Ted Christoph milks 480 cows with his dad in Fallon, Nev. A young producer, he is active in helping guide their farm’s risk management strategy.
In 2016, part of that strategy will include the USDA’s Margin Protection Program (MPP)—a decision he made using a new MPP Advanced Decision Tool.
“After using the advanced decision tool, we decided that the $4 minimum coverage would be the best fit for us in 2016,” Christoph says. “The futures look like they are improving going into next year, and it’s expected to be a large corn crop which will keep feed costs down.”
The advanced decision tool takes several points of a producers operation into consideration to provide a recommended coverage level. It looks at the number of cows a farmer is milking, how much milk they are making per cow, other expenses, risk management tools employed and financial information, such as working capital per cow and debt-to-asset ratio.
Christoph, a second generation farmer, says that he and his dad are financially positioned to ride out low prices. So unless there is a complete meltdown of the U.S. economy, purchasing MPP coverage will only reduce their margin. The $4 coverage level only costs the annual $100 administration fee.
“We have no debt,” he says. “Not even operational debt. So we tend to stash away money in high prices to help smooth out low prices. For the next year, I don’t predict the national margin to drop below $8, so paying the premium each month will only lower the amount of money I’m able to put in savings.”
Jason Karszes of Cornell University’s PRO-DAIRY Program says many farmers in New York are taking a similar approach.
“A lot of farmers I have talked to say that they would rather capitalize on the highs and utilize the profits to pay down debt and/or build working capital. [They’d rather] stash cash for the lows or pay down debts than to be continually participating in a risk management program that potentially reduces profits,” he says.
However, there are some farmers who have opted for higher levels of coverage as part of their risk management plan. They don’t feel they are in a position to ride out lows in the milk price, Karszes says.
Each farm has different needs. And that is exactly what the decision tool was designed for, says Marin Bozic, a dairy economist with the University of Minnesota.
“The tool is a stress test,” Bozic says. “It allows producers to see how their own businesses would benefit from MPP if there were a crash in the market.”
He says farmers should consult with their accountants and business advisors when looking at how much MPP coverage to purchase. Karszes agrees. “This is not a quick, five-minute decision to make,” he explains.
“Take time to consider all of the things that can be done to manage risk and determine if MPP is the right tool to add to your operation’s strategy.”