November 14, 2014 — Dairy farmers face some tough decisions planning their risk management strategy. Block cheese hit the lowest level since December 16, 2013 on Thursday and the falling dairy product prices mean lower milk prices ahead. The December 5 deadline is approaching for signing up for the new Margin Protection Program (MPP). They also have the option of the Livestock Gross Margin program (LGM), and there’s the trading of dairy options and futures at the CME.
I ask FC Stone dairy broker, Dave Kurzawski, in Friday’s DairyLine, do dairy producers need anything beyond the Margin Protection plan. Kurzawski admitted that his “crystal ball is not that clear,” but warned if producers go with the MPP, they can’t use the LGM, “it’s one or the other.” The use of dairy options and futures and forward contracts with coops, on the other hand, can be used with either program, he said, but a lot depends on where a producer is located in the country and how much feed has already been purchased for next year.
“It’s a unique year to go into the MPP,” Kurzawski stated, “Because there are some folks who have some higher priced feed in inventory already, which would negate some of those potential benefits that might kick out from the MPP.”
Going into next year, Kurzawski said he believes more people will sign up for it, though he thinks we’ll see “widespread participation but we just don’t know what level people are going to look at it.” The question, he added is “How meaningful it would be if a producer already has feed inventory already put away.”
If a producer elects to use dairy options and futures, what does Kurzawski recommend? While he admits that “things have got a little worse for 2015,” he still believes you can get some “decent coverage that would rival anything you can get on the Margin Protection Program for next year.” He suggests a “min/max type structure where you have a floor that might be around $16 on Class III and maybe $15 on Class IV and a ceiling closer to around $18.” It depends on a farm’s basis, he said.
The use of futures or forward contracts on a portion of their milk at a $17 Class III average or a $16 or $16.50 Class IV average would be a “wise strategy,” he concluded, “But it depends on what their profit margin looks like, where they got feed locked up or where they don’t have feed locked up, so it’s really a case by case basis.”