Conversations involving risk management and forward contracting often end up resulting in a discussion of “one time.”
“One time I missed out on $25 milk.”
“One time I contracted milk at the lowest point and lost a lot of money.”
Undoubtedly, participation in risk management will cause a farm to miss out on some of the highest points of the market. That’s part of the nature of the beast, but it’s a consequence that Cornell dairy economist Chris Wolf believes dairy producers should look at a different way.
“I think a lot of people tend to focus on regret because of things they did and do not notice the regrets they maybe should have because of things they didn’t do,” he said during the November 4 Hoard’s Dairyman DairyLivestream. “To me, that’s one of the real keys to this whole set of risk management decisions is having a well-thought-out plan that came about without the emotion involved in it, and then being consistent about how you apply it.”
That consistency has been a staple of dairyman Bill Wavrin’s economic plan since he started out nearly 30 years ago.
“I like analogies, and people that are as old as me – maybe who grew up in the Midwest – will recognize the difference between Harmon Killebrew and Rod Carew,” the Washington dairy farmer elaborated about two of baseball’s great players. “One guy is about home runs and strike outs, and one guy gets on base every day. Both are Hall of Famers, so if you’re built for that sort of tyranny, of working all year for nothing and then cleaning up in a different year, that’s fine. I like to get on base every time and this is a way to do it.”
He offered another example to help explain why he adamantly participates in risk management. Farms are often willing to buy insurance on crops either in the field with concern of weather or even stored forages. They will insure buildings — yes, sometimes this is required – but when it comes to the milk they sell, purchasing insurance feels like pouring money down the drain. He shared that there are many times he has purchased insurance in the form of risk management never to need that insurance.
“I want to win.
“I want to get on base, and we have found it possible for every year and every quarter over the last 20 years to be profitable, and as an example of how comfortable we are, I couldn’t tell you over those 20 years if we got paid more or less than our neighbors,” he explained. “What I can tell you, and all that matters to me, is that we were profitable in every quarter because risk management tools offered us an opportunity to do that.”
Even when margins are tight
According to Wavrin, some risk management decisions are easier than others. His Sunny Dene Ranch has a Plan A and Plan B coverage program. In detailing both, the farmer, who also is a veterinarian, explained that Plan A is triggered any time that the market exceeds a margin that secures a specific amount of profit for the farm.
“When we can get into double-digit returns on invested capital, that milk is sold,” he said. “If we get into more moderate profit or even potential losses but are still concerned, we use Plan B coverage.”
That is a direction Wavrin and his team have turned recently as they look to 2021 with concern over expanding milk supply, political uncertainty, and the unknown surrounding COVID-19. Engaging Plan B causes the farm to secure a bottom on their markets, locking in Dairy Revenue Protection (Dairy-RP) on their Class III and Class IV sales through the end of 2021. The way that program works, they are able to leave the top of the market open to capture higher prices if they occur.
“We chose to add to our current position in Quarter 3 and Quarter 4 of 2021 using Dairy-RP with the expectation that we can adjust those projection levels using derivatives, futures, and options as time goes by and better opportunities are presented,” he explained of their current risk management plan. “Now we have ensured it can’t get worse than this, and we have ample opportunity to access opportunities to get better than this.”
An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast “Can we sell all this milk?” will be on Wednesday, November 18. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.