Dairy Leaders of Tomorrow

Purpose

Dairy farm profitability is dependent upon many factors—some of which are beyond a farmer’s control. But, what exactly are these factors and how can dairy farmers take control of their own profitability? Lesson 3.5 will focus on the types of risks that can affect dairy farm profitability while Lesson 3.6 will investigate how to protect dairy profits.

Materials

Pen/Pencil Calculator Internet Access

o CME Group Website (http://www.cmegroup.com/trading/agricultural/)

Procedure

Part One—Cyclical Market

Dairy farmers are dependent upon the price of their inputs (feed) and outputs (milk) to make important management decisions. However, feed prices and milk prices do not remain the same for very long—they are ever-changing.

Below is a graph that shows the variation of corn prices from 2005-2014 and the variation of Class III milk price from 2000-2010. As you can easily see, the prices of both commodities rise and fall. This series of highs and lows is known as a cyclical market.

Answer the questions regarding the price changes using the graphs below.

Lesson 3.5: What are the Areas of Financial Risk on a Dairy Farm?

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

$24.00

Class III Milk Prices $ /cwt

When was the highest price of corn reached? What was the price?

When was the highest price of milk reached? Describe the price of milk at this time.

What would cause the price of milk to drop?

What would cause the price of corn to rise?

If the milk price is high, does this guarantee a higher profit for the farmer? Why or why not? Utilize the graphs to defend your answer.

Part Two—Who Sets our Milk Prices?

The graphs above displayed the prices for milk and corn, but how are those prices set?

Instructions: Read the “Milk Pricing” handout that describes the numerous factors affecting how milk price is determined.

Be prepared to share your answers as designated by your instructor.

What is meant by “end product pricing?”

Does the government set milk prices? Explain your answer.

Which service requires Dairy Manufacturing Plants to report sales and purchases of dairy products?

___________________________________ incorporate monthly prices from the AMS report into national wholesale prices for the following month.

True or false: Dairy farmers whose milk is used for Class I (beverage milk) receive a higher price for farmers’ milk that is used for Class IV (butter). Explain your answer.

The CME (Chicago Mercantile Exhange) Group is responsible for reporting the future prices for numerous agricultural commodities, including the milk price.

Utilizing the link below, visit the CME website and complete the following information about the prices for the following commodities:

http://www.cmegroup.com/trading/agricultural/

Product Name Contract Date Price

Corn per bushel

Soybeans per bushel

Soybean Meal per ton

Soft Red Wheat per bushel

Live Cattle per CWT

Lean Hogs per CWT

Feeder Cattle per CWT

Class III Milk per CWT

*For corn, soybeans, and wheat, move the decimal 2 places to the left to obtain price

Is the price of milk higher or lower than January of 2010 (graph in Part I)?

Is the price of corn higher or lower than 2014 (graph in Part I)?

Part Three—Hurricane Warning

A final risk to farmers is the weather—another factor that a farmer has no control over. When thinking about the impact of weather, it becomes imperative to monitor the weather in various parts of the country as well as locally.

For example, the Mid-West of the United States is nicknamed the “Corn Belt” because it produces a majority of the corn. If a massive drought hits the Mid-West, this has a major effect on the rest of the country.

Below you will find a series of “If, then” statements based upon how the weather can affect the dairy industry. Complete the sentence with an appropriate word or phrase.

Example: If Iowa produces 100 million extra bushels of corn, then the price of corn will _________________.

1. If a hurricane dumps 24 inches of rain on your soybean field, then you can expect an (circle one) increase/decrease in crop yield.

2. If a farmer produces 1,000 less bushels of corn than he needs to feed his dairy cows, then he would expect an (circle one) increase/decrease in his feed prices for the year.

3. If Nebraska experiences a drought, then the price of corn across the country will _______________________.

Weather also affects many other components of a farm besides crops. With a partner, brainstorm how adverse weather scenarios can cause problems on a dairy farm and the financial impact involved.

Scenario #1: Buffalo, NY receives 6 feet of snow in 2 days. Brainstorm the problems that can occur regarding…

a. Milk Trucks getting to the farm Financial Impact

b. Snow on barn roof Financial Impact

c. Animal health Financial Impact

Scenario #2: A dairy farm receives 12 inches of rain in 3 hours. Brainstorm the problems that can occur regarding…

a. Barn flooding Financial Impact

b. Water in Feed Storage Areas Financial Impact

c. Crop Yield Financial Impact

Conclusion Questions

1. Which term best describes the pattern of commodity prices? (Circle one)

Repetitive Cyclical Square Redundant

2. What is a Federal Milk Marketing Order?

3. What does CME stand for?

4. Which organization reports the milk product prices each Wednesday?

5. Explain the following statement: Farmers are dependent upon numerous risk factors that dictate their profitability.