Lock in Risk Reduction in Late Summer
The state of U.S. dairy industry in 2023 may later be recalled as the year of “the correction,” “the valley,” or “the crash,” as milk prices have plummeted by as much as half from record-setting highs in 2022.
But don’t let mid-year despair overcome the need to manage risk going forward. The August-September window is an important time to act, according to Dr. Kevin Hoogendoorn of Ireton, Iowa, developer of the ZISK app.
“The fall of this year will again bring us better prices,” Hoogendoorn predicted, noting that October and November have consistently posted healthy milk-price bumps in the past 5 years. “In the future, when we see an opportunity to lock in prices, we need to act. Back in September of last year, we could have locked in this summer’s entire milk production for over $20.00/cwt.”
Feed costs, too, require attention in the early fall. Hoogendoorn noted that 5-year, retrospective data shows average soybean meal price has taken a sharp downward turn from August through December. Corn prices did not stay as consistently low through year-end, but they, too, fell precipitously in August over the past 5 years.
Hoogendoorn is an enthusiastic proponent of the Dairy Revenue Protection (DRP) program to manage risk. In the U.S., about 90% of all corn and soybeans produced currently are covered by federal crop insurance.
Dairy figures are a little harder to ascertain. But coverage by either DRP or Dairy Margin Coverage (DMC) bounces around in use consistency, and is estimated to be considerably lower. Data from 2019-2022 shows that 51-77% of U.S. milk production was covered by DMC in that time period, while DRP participation covered 14-29%.
In his advice to dairy producers going forward, Hoogendoorn’s message is direct:
- “Spend the money on DRP! It’s worth it. Every year. Buy it in August or September.
- Protect your feed inputs. Do this in August or September as well.”
To better understand and cope with the cyclical nature of dairy markets, Hoogendoorn also recommended the business book Peaks and Valleys: Making Good and Bad Times Work for You – At Work and In Life, by Spencer Johnson, MD.
Some advice from the book: “To manage your good times and bad, make reality your friend. To get out of a valley sooner, find and use the hidden good in a bad time. To stay on a peak longer, appreciate and manage your good times wisely. Save resources for your upcoming valleys.”
Extrapolating this to dairy, Hoogendoorn advised: “When prices are high, we need to STOP assuming that they will always stay there. And when they are low like they are now, take comfort in the fact that they WILL come back up.”
