Mitigating Multiple Risks

November 28, 2011 05:40 AM

JeremyVisser 049Jeremy Visser

Sumas, Wash.
Visser milks 3,200 Jerseys and Holsteins near the Canadian border.



**Extended comments highlighted in blue



There are many risks involved in milk production. From weather and crops to feed price, diseases and conversion margins, we are in a dynamic business with many unknowns.
The single largest risk to any of our businesses is death. We have chosen to purchase life insurance to avail me or my partner the flexibility to unwind each other’s position in the business.
I hope we have planned for enough of the "what-if" situation that may arise from the loss of a business partner and family member. We owe it to the others in our business and family to hedge the loss-of-life risk that we run every single day of the year.
We have chosen to attempt to mitigate the potential negative risks to our animal health through the use of a broad spectrum of vaccines. Because our heifers are commingled with other herds and we have bought cows in the past and probably will in the future, we have a higher risk to introduce a new disease to our herd. Protecting our investment in livestock is of paramount importance to the continuation of our business.
After these two risks are addressed, then it may be deemed necessary to try to manage the risk of feed price and availability. Typically for us, this is the area of great opportunity.
We have found that carrying a large inventory of attractively priced feed, while simultaneously using futures or options to manage downside inventory risk, has been a good strategy for us. It seems that if we have a good inventory of feed, we are more willing to experiment with byproducts or new commodities because we have the base of good feed in inventory and are less afraid of inventory risk or feed availability.
I prefer to forward-contract milk to the co-op for profitable prices when they are presented, and I have the feed price risk managed already. Due to the lack of liquidity in the Class III derivative market—and even worse, the functionality of it as a hedge for milk price because of Class III basis risk to our end milk price—it is not a preferred avenue for us to use as a hedging tool.
With Class III rarely in carry mode (back months higher than front months), and feed generally a carry market, there are limited opportunities to proactively sell contracts more than two quarters out with margin over implied feed pricing.
In order to be more useful as a hedge tool, it must offer greater liquidity. Hopefully, it will have more participation from end users and speculators. Unfortunately, I fear that it will continue to not work as well as a useful hedge until there is more end-user participation. 




Visser's November Prices  
Milk (net mailbox for October) (3.5% bf, 3% prt) $18.30/cwt.
Cull cows $38/cwt.
Replacement springers $1,350/head
Alfalfa hay (milk cow) $330/ton
Corn (rolled) $308/ton
Canola $250/ton
DDG $275/ton
Soymeal $430/ton


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