Risk Management: A Critical Ingredient to Spell Success

Craig Caballero believes risk management is a much-needed discussion and a much-needed ingredient to help manage his 5,200-cow dairy in Elroy, Ariz. 

Since 2007, Caballero has utilized risk management and says he could not imagine dairying without it, especially with all the volatility in the market and world right now.

“Risk management is a tool that we use every single day,” he says. “It’s part of what we do, and I personally could not imagine in the volatility that we live in, not participating in some kind of a plan.”

With milk prices far exceeding $20, Phil Plourd with ever.ag says that participation in Dairy Revenue Protection (DRP) in the first half of 2022 has mixed results. 

“On volume booked in the first quarter, effective volume was slightly down from 17 billion lbs. versus 20.6 billion lbs. last year,” he says. 

However, Plourd reports that the volume of coverage in place for the first half of 2022 is actually up from 27.6 billion lbs. versus 35.4 billion lbs. year-over-year.

“Producers are definitely using the tool in healthy numbers,” he reports.

According to Plourd, given all the volatility we have seen, DRP premiums are higher and that can work against participation.

“The fact is that today, dairy producers have the opportunity to establish Class III trigger price thresholds for the third and fourth quarter at levels near or topping the highest levels we’ve ever seen for those time frames,” Plourd says. “That’s got a powerful appeal.”

He says this is especially true when considering all the uncertainty on the cost side of the equation. 

“DRP allows producers to protect something near-record income levels, taking disaster off the table, while leaving the upside open just in case markets keep going higher,” he says. 

Plourd states that more than ever, a disciplined approach to risk management is critical. 

“There’s so much uncertainty swirling on both the income and cost sides of the ledger,” he says. “It’s great to see Class III milk futures trading at $24. But in our estimation, that’s a reason to be proactive about risk management, not complacent – whether that means DRP or some other strategy.” 

Caballero believes protecting both sides of the ledger is needed to help manage his dairy.

“I wouldn't call it risk management if you’re not handling both sides of the ledger,” Caballero says. “It’s more like speculating.”