Reduce Your Risk With a Well-Thought-Out Marketing Plan
Risk is inherent with running and owning any business. Dairy farmers are no exception, as they have a wide variety of risks in their production cycle. Farmers deploy various methods to mitigate many of the risks on their farms, such as using fungicides on crops, vaccines for animals, property insurance on buildings and machinery, etc. All of these risk mitigation tools have a cost, but the benefit of reducing the risk to the farm far outweighs not using those tools. One of the risk mitigation tools that many farmers forget to use is a price protection strategy.
Over the past 12 months, milk prices have risen more than 35%. In November, the CME Class III milk price hit $20 for
the first time since 2014. As of the writing of this article, the 2020 futures board for Class III is above $17 for all 12 months. If these prices hold, most dairy farms will likely make a profit in 2020. But as history shows us, prices will always go up and down, and just because a price is on the futures board today doesn’t mean it will be there tomorrow. In today’s volatile commodity markets, farmers need to use marketing tools to survive and thrive for the long term. Just like having fire insurance on their farm buildings, farmers need to have a marketing plan in place in the event markets take a turn for the worse ... and at some point they will.
There are a variety of tools available in the marketplace that can be purchased through your crop insurance agent or through brokerage firms that specialize in farm marketing solutions. The tools can be tailored to the level of sophistication and complexity and to the comfort level of the farmer. At times, the options in the marketplace can be overwhelming and cause a farmer not to take action on formulating a plan. There are farmers that elect not to pursue marketing options because of its nominal costs. However, in today’s volatile commodity markets these are not valid excuses to appropriately manage commodity price risks.
The first step in putting together a marketing plan is to understand, “What is the farm’s average cost of production?” Then the farmer can appropriately determine his or her breakeven milk price. Once this understanding is in place, the farmer can formulate a plan that manages commodity risks and locks in profits. A well rounded plan will include managing input costs and not just milk price. As 2019 demonstrated, there are a variety of factors that can impact the input side of the equation, which in turn impact the profitability of the farm operation. Taking the volatility risk out of the input side is as important as taking it out of the sale side of the equation.
The volatility in the commodity markets are likely here to stay for the foreseeable future. It’s normal. Volatility creates risk and opportunities. The tools and experts are available to help farmers mitigate those risks and create opportunities to be profitable. In order to take advantage of those opportunities, farmers need to have a marketing plan in place or they are putting the farm at risk of a financial fire that could be avoidable.