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Managing Volatility on Dairy Farms


We recently interviewed Cory Mellott, crop insurance specialist with AgChoice Farm Credit and Crop Growers LLP. Volatility in dairy markets is a significant challenge for the dairy industry, and 2020 was certainly no exception. Cory discussed risk management tools available to dairy producers and how to effectively make risk management decisions. Listen to the full podcast episode with Cory here.

For those who aren’t familiar with the dairy industry, could you explain why developing a risk management strategy is critical for dairy producers?
Our market has shifted over the years, and the dairy producer has very little control over the price. Risk management is one of the only ways that you can ensure what you're getting for your products in today's market.
 
Now, let’s talk about the risk management tools available for dairy producers. Could you give us a quick overview of a few of some of the main programs available?
Farm Service Agency (FSA) operates a program called Dairy Margin Coverage, or DMC for short. DMC is a relatively simple program and there are only a few decisions a dairy producer needs to make to enroll. It's a one-time signup, and this year’s deadline is December 11 to enroll for coverage next year. The program is based on a margin protection. 

The next program is Dairy Revenue Protection (DRP). DRP is sold by crop insurance agents like me. It lets you go off the futures prices to lock in a floor. DMC and DRP can be used simultaneously.

Co-op programs, or also contracting, are very appealing whenever there are short spikes of higher prices that you would like to lock in. If you are part of a co-op, work with them to learn about those programs.

Finally, there’s one more crop insurance program – Livestock Gross Margin-Dairy (LGM-Dairy). It’s a gross margin program. Depending on the market, LGM-Dairy still shows sometimes where it is viable to use that program as well.

When you work with dairy farmers, how do you help them decide which tool is best for their farm? Where it makes sense, do you recommend the use of multiple tools?
The use of DMC from FSA is probably my first recommendation for signup because it has a set price. We know what it’s going to be and it's an easy decision to make as far as there's not a lot of time restraints for the farmer. You set it up and it pretty much works automatically.

Using additional programs with DMC is also a good choice for many producers. Adding in DRP or forward contracting with DMC allows you to be more selective to make sure you are keeping the highest floor or locking in the highest price. There’s more flexibility in DRP and individual contracting. Even LGM-Dairy allows you to pick the days on the futures market that you want to secure that price.

Is there anything else you’d like to share with our listeners today?
My parents used to be dairy farmers. If I was giving advice to my dad, I would tell him that DMC is a wise decision because of the volatility we've had in the past year. DMC can be good for small or large farms. I would recommend five million pounds at the $9.50 coverage level, and it should cost you $0.15/cwt. In total, it’s going to be somewhere between $7,000 and $7,500. That would be my first recommendation. 

Then I would use DRP on top of that. Also, I’d never rule out doing individual contracts per months. DRP is run by the quarter where each of the individual contracts are monthly. So you may be able to secure a higher floor for a particular month. There's a lot of different options with DRP and individual contracts. 

LGM-Dairy is one of those products you may want to consider, depending on what margin is between the feed costs and milk price. It's something we have to pay attention to in today's volatility, and it is a little bit more work for the farmer.

Crop Growers has a team of more than 30+ crop insurance agents. Here in Pennsylvania there are three of us that work for AgChoice and serve the AgChoice territory. Simply call AgChoice and ask for a crop insurance agent. If you’d like to reach out to me directly, email me at cmellott@agchoice.com or my cell phone number is (717) 377-9605. If I'm not in your particular area, I'll get you lined up with the right person. 

Definitely reach out to your FSA office by December 11 to make sure to get signed up for DMC. If you have any more questions or concerns, reach out to your crop insurance agent. There are many of us in the industry that want to see you get protected.
 

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