University of Minnesota dairy economist Marin Bozic says the coronavirus outbreak has created a lot of uncertainty for dairy producers, but a consistent risk management approach can help them navigate the challenging times.
Bozic, speaking on March 25 in a webinar hosted by the I-29 Moo University collaborative and Minnesota Milk, says producers should try to avoid repeatedly changing course in response to the market conditions.
“You don’t make radical decisions day by day, you want to be steady,” he says. “Don’t alter your risk management day to day.”
Bozic remembers speaking at an event a couple of months ago, thinking 2020 would be a good year for dairy producers.
“And here we are two months later, and the world is unrecognizable,” he says.
Producers have already seen a variety of impacts. Bozic notes the significant volatility in the stock market and changes in consumer behavior as more people are stocking up on groceries and eating at home, with less dairy consumption from restaurants. He says fluid milk volume sales are up 33.6%, and people in the dairy industry are wondering how long these trends will last.
“What we want to know is whether this is a one-off event, a one-week event, the stocking up,” he says.
Bozic says about 30% of milk solids are consumed through the food service industry, which has been hard hit. The overall result so far has been lower milk prices, and the futures markets are showing that trend continuing into the second quarter of 2020, he says.
Risk management is one way for producers to try to deal with the uncertainty and price declines.
In normal times, Bozic says dairy producers can use the last two quarters to figure their break-even price and use break-even price protection if they can. If they get closer to unprotected months and can’t get their break-even, they can look at loss mitigation coverage.
“As you approach the month that you still don’t have protected, within two quarters, then you go into loss mitigation mode,” he says. “Put a limit on how much you can lose in those tough times. Then maybe if prices are really high, you look to lock in profits.”
A more distant-month strategy of risk management usually results in clustered payouts, which Bozic says is beneficial because it provides payments grouped together when times are toughest.
However, current conditions are far from normal, he says, with limitations on movement and restaurants closed or doing to-go orders only.
“April will probably be something like we haven’t seen in our lifetime,” he says.
During these more uncertain times, Bozic suggests shifting to focus on loss mitigation for the foreseeable future. Even if the virus situation goes away shortly, he says shocks to the system often have “a long tail” with lingering effects, and sometimes historic events can change people’s habits and behaviors.
“Look at loss mitigation instead of break-even, even if it’s below break-even,” he says. “It’s better than 10 bucks. Not saying $10 is going to happen, but not saying that it won’t happen either.”
When it comes to Dairy Risk Protection, Bozic says he suggests taking advantage of the program, but still allowing for some flexibility in case prices go up.
“I would probably go 50% of my milk with production factor 1.5,” he says. “That gives me some flexibility.”
Bozic is hopeful producers won’t have to dump milk, with the United States’ “robust infrastructure,” but he says if it happens producers should get it listed on their milk paychecks for future indemnity payments.
Overall, Bozic says utilizing risk management should help producers prepare for inevitable and largely unpredictable issues.
“Use risk management not to protect against what you know, but to protect against what you don’t know,” he says.