Why Are Dairy Farmers Slow To Adopt Risk Management Tools

Downes-O’Neill dairy broker Dave Kurzawski reacted in Wednesday’s broadcast to DairyLine’s latest web poll where respondent, by a two to one margin reject the use of dairy options and futures trading.

When asked if that was a result of the failure of dairy brokers or the dairy media to educate dairy farmers, Kurzawski replied, “I don’t think so. I think that it’s still very new to most dairymen and most end users of dairy products.”

He explained that, “In the mid 1980s, the support price and so forth kept a moderate volatility and most dairymen happy but those have been removed for the most part and as a result you have a real volatile market and new need for some type of risk management for some dairymen and some end users.”

He gave corn as an example, pointing out that corn trade volume far out numbers dairy trade volume, “but they’ve had a 150 years head start.”

To change this, Kurzawski said it requires “a process of educating as best we can.” He said there are many good brokers across the country that are trying to explain how these markets work and figure out what the bottom line is for dairymen.” There’s no overnight fix, he said, and he doesn’t believe it’s options and futures trading is necessarily for every dairyman but he believes “it’s an education process that takes longer than 15 years.”

One of the comments left on our website poll charges that most of the dairy farmers this individual talked with who had tried this new tool had lost money.

Kurzawski said he would have to delve further into each instance to know what happened but, “If you take a producer who does nothing and one that actively manages his price risk over the course of five years, I would never guarantee that one would be better off than the other. They’re probably going to be about average, but I will tell you this, the reason a producer uses these tools, be it forward contracting, futures, or options, is to mitigate or lessen price volatility.”

Right now, farmers don’t know what they’re going to get next month for their milk, argued Kurzawski. “This is a way to insure that they have an idea of what that milk will bring them and bring that profit back to the dairy.”

He added that “there are hedge losses and spec losses but they’re totally different things so from a standpoint of a five year hedge plan, you’re probably not much better off than anybody else that hasn’t been doing it but you would have been able to weather a year like 2009 a whole lot easier than most folks.”

“If the majority of the customers that we deal with had been losing money instead of mitigating risk and insuring profit margins over the years,” Kurzawski concluded, “We would have been out of business a long time ago.”