Consistency Is Key

November 27, 2011 07:35 PM
 

CarlsonsCarlson Dairy, LLP

(Curtney & Louise Carlson, Chad & Kindra Carlson, Carl & Kellie Carlson)

Willmar, Minn.
The Carlsons milk 950 cows on a 120-year-old family farm.

 


**Extended comments highlighted in blue.

The dairy industry is no stranger to the boom-bust cycle. What’s different now, though, is that the time between peaks and valleys continues to narrow.
 
With our farm’s expansion over the last 10 years, this means there’s an even greater need for us to manage risk. We can’t afford to take on the full brunt of a couple of bust cycles. That’s why we’ve been using varying degrees of risk management tools since 2000.
 
For the first few years after we expanded in 2000, we did some forward contracting directly through our milk processor on about 25% to 50% of our milk. During that time, we also locked in some feed prices with our feed suppliers when it seemed to make sense. Overall, we didn’t do anything consistently and had mixed results.
 
A few years later, we took a more pragmatic approach and began working with a paid milk marketing consultant. Again, the focus was mainly on forward contracting, but this time hedging around 50% to 75% of our milk for a longer period of time. We won some, but lost more. Over time, it became evident that our views and the consultant’s views were not in sync. It also became clear that we wanted to explore some additional risk management tools for milk.
 
Based on what turned out to be some very good advice, in mid-2008 we began using put options to lock in a floor price but still have the full upside for our milk. In addition, we started using "fence" trades (buying a put and selling a call) to set a floor and a cap for our milk each month. We typically shot for a $2 to $3 price range (for example, a $16 base and $19 cap) at a net cost of about 25¢ to 30¢ per cwt. This was cheaper than buying a stand-alone put, because we gave up some, but not all, of the upside price potential. When the milk market collapsed in 2009, this turned out to be a great safety net.
 
We now contract with a dairy marketing consultant who specializes in both milk and feed marketing to help us manage our pricing risk. We work with the consultant to put together a market plan at the beginning of each year to serve as a base for both feed and milk marketing decisions.
 
Our goal is to make disciplined and consistent decisions. This continues to be a struggle for us, but with outside support from our consultant, we at least have the ability to evaluate different options.
 
Our 2011 goal is to stay 50% or more covered with feed and milk. We’re using mainly forward contracting and fence trading with milk. And we’re working to tie up pricing for dry corn, beet pulp/shreds, canola meal and dry hay. At this time, we are out to mid-2012.
 
In a nutshell, some things we’ve learned over the years:
  • Consistency is key.
  • Lock in both sides of the equation. (If you have milk priced, you need to have feed priced.)
  • Be proactive, not reactive. (Base decisions on what the market is giving you, not emotion.)
  • A good marketing consultant and plan are important.
  • All of this is often easier said than done.

 



Carlsons' November Prices  
Milk (estimated October) (3.7% bf, 3.1% prt) $20.05/cwt.
Cull cows $63/cwt.
Springing heifers $1,750/head
Alfalfa hay (milk cow) $175/ton
(160 RFV)
Dry beet pulp $150/ton
Ground dry corn $240/ton
Canola $196/ton

 

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