‘Timing couldn’t be worse’: Risk management plan helps protect producers

SUN PRAIRIE, Wis. — Although disruptions can be initially negative, they can also result in future opportunities.

“A black swan is an event that comes out of nowhere and causes markets to go up or down beyond what you ever expected,” said Sara Dorland, Ceres Dairy Risk Management LLC managing partner.

“The coronavirus is an excellent case and something even a few weeks ago the U.S. and Europe said was not going to be much worse than the flu,” Dorland said during a webinar hosted by Compeer Financial. “But the severity of the virus and the impact on the supply chain has exceeded expectations.”

The COVID-19 pandemic reinforces the need for risk management, Dorland stressed.

“When you’re giving up money to the upside you are still making money and you’re still in business,” she said. “When things flip the other direction, that can actually take people out of business, but risk management can prevent the black swan from hurting people.”

Dorland encourages dairymen to look at what is happening today, so they can plan appropriately by deploying risk plans.

“We need to pay attention because markets will turn around and we’ve got to be prepared,” she said.

Prior to the coronavirus becoming a problem in China, the global economy was moving along at a pretty good pace, the market analyst noted.

“We were looking for 2020 to be a better year than the past five years,” she said. “Now we’ve got commerce slowing down as a result of the unknown.”

Since food service and restaurants are closed in the United States, Dorland said, new orders are postponed or canceled, which is problematic.

“Food service is down and impacting the dairy sector, but there are things that can keep it moving,” Dorland said.

“The good news is the borders with Canada and Mexico are closed only for non-essential traffic and today food is considered essential,” she said. “We’ve heard milk trucks are making it across the border, so a lot of activity is still happening.”

Panic buying by U.S. consumers has left some grocery store shelves bare.

“We are continuing to supply the system, but with the constant pull we can’t keep up with it quite yet,” Dorland said. “We expect the 300% increase in milk going to retailers will go back to manufacturing.”

U.S. milk production for February is 1.7% higher than one year ago, Dorland said.

“We expected that because last year we were seeing a pull-back of milk production because farms had been suffering for a long time from low prices,” she said.

“There is big production in Texas, Colorado, California and Idaho and the timing couldn’t be worse,” she said. “We are bringing milk into the system when it is shutting down.”

Weather is impacting dairy production in other countries, including Australia.

“Even though their numbers improved at the end of last year, these are the lowest numbers they’ve had since 2008,” Dorland said. “We have a free trade agreement with Australia and they are importing more products mainly cheese from the U.S.”

New Zealand is dealing with drought conditions.

“The forecast is for continued dry weather,” Dorland said. “So, I don’t expect them to be the powerhouse they’ve been for the last few decades.”

For U.S. producers, if they know their cost of production for 100 pounds of milk, then they will want a known milk price.

“That will give you a known margin,” Dorland said. “If you can establish that price, then you’re left to produce the highest quality, lowest cost milk you can and that’s in a dairy producer’s wheel house.”

Trying to outguess the markets, Dorland said, is an act of beating your head against the wall.

“Do what you really do well and take the unknown out of your business with risk management,” she advised.

Almost every dairyman should be signed up for the Dairy Margin Coverage program, Dorland said, especially for events like the COVID-19 pandemic.

“Today the average price is $15.84, a month ago the average was $17.37 and two months ago it was $17.83,” she said. “Today is not a great day to lock in milk prices, but there was a point in time when those numbers were pretty good.”

Although it is uncertain how long the market disruption from the coronavirus will last, Dorland said, people are consuming dairy products whether it is at home or in a restaurant.

“This could help lift prices later in the year,” Dorland said.

“Nobody can predict the future, but a good risk management plan can help you ride this out,” she said.