Milk prices are high right now, and the upward trend seems to have not reached a ceiling. For example, the Class III milk price for the October contract on the CME has passed $23.50 per hundredweight (cwt.), and the December contract passed the $22 per cwt. mark a few days ago. This scenario reminds me of 2014, one of the years with the highest milk prices I can remember.
Anybody who understands dairy farming will also understand that having high revenues may be exhilarating to dairy farmers. After all, this holds for any business, right? First and foremost, high revenues provide relief to farmers under financial stress. In this regard, now is the best opportunity to “put the house in order,” meaning that the current scenario is a chance to revise and adjust financial indicators like solvency and liquidity. High revenues also help fix (literally speaking) equipment and facilities that are hard to address during financial stress. Fixing broken equipment and facilities in the present may allow cows to express their maximum potential and sustain revenue in the future when milk prices are not as high as they are now. Also, high revenues permit investing or expanding.
By all means, I am extremely happy for the dairy farmers embracing these favorable market conditions. Every dairy farmer deserves this satisfaction. Nevertheless, the current scenario should not blind our risk management skills. Caution in decision making is still warranted. We should remember, for example, that after the high milk prices of 2014 came one of the worst and most prolonged crises ever, the crisis of 2015, which lasted until 2018 or even longer. I hope the current exhilarating outlook does not blind the risk management skills of dairy farmers.
Know your options
Regarding risk management, enrollment in the Dairy Margin Coverage (DMC) program will likely open in October (or a few months after). Therefore, now might be a good time to evaluate this risk management strategy. Seeking higher coverage in the DMC program might be a good decision if the current conditions allow a farm to afford the premium. The DMC program is an insurance tool or “a safety net” against low margins (or income over feed costs). As insurance, DMC intends to buffer a fall, so look at it as an investment.
Other strategies exist to manage risk at the dairy farm. Hedging prices in the futures market and securing revenue through the Dairy Revenue Protection (DRP) program are two alternative strategies. In contrast to the DMC program, farmers can use these two strategies year-round. However, they require deeper analysis and more advanced risk management skills.
The Southern Extension Risk Management Education (Southern ERME) Program, a subprogram of the National Institute of Food and Agriculture at USDA, has supported our Extension efforts to develop and deliver educational programs to help farmers use these risk management tools. We will release new risk management programs and tools in the following months, likely as workshops and e-learning modules. Stay tuned and alert to our upcoming news. Hopefully, these programs will prepare farmers for the worst while they hope for the best and enjoy the good times.
