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| navigate: home: magazine: fall 2001: article | |
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Program helps dairy farmers weather fluctuating dairy markets By Susan J. Burlingame | ||||||
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“How do you help dairy farmers in an environment of fluctuating dairy markets?” asked Dr. Ken Bailey, associate professor of dairy markets and policy at Penn State. “We are in this new environment where it’s either boom or bust for dairy farmers. One year you’re going to make a lot of money, and, the next year, you’re going to lose all the money you made the year before.” Explaining how the very nature of dairy farming is changing dramatically, he discussed a program at Penn State to help Pennsylvania dairy farmers understand a new way of looking at the business of dairy farming. In 1996, the federal government introduced the Dairy Options Pilot Program (DOPP) to give farmers the option to buy into the futures market to lock in milk prices. As Pennsylvania’s land-grant institution, Penn State took the lead to bring this program to the state’s dairy farmers. On the Chicago Mercantile Exchange, there is a futures market for milk and dairy products. In essence, brokers who represent the interests of dairy farmers negotiate with brokers for the dairy processing companies (cheese processors, for example), to lock in prices based on market trends and predictions for what future dairy products will sell for. In other words, “futures” means farmers are buying insurance against prices falling. The government dairy options program subsidizes 80 percent of the premium and $30 for the broker fee for each transaction. “If you are worried about falling milk prices,” Bailey said, “you can go to the exchange and lock in a price.” Last September, for example, the Class 3 price of milk was $10.76 per 100 pounds. On May 31 of this year, farmers could have locked in a price of $15.65. “In Pennsylvania,” he said, “our farms are very competitive. We are ranked in the top third in the country in terms of how much milk we produce. But what we need to strengthen is the business skills. Farmers need to know how milk is priced, and they need to understand how the futures market works.” The Dairy Options Pilot Program, which grew from two to 25 counties, has been introduced to the farmers through Penn State Cooperative Extension agents. Bailey has personally trained the majority of Cooperative Extension agents in these counties to deliver a four-hour course to teach dairy farmers how to use the futures market to keep their farms solvent. Plus, on a Web site that receives national exposure (http://dairyoutlook.aers.psu.edu), Bailey puts out a weekly market report to support the program. He gives information about production reports, the economy and more. “One of the keys to survival in the dairy business today,” asserted Dr. Theodore R. Alter, associate vice president for outreach, director of Cooperative Extension and associate dean for the College of Agricultural Sciences, “is for farmers to take a proactive business approach. Using the futures market is a much more sophisticated tool than most farmers use. The Dairy Options Program is about strengthening the profitability of the dairy farming sector of the economy in Pennsylvania. It is essential that dairy farmers today adopt sophisticated risk management strategies.” With a more comprehensive program under development and a push to reach as many Pennsylvania dairy farmers as possible, Bailey hopes to offer “a whole new way of thinking about a very big industry in Pennsylvania.” Acknowledging that there is some resistance in terms of getting farmers to attend the training programs, he is encouraged by the number of farmers who are beginning to use the Internet as a business tool. “With our Web site,” Bailey said, “we are delivering the same type of market information that traders in Chicago have. Our goal is to reach as many milk producers as possible with the education program. Farmers need to think strategically about marketing milk.” | |||||
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