While it's not always possible to lock in a margin through hedging, knowing your cost of production and monthly cash flow needs are critical in any risk management plan.
"The lesson of 2004 through 2009 is that markets can and will do the unexpected. We can get $10 milk, $8 corn and $150 crude oil prices,” says Alex Gulotta of Valley Futures Trading, Weyauwega, Wis. "Risk management cannot be ignored. You will make mistakes, but if you're
making a profit you can't go broke.”
Know your cost of production, says Steve Bodart of Lookout Ridge Consulting, Baldwin, Wis. These include feed, labor, replacements less cull revenue, depreciation and overhead less other income. For Bodart's clients, this averages to $15.25/cwt. "Cash flow break-even will be higher than cost of production because it includes loan principal payments,” he says.
Work on a budget. "Monitor actual performance and stay dynamic. Don't let short-term cash decisions interfere with long-term viability,” Bodart says. "Monthly variation in cash needs may change what you need from your marketing efforts.”
Last fall, for example, some dairies opted not to empty lagoons because of tight cash flow. This spring, they'll need more cash to get those lagoons emptied ahead of planting.
More on risk management:
Lookout Ridge Consulting
Valley Futures Trading