[Watch] ‘Risk Management: What is it?’

An educational session risk management strategies for the dairy industry

photo of two people sitting by a laptop

Risk management: it’s a phrase everyone has heard, but do we really understand what it means, or the importance of putting it to practice on our dairy operations? Our team of risk management experts has put together a brief training video to discuss the basics of risk management strategies for the dairy industry, examples, benefits and federal programs available to dairy members.

In this educational session, Tim Patchin, senior dairy business advisor leads members through Risk Management: What is it?

This twenty-minute webinar outlines the following topics:

  • The definition of risk management (00:00:40)

  • Four dairy risk management methods (00:01:50)

  • History of federal risk management programs (00:02:52)

  • Historical volatility and pricing (00:05:14)

  • Types of risk management programs available today (00:08:29)

    • o Contracting (00:08:57)

    • Contracting options through Land O'Lakes, Inc. (00:10:42)

    • Livestock Gross Margin (LGM) – Dairy (00:11:40)

    • Dairy Margin Coverage (DMC) (00:13:10)

    • Dairy Revenue Protection (DRP) Insurance (00:15:10)

  • Closing (00:17:35)

  • Contact info (00:18:11)

The Definition of Risk Management

  • Identify: Potential risk ‘factors’ What can go wrong? Or what could change that could affect my business?

    • Common risk factors include natural disasters, weather, climate, diseases, market conditions, price changes, environmental shifts, logistics and supply chain, infrastructure, politics, public policy, institutions and demand.

  • Analyze: What happens to me if those factors change? What is the consequence to my business?

  • Evaluate: What are my options to deal with it?

  • Treat: Execute once you’ve chosen an option

It’s important to remember, risk management is a continuous process. You must review and refine these steps on an ongoing basis.

Four methods to managing risk in dairy

  1. Avoidance: Sell the cows (or not purchasing)

  2. Loss control: Diversification, supplemental income

  3. Retention: Shouldering or bearing the risk yourself; taking the ups and downs. This method is the most popular in the dairy industry.

  4. Transfer: Movement of some risk to another party through contracting, options or insurance.

Types of Risk Management today

Contracting

  • Forward: set price and date at contract date, delivery common

  • Futures: price will vary with market moves (Marked to Market), delivery less common, used frequently by speculators

  • Puts: establish a “floor or minimum price”

  • Calls: establish a “ceiling or maximum price”

  • Contracting is done through a Broker/brokerage and typically requires margin account or hedge fund to cover margin calls

Member Contracting Options through Land O’Lakes, Inc.

  • Dairy members can forward price through our desk without a hedge fund or margin calls

  • Day-only orders: Class III and Cheese

  • Open order target price: Class III, IV, and Cheese

  • Floor/Ceiling open orders: Class III, IV, Cheese

  • Can be done online through MPOL

  • Settles on your milk check

  • Participation agreement is required

  • Administrative fee and flexibility in prices required

Click here for more information on Land O’Lakes forward-contracting

Livestock Gross Margin (LGM) – Dairy

  • Administered by USDA Risk Management Agency (RMA)

  • Allows for protection of a margin, milk income over calculated feed costs

  • Uses CME futures prices to establish margins (corn, SBM, Class III milk)

  • Deductibles are selected by producer up to $2.00 in $0.10 cent increments

  • Target marketing amounts determined by producer

  • Insurance periods are 11 months

  • Offered weekly, Thursday afternoon through Friday morning

  • Can use in conjunction with Dairy Margin Coverage (DMC)

  • Cannot overlap time/production periods with DRP policy

Visit the rma.usda.gov for more information

Dairy Margin Coverage (DMC)

  • Federal program administered through local Farm Service Agency (FSA) office

  • Generally designed to provide relief in low margin environments

  • Allows producer to choose preset margin level over feed cost

  • First five million pounds extremely cost effective at $9.50 margin (Tier I coverage)

  • Requires annual enrollment and fee

  • Feed pricing formula updated for 2022

  • New program includes Supplemental DMC (production adjustments, retroactive payments based on previous participation and production increases)

Visit fsa.usda.gov to learn more about the Dairy Margin Coverage program.
Note: Recently, the USDA extended the 2022 DMC sign-up period to March 25, 2022.

Dairy Revenue Protection (DRP) Insurance

  • Administered by USDA Risk Management Agency (RMA)

  • Designed to protect high prices vs. buffer low prices

  • Allows producer to set a “floor” on covered pounds

  • Ability to select a variable protection factor (1.0-1.5)

  • Prices determined daily, based on quarterly averages

  • Premiums move with milk price and volatility

  • Can be used in conjunction with DMC, without regard to revenue (pounds) protected

  • No deadline for sign up

All our Land O’Lakes Dairy Business Advisors are licensed agents through RMA and can help members get signed up with a policy. For more information, visit the Risk Management page or contact your local DBA today.

PMVAP Education Opportunities

This educational session is part two of three of the educational training offered as part of the Pandemic Market Volatility Assistance Program (PMVAP). Session three will be released soon. Watch for further details and invites on these continued opportunities through Land O’Lakes experts.

Want more? Our Risk Management Experts are available to all dairy members

Land O’Lakes has a team of risk management experts that can provide comprehensive and tailored education and services to all our dairy members at any time. For more information and your Dairy Business contact, visit the Risk Management page.