Protecting your milk price

Over the years, it seems that producers are reluctant to protect a milk price when it is higher. But, they end up wishing they had when the milk price drops and then tend to lock in a price lower than a cost of production. It is natural for all of us to want a higher price, especially when they are low. And, when in an upward trend, we tend to think it will just keep going. Remember, the best cure for high prices is high prices. Have we seen the high prices? Are we on the downside?
So, the inevitable question is, “What should I do?” Well, there are as many choices as opinions, or so it appears. Let’s start with looking at some real choices.
First, every farm should be enrolled in the Dairy Margin Coverage program. This will protect up to 95% of the actual production history, up to 5 million pounds, with a government subsidized premium. This is a no-brainer, as it provides a $9.50 margin, using government feed prices and a national milk price. I have tracked this for a number of farms, and it isn’t quite that good for everyone’s actual milk mailbox price received, but it’s the best alternative for that amount of milk. Other common choices, for additional milk over and above the DMC milk, may include: contacting with a local processor for a fixed price, buying a put, using the Dairy Revenue Protection program, Livestock Gross Margin or futures – be careful.
Contracting with a processor provides the advantage of low cost (usually around $.10 per hundredweight). It limits your upside but will protect your downside should the milk prices drop. Some producers feel like they got burned this spring in locking in a good price at the time, but the price ended up being much lower than they could have gotten had they not done anything. If looking at this option, remember to scale up and scale down contracts over time to allow for a more average price.
Buying a put will give you a minimum price and allow an upside potential. The only issue on these is the potential cost. My recommendation is to limit the fee to $.35/cwt or less, which today may be difficult.
Using DRP is a method to use as a quarterly average to protect your milk price. The government has a subsidy to help off-set the price, yet these too look to be a bit expensive for quarters two and three of 2023 at approximately $.58/cwt and $.65/cwt, respectively. Though DRP is a great tool in your toolbox, remember that the whole quarter must average above your price, and sometimes, one good month might negate the two struggling months when it comes to quarterly prices.
LFM has been a tool used for years. The program has changed in the past couple of years to the benefit of the dairy producer. The pricing can now be entered every Friday. Even though you need to contract two months at time, it settles out each month, thereby eliminating the quarterly average price to receive an indemnity. The premium cost is the same for LGM as the DRP, so it may have an advantage in the likelihood of an indemnity payment scenario.
When it comes to futures, I would use caution, especially entry level marketers. The potential for margin calls can be difficult both on the farm’s cash flow as well as the mental health aspect of receiving ongoing calls to pay margins in the event of price increases. With the potential need for cash to pay margin calls, a farm may also need a significant line of credit availability at their bank.
Perhaps a question to be addressed with all the marketing ideas is how much, or what percentage of, milk should be protected. No one answer is the correct answer for all farms. Some producers may feel no protection is necessary and another may want 100% coverage.
My recommendation is to assemble a marketing plan for the current year and the following year using a variety of tools.
Example: DMC covering 25%, forward contracting at 25% and LGM at 25%. The DMC will be $.1125/cwt, the forward contract about $.10/cwt, and the LGM may be the variable premium of $.55/cwt. If this were the case, your average premium cost would be approximately $.25/cwt, with a 75% coverage for all your production.
There is no one magic formula for every farm or every milk price scenario. Each farm needs to determine the risk they wish to take and how much risk to shift to the person on the other end of the contract. The key to a successful marketing plan is to create a plan and stick with the plan on a consistent month-to-month basis. If not, it seems you may always be on the wrong side at the wrong time. A farm management person or marketing company can assist in making a plan and executing the plan in a timely manner.
    Tom Anderson is a Farm Business Management faculty member at Riverland Community College.