BOTTOM LINE Thursday, November 18, 2021 SECTION E
Sharing ideas, solutions, resources and experiences that help dairy producers succeed.
2022 Forward Class III Milk Prices vs. Historical
Class III Milk & Various Inputs Price Appreciation
$/cwt
$20
140%
2021 price levels vs. 2019 price levels, % change
120%
$18
100% $16
80% 60%
$14
40% $12
$10
20%
2015
2016
2017
USDA Announced Price
2018
2019
DRP 95% Coverage
2020
2021 YTD
Forward Price
2022
0%
Baltic Dry Propane Fertilizer Freight
Corn
US M2
Sources: USDA AMS, FutureSource, Atten Babler
Soybean Meal
Diesel
Wages
Illinois Farmland
CPI
Machinery Class III Cost Milk
Sources: USDA, FutureSource, Federal Reserve, University of Illinois
Manage risk in inflationary times WILL BABLER
COVID-19 unleashed a series of supply-chain and labor-market disruptions, monetary and fiscal stimuli, and policy and behavioral changes that have combined to stoke inflation. Dairy producers are feeling the impact of inflation and broken supply chains across almost all inputs to operations. Unfortunately, as seen in the chart, milk-price inflation has yet to follow. No one Babler knows if the current inflation will be transitory. But given the scale of the supply-chain disruptions and the magnitude of the stimuli, it’s likely it will be a problem for the entire 2022 marketing year. Dairy producers need to take action to mitigate the inflationary risk for next year. That includes managing both inputs and milk prices.
to manage downside risk in milk while maintaining upside opportunities. Dairy Revenue Protection is an ideal tool for that environment because it provides insurance against decreased revenue for a subsidized, reduced-cost premium. Importantly, the producer will be able to realize increased revenue if milk prices increase because Dairy Revenue Protection doesn’t limit the upside beyond the premium paid. In an inflationary and volatile environment it’s critical to maintain as much revenue upside as possible to help offset increasing input costs. Fortunately Dairy Revenue Protection coverage levels are at attractive values for the 2022 marketing year, with all Class III and Class IV forward prices now
trading at more than $18 per hundredweight. Many producers are familiar with Dairy Revenue Protection; we encourage them to take advantage of the opportunities that are currently available. For those who have not yet used Dairy Revenue Protection, now is an ideal time to learn more about it; it’s a tool uniquely suited to the current environment. No one knows for sure what the future may be for inflation in general or dairy markets in particular, but it’s clear that Dairy Revenue Protection can provide a strong level of protection under any future scenario. Will Babler is principal at Atten Babler Insurance Services; email wbabler@attenbabler.com to reach him.
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Growing Farm Safety Traditions
Control input risk
Dairy-commodity inputs such as corn, protein and forages have all increased in price. Other inputs such as labor, equipment, machinery, spare parts, fuel, medicine, supplies and chemicals have also increased in price – and are at risk of becoming unavailable. Producers should carefully consider which inputs, if unavailable, will shut down or significantly impair their ability to produce. Securing those inputs with contracts or taking delivery into on-farm inventory will go a long way toward weathering supply-chain disruptions and further price increases. The challenge with an aggressive procurement strategy is that the aforementioned concerns may not materialize and prices could decrease. That could create significant financial risk for producers. There are two ways to mitigate that risk. Producers can open downside opportunity with put-option strategies for corn and protein commodities. Milk prices can be protected with minimum revenue hedges to offset input costs. The second approach helps to protect against price declines in traded commodities and inputs that are more-difficult to hedge.
Manage milkprice risk
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One way to manage the risk of increased input costs is by securing a minimum milk price with Dairy Revenue Protection insurance. The increasing tide of inflation could influence all markets but not necessarily equally. There are no guarantees that feed costs and milk prices will be correlated, especially in the short run. In the worst case the milk market could diverge and prices decrease sharply due to its own fundamentals – while inputs remain elevated. The current increased level of uncertainty in markets makes it critical
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