The importance of a marketing program
Thursday, January 3, 2019
Three years of low milk prices has been very difficult and resulted in many farms exiting the dairy business. This has changed the life of many families as difficult adjustments needed to be made.
Most farms were doing things right. Cow comfort was improved, milk quality was exceptional, rations were balanced, breeding programs were managed well, calf and heifer management was strong, harvesting of crops was timed for optimum quality, etc. However, the farm still lost money as milk income was below the cost of production for too long. This is where the importance of developing a marketing program comes in as it is just as important as the other areas.
One of the key ingredients to a marketing program is determining cost of production. Many feel they have a good idea of the milk price they need to cash flow, but they do not really know their cost of production. That is foundational to building a marketing program. After all, a marketing program needs to have a solid foundation otherwise one might end up hedging a milk price that could be below the cost of production.
To many, this seems a daunting task. However, there are some examples and worksheets that are available through university websites or your county agent that will guide you through the process. Using your Schedule F on your tax return can be done, but it will be a very rough estimate. It does not account for things like inventory adjustment, feed costs, depreciation, etc., throughout the year. It does not delineate between expenses for the dairy or for its grain enterprises.
So, the best strategy is to look at your expenses that are related to the dairy operation on a per cow basis. If you work with a consultant, he or she can help you determine cost of production. It is also very important to work with a broker to help you understand the various marketing options and to initiate hedge positions.
Determining levels to protect milk prices must not only be built on cost of production but should also include goals for the dairy. A goal can be set for a year or more down the road with a price per hundredweight determined to reach that goal. This must be built into the marketing program. It could be that you might need to add 25 cents per hundredweight or some other amount to your cost of production in order to reach your goal at a set time in the future.
Add that into the milk price that you need to defend allowing you to confidently utilize the tools available to achieve your goals. The key then is to execute the program using strategies that provide price protection and flexibility.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at (877) 256-3253 or through the website at agdairy.com.