When Covid-19 hit earlier this year, our way of life changed overnight. Previously, 50% of cheese and butter was consumed outside the home through restaurants and other food service providers. However, people were told to stay home so demand shifted from food service to retail, with a big help from government support via the Farmers to Families Food Box program. This caused dramatic price swings in dairy markets, so what should dairy producers expect in 2021?
To help producers prepare for the year ahead, Crop Growers LLP, Farm Credit East, Yankee Farm Credit and AgChoice Farm Credit recently hosted two webinars to analyze 2020’s impact on dairy markets, look at current and future dairy markets, and discuss risk management strategies.
Dr. Marin Bozic, of the University of Minnesota, who presented this webinar, predicts a COVID-19 vaccine will be widely available in June 2021 with a return to normalcy shortly thereafter. However, he reminds us that things are going to get worse before they get better, so in the near-term, this may continue to negatively impact dairy producers.
Government Assistance Programs
At the start of the pandemic, there was concern that fresh farm products would go to waste. So, initially the Farmers to Families Food Box Program was a beneficial program to purchase fresh farm products. However, in September, Secretary Perdue said he does not foresee this program continuing in 2021.
However, government assistance programs have induced prices and cows are producing more milk, more efficiently. As a result, milk production across the country is up more than 2% through October. This indicates there may be oversupply in the near future. Bozic’s largest concern is the potential oversupply of cheese, which he anticipates production will be up 7% more than in previous years due to increased processing capacity. So how can producers mitigate their risk?
Dairy Margin Coverage
While only introduced in 2019, Dairy Margin Coverage has become the cornerstone of many dairy producers' risk management strategies. When considering the impact this coverage would have had over the last several years, for every $1.00 paid in premium for DMC coverage, producers would have collected $9.00 in indemnities. This makes it a cost-effective option for producers, especially smaller producers, to hedge risk. The deadline to sign up for this coverage is December 11.
Dairy Revenue Protection
Dairy Revenue Protection provides protection against declines in quarterly revenue from milk sales, which is something producers have seen a lot of in 2020 and may be expected well into 2021. This product is indexed using state-level milk production and there are two pricing options available to choose from Class Price (class III and IV milk prices) and Component Pricing (butterfat, protein, milk solids). Not all milk production is required to be covered during the quarters chosen to insure and the insured can choose either or both pricing options. Up to five quarters can be insured at a time.
When considering this coverage, Bozic recommends building coverage over time. For example, when you “don’t like” the price, still buy some, but when you “like” the price, buy more. He advises to target having 65% of milk covered three months before the start of the quarter, leaving the remainder for opportunistic hedging.
While this webinar presented insights and predictions from a current snapshot in time, if we’ve learned anything from this past year, it’s that there are many unknowns and we need to be flexible. To stay up-to-date, Crop Growers is offering a promotional trial for dairy producers to join their bi-weekly sessions with Dr. Bozic. Traditionally, these sessions are exclusive to customers enrolled in the DRP program through Crop Growers, LLP. You may also be interested in learning more about Crop Growers proprietary decision support tool, the DRP Analyzer, that offers real-time market and historical data to help you make educated decisions. However, Crop Growers will be opening them up to any interested dairy producer during the months of January and February. Learn more here.
To view the recording from the webinar summarized above, click here. And if you’re interested in learning more about risk management products available to dairy producers, be in touch with your Farm Credit East representative or one of our Crop Growers agents.