Managing Risk During Volatile Times

There is a slight flicker of light at the end of the tunnel regarding milk and feed prices. Unfortunately, the slight increase in projected milk price may not be enough to pull producers out of the economic slump they have been experiencing for the past 10 months. Feed costs do not appear to be declining to any great extent. What strategies are available to manage financial risk during these bleak times? When will milk prices recover?

There has been a lot of press on calculating and monitoring income over feed costs on a monthly basis. This is a great first step, but is not the end all. Developing and following a cash flow is the best approach to managing risk and making informed decisions using pertinent facts from the farm’s financial and production records. A cash flow plan can help on several fronts:

1. Operating credit requirements. It allows both the producer and the lender to determine the feasibility of the farm paying off loans both for the short-term and the long-term.
2. Quality of long-range plans. Will the farm have cash reserves? Can pre-paid expenses for crops, feed etc. be an option?
3. A cash flow is a must if the farm plans on refinancing or restructuring. This also means that the farm needs to follow the plan and adjust it when the market changes. It has to be a working plan to be effective.
4. Projecting a cash flow into the future with the best available information on milk and feed prices will give the farm a sense of their future solvency and help them decide how to proceed.
5. A cash flow can evaluate the effectiveness of using risk management tools. A cash flow is essential to make smart decisions on using “Livestock Gross Margin Insurance” (LGM), options, futures or forward pricing contracts.

The essential components of a cash flow include historical financial data, cow flow-herd inventory plan, ration and cropping plans and price outlook information. The challenge in completing a cash flow is that it takes commitment and time by the producer to compile the required information and then to sit down with a qualified financial person to develop the plan. The biggest mistake observed after developing a cash flow is not following it or not making adjustments when major changes occur in the farm’s financial situation. The cash flow plan has to be a working document. It helps the producer keep on top of price volatility and make decisions that affect the bottom line vs. waiting until opportunities have passed.