Managing the Seasons and the “What Ifs”
In late June, soccer surpassed two of America’s more traditional pastime sports – baseball and basketball – as the second most watched sporting event ever, second only to the Super Bowl, when 25 million Americans tuned in to watch the US and Portugal game in the World Cup. At halftime of that game, Portugal was leading 2 – 1. But at the last minute, the US scored a goal, tying the game to deny Portugal a place in the next round.
The US – Portugal match was like so many sporting events we have watched, with the final outcome completely different than what the halftime score forecasted. July is what we would consider the “halftime” of the year and of the growing cycle. Many companies are releasing their mid-year financial results, and the mid-year crop production estimates have been posted. But nobody knows for certain what will happen between now and when December ends.
So far, dairy producers have seen very positive returns in 2014, with Class III prices at record high levels and dairy exports in high demand across the globe. With feed prices falling, the cattle market strong and margins at all-time highs, dairy producers have every reason to believe that this year will be an excellent year to be in the dairy business. But, as you look ahead, are you prepared for what might happen after halftime?
In 2008, the USDA introduced the LGM for Dairy Insurance Program to provide dairy producers the opportunity to protect their margins as the dairy marketplace continues to become increasingly more volatile. That year, before the LGM-Dairy program could really generate interest, dairy producers saw the Class III milk price fall from record highs of $20.25 per hundredweight in June to a low of $15.28 in December. Prices continued to fall to reach a record low of $9.31 per hundredweight in February 2009.
While nobody wants to see 2009 happen again, history would tell us that when the margins are strong, our nation knows how to produce a lot of milk. Right now, we are enjoying a very strong demand for our products, both domestically and globally, with more than 17 percent of our milk supply exported. But those exports need to stay strong for that demand to continue. Having a risk management plan in place that addresses the “what ifs” should be part of any business’s game plan.
Imagine if you were Portugal and at half time, you decided to bank your next year’s earnings on the expectation that you were going to make it into the next round. Where would you be now? You would be one goal short of profitability next year.
With the new Farm Bill will come a new risk management option, the Margin Protection Program, that will allow dairy producers to protect their margins. However, this program may not become available until the market forecast has already changed. Looking at your risk management options now while prices are strong may be the difference between profits and losses in 2015.
USDA’s Farm Service Agency recently announced that producers who wish to purchase LGM-Dairy Margin Insurance in order to protect today’s exceptionally strong margins may do so and still participate in the new Margin Protection Program. County Farm Service Agency offices will implement and oversee the transition as more information becomes available.
With today’s futures markets offering a rare opportunity for producers to protect high margins for next fall and winter, all dairy producers must consider their risk management options. Those who market milk through a cooperative can take advantage of the programs their cooperative has available, and others may choose to work with a brokering agency to protect their margins. Some may simply want to put away cash reserves to prepare for a downturn in the marketplace. And, still others may want to use LGM-Dairy, with a substantial portion of its annual underwriting capacity for this fiscal year available.
Whatever you choose to do, even if it is nothing, make sure it is your choice by simply evaluating your options and developing your own risk management plan. Portugal knew that it may not make it on to the next round, and even the US knew it may still fall short of the World Cup. While we all hoped we would see the US in the final round, they as a team had to know their game plan if they did not make it. In dairy, knowing our own game plan is just as critical.
Alan Zepp, who serves as the center’s risk management program manager, is available to help you consider your risk management options and develop a plan. To contact him, call the center at 717-346-0849 or email email@example.com. You can learn more about the center’s resources at www.centerfordairyexcellence.org.