Commodity Chat

Born in the USA. Dairy price risk management

 

By Nick Holt-Martyn, The Dairy Group

Like dairy farmers the world over, farmers in the US have struggled with highly volatile milk prices and feed costs. The causes of this volatility include familiar factors such as currency fluctuations and the delicate balance of global demand and supply forces to name but a few.Nick Holt-Martyn of The Dairy Group

To help combat the damaging impact of volatile prices and costs, the US government set up the Margin Protection Program for Dairy Producers in 2014.  It’s a voluntary program to provide dairy farmers with a risk management tool to protect their farm.

In essence it pays out when the national average dairy margin falls below a pre-agreed level. The National Average Margin is calculated on a monthly basis from the ‘All Milk Price.’ Corn Price, Soya Bean Meal and Alfalfa Hay Prices are used to estimate the national feed cost.

Nick Holt-Martyn of The Dairy Group explains “the premiums are subsidised by the US government to make it more attractive. For those signing up, there is a basic ’emergency’ level of cover which only costs $100 to cover administration costs, with higher levels of cover available to farmers of up to a maximum of $8/cwt.”

The scheme is run by the Farm Service Agency, enabling producers to choose to cover 25-90% of their production with the insurance premium set at two levels depending on the size of farming operation. 

Current Progress in 2018

So far in 2018 the margin has been below $8/cwt from February to August, dipping below $7/cwt for five of those months, but it is forecast to move above the threshold for the rest of the year.

Unsurprisingly, no year follows the same pattern.  In 2017 it remained above $8/cwt for the whole year and in 2016 it was fell below for 4 months. The key consideration for producers is what level of margin to select, how much milk to protect and what the cost of the protection will be.

Case Study

For a 2.2 Million lb producer, (Approx 1 Million Litres) the current financials of margin protection for 2018 are laid out below. 

Price: A 1 million litre milk producer in the USA can buy the maximum level of margin protection for approximately 0.24ppl.

Dates: Producers can sign up as late as June to cover the whole calendar year and is still applied back to January. Producers can use this extra time to get a feel for Futures pricing before signing up for example.

Advice: The Farm Service Agency provides a guide to the expected levels of margin in the upcoming months as an aid to decision making. Producers can decide to use either the MPP, or the Livestock Gross Margin–Dairy Protection scheme.

Cost: A 1ppl drop in milk price costs the business an equivalent of $13,000.

The Result: The FSA’s aim is to lessen the financial shock of lower margins, but clearly not to alleviate them altogether so producers are still exposed to normal market forces. Sign up is not a forgone conclusion, but the ability to decide to protect the farm ‘mid-season’ is a great help in the decision making process.

Source: The Farm Service Agency

Could this work in the UK?  

Here in the UK, we have a good measure on the total cost of production, but there is a current gap in reliable data for forage costs which isn’t traded as much as in the US. A milk price less feed and forage could be calculated, but it would need to incorporate several indicators to produce a reliable UK figure on a monthly basis.  Milk price insurance is probably a simpler route to examine for now, to help British farmers manage volatility.

To contact Nick Holt-Martyn, The Dairy Group (01823 444488) e-mail: nick.holt-martyn@thedairygroup.co.uk or visit www.thedairygroup.co.uk

 

Stable was designed and built by farmers. We help farming and food businesses of every size and sector manage the risk of volatile prices so they can invest in their future with confidence.  Stable’s index-insurance platform enables farmers and food businesses to insure themselves from a wide range of volatile commodity prices and input costs.

To find out more about Stable or to book a demo, please visit our website or call us on +44 (0) 203 8599390 or email hello@stableprice.com and we can show you how dairy farmers are using Stable to protect their balance sheets.

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