It didn’t come as any great surprise a week or so ago to hear that the U.S. Department of Agriculture had stopped tracking participation in a forward-contracting program for milk-pricing, because participation was so low. Just 70 farmers out of 2,000 eligible had tried the option, the USDA reported.
Forward-contracting is not attractive in times of low milk prices like we have had in recent years.
And, there never has been much interest on the part of dairy producers to use risk-management tools such as forward-contracting or the futures market, according to Bob Young, chief economist for the American Farm Bureau Federation.
Certainly, dairy farmers are less likely to use risk-management than crop farmers. But there are fundamental differences in the way milk and crops are sold. The co-op structure in the dairy industry has played a role, giving farmers a place to send their milk without having to worry about the marketing aspects.
Grain futures have a long history — corn at the Chicago Board of Trade goes back to the mid-1800s — while those for milk and cheese are relatively new.
While history has not always encouraged use of risk-management tools in the dairy industry, recent volatility in milk and feed prices may be changing that, Young adds. Increasingly, lenders are encouraging dairy farmers to adopt risk-management to manage the volatility that has shaken milk and feed prices.
And, Young notes, the National Milk Producers Federation’s “Foundation for the Future” proposal for reforming federal dairy policy has an element of risk-management built in. Through margin protection, Foundation for the Future would insure producers against years such as 2009 when milk prices were low relative to feed costs. Farmers could increase their level of protection by paying higher premiums, much like an insurance policy.
We have endorsed Foundation for the Future for various reasons, including its approach to overall profitability (rather than just looking at the milk price). It may be the only real chance of finding consensus in the dairy industry going into the 2012 Farm Bill debate. And, it has an element of supply management. Producers who over-produce in times of low profit margins will have a portion of their milk checks deducted, thus encouraging them to bring their production back in line and control the costs of the program. That is an important consideration for lawmakers, given the new sense of austerity in Washington, D.C.
Finally, Foundation for the Future will get dairy farmers into a mind-set that is more likely to embrace forms of risk-management.