The Steps to Better Managing Milk Price Risks

Welcome to the risk management section of the Center for Dairy Excellence’s Web site. Increasing feed costs, milk price swings and volatility at all levels make it a necessity for dairy producers today to consider their risk management options.

In this section, you will find the basic steps to establishing a risk management plan for your dairy operation. You can also find information on how to use the LGM for Dairy program and where to find current market information.

1. Learn the basics about risk management

   Risk management is the practice of knowing your production cost and locking in a profit margin above that cost to protect your business. Several Web sites offer excellent information on understanding the basics of risk management. To access those Web sites, click on the links below.

   Risk Management Agency
   University of Wisconsin
   Penn State Extension

2. See what the current market is doing

   Before you can practice price risk management, it is important to understand what current markets are doing and how current prices compare to historical prices. Below are three Web sites where you can see a current market outlook.

   Penn State’s Dairy Market Outlook Site
   CME’s Daily Dairy Report
   Bloomberg’s Commodity Report

3. Access my dairy risk

   Weather, personal health, livestock health, fire, property damage, liability and markets are some of the risks that are assumed by dairy farms as well as other businesses. While none of these factors can be controlled entirely, you can make decisions to manage the amount of risk that you are exposed to.

   Dairy Risk Management Profile coming soon.

4. Understand my risk management options

   In recent years, the market prices for commodities such as milk, corn and soybeans have become increasingly more volatile. To protect your business from falling milk prices and/or escalating feed costs, dairy producers have several options available to them. Those options include:

   Using the LGM for Dairy insurance program

   http://www.rma.usda.gov/help/faq/lgmdairy.htm

   Contracting milk and feed through your cooperative and/or feed company
   Many milk and feed cooperatives, as well as privately-owned feed companies, offer opportunities to lock in a price for your milk and feed. Contact the companies you work with to find out the options available to you.

   Contracting milk and feed on the Chicago Mercantile Exchange
   This is the most complicated way of protecting your milk price risks and typically requires greater volumes of milk and/or corn and soybeans. To learn more about contracting on the open market, click here.

5. Protect my milk price risks

   Below are steps you should follow to protect your milk price risks. The first step should be used no matter what option you choose. However, if you plan to use milk and feed contracting as your risk management option, you need to contact your cooperative and/or feed company after completing step one. The remaining steps assume that you are using the LGM for Dairy program.

   Step 1: Determine Your Cost of Production
   Before you can protect your risks, you must know your cost of production. Penn State’s Cost of Production calculator can help you do just that.

   Step 2: Calculate Your Cost of Insurance and Margin Level
   Use the Premium Calculator found on the University of Wisconsin’s Web site to calculate your cost of insurance and the margin level you can lock in monthly and annually using LGM for Dairy.

   Step 3: Find a list of Agents able to handle LGM for Dairy
   USDA has a list of agents available on its Web site. To access that list, click here.

   Step 4: Contact your agent of choice.
   Identify the agent you would like to work with and call them to indicate your interest in using the LGM for Dairy program. Once you contact the agent, you must be prepared to initiate your LGM for Dairy policy within the last three days of the month.

For more information about the Center for Dairy Excellence’s risk management programs, contact Alan Zepp, risk management program coordinator, at 717-346-0849 or azepp@centerfordairyexcellence.org.