then, is to get serious about risk management—on both inputs and milk sales. (See "Manage Your Price Risk,” page 6.) This is not cost-free, of course. Lenders say you'll need to budget $200/cow if you're at a medium level of risk management and want to protect 50% of your milk production. Ratchet that up to $300/cow if you're highly leveraged and need greater risk protection.
That sounds like a lot of money. But it's only a couple of months of losses when times get ugly. You decide.
Commodity Price Volatility Likely to Increase
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Manage Your Price Risk