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Keep the Boat Afloat

November 28, 2012
 
 

 


DanSiemersDan Siemers
 

Newton, Wisc.

Dairying with 2,700 cows, Siemers Holsteins has been operating at the same site for more than 120 years. 

 

 



**Extended comments highlighted in blue.

When I saw the title for this month’s discussion on risk management, my mind jumped to milk futures and feed prices. But the more I thought about it, there is more at risk than one year’s profit-and-loss statement.

Don’t get me wrong: profitability (and defending it) is a big deal. But there are many other things that we all do to keep the boat afloat:

1. Insurance—There are many types of insurance most of us need to mitigate risk. Crop insurance is almost a no-brainer in today’s world. We carry revenue-guaranteeing crop insurance, and it has really made a difference for us in bad years. Life insurance is vital for our team—to give us flexibility in case of an untimely death. Umbrella insurance, fire insurance, workman’s comp…you get the picture.

2. Business agreements—Heifer-raising contracts, land leases, buy-sell agreements, estate planning, credit terms—lots of things to think about both short- and long-term that can pose risk to our business.

3. Political risk—Here’s one we don’t always consider, but immigration policy, environmental regulations, access to capital, interest rates, trade policies, exchange rates, tax codes and the world economy affect us virtually every day. Who would have thought years ago that faraway places like Greece and China would mean so much here at home?

4. Biosecurity—Most of us owe much of what we have to our cows. Protecting them from the threat of disease is vital for our individual herds, as well as our nation’s ability to export products.

5. Margin security—Finally, the area most of us think about when we talk about risk management. I don’t think there is any one answer that works for everyone. I personally have been all over the board on this, from Class III milk futures (how many of us at some point have uttered, "I’m never doing that again?") to options, using advisers or our own plans.

Do we lock in feed when we lock in milk? It all really boils down to what each of us needs to do to sleep well at night and our individual equity situation. When things are tight, it is sure nice to know there is a profit locked in (until we realize how much we left on the table), or when we are still stinging from being in the wrong position, deciding never to do futures again only to see ruinous prices and lost equity.

On our dairy, we currently lock in a percentage of our milk with our co-op when it works, and we do the same on purchased feed. I like using fence positions with options when they make sense. I feel that being an effective marketer takes lots of homework and the ability to stick with a good plan, yet be flexible enough to see when that plan needs to be altered (if that makes any sense).

There are really only a couple things I do know on this subject for certain. Being right feels great. And nobody (especially whoever writes the checks), likes margin calls.

It has been a pleasure sharing my thoughts with you this past year. Happy holidays!

 

Siemers' Most Recent Prices  
Milk (3.57% bf, 3.16% prt) $21.56/cwt.
Cull cows $55 to $77/cwt.
Springing heifers $1,400 to $1,900/head
Alfalfa hay (milk cow) $230/ton
Cottonseed $380/ton
Ground corn $304/ton
Soybean meal 48% $540/ton
 

 

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