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Dairy Prices Drop Shows Importance Of Managing Risk

Dairy marketing specialist Robert Cropp started warning Wisconsin dairy farmers last December that it might be time to think about locking in some of those record high milk prices with dairy futures, options or forward pricing.

Dairy producers who took his advice may have escaped the consequences of a sudden and drastic drop in prices – from $17.34 per hundredweight in December down to $10.27 two months later.

Cropp, professor of agricultural economics with University of Wisconsin Madison/Extension, says that February price was due to a fluke in the way prices are calculated. He”s confident the prices will go back up for March and April.

“If feed prices stay down, this will ease some of the pain from lower milk prices.” Cropp predicted.

“Everyone is affected by a drop like the one we experienced in January and February,” he continued. “More people are talking about how to manage the price risks.

“A sudden price drop is hardest on those who have a lot of debt and easiest on those who have low debt or use the risk management tools so they don”t have to accept those lower prices,” he said.

Cropp and the Marketing and Risk Management Team at University of Wisconsin-Extension, have encouraged dairy producers to consider using the futures market and forward pricing strategies to stabilize their incomes.

“When you use futures to minimize your risk, you may not always get the highest prices, but you usually can lock in a profit,” Cropp said. “Nobody ever went bankrupt by making a profit.”