Volatility: high cost struggle
The first thing to remember is that price volatility will not affect all dairy farmers in the same way.
The impact will vary, depending on the competitive position of each dairy farmer – or, in other words, the relationship between milk price and production costs on each farm.
The high cost producer will really struggle with volatility, and will struggle to operate profitably, except in high milk price years.
Unless this farmer improves competitiveness, he or she will be forced to exit milk production.
The main objective for this farmer is to reduce costs and/or increase output.
The medium cost producer will also struggle with periods of low milk price (but not to the same extent as the high cost producer).
He or she will benefit from risk management on milk price, but any such strategy needs to incorporate management of input costs also.
The low cost producer can cope with periods of low milk price relatively comfortably, and it is questionable if he or she will benefit to the same extent as the medium cost producer from hedging milk price (as this will tend to slightly reduce average milk price).
The key messages therefore are the requirement for dairy farmers to focus on improving competitiveness on their farm through increasing the average milk price received, and through reducing costs of production.
A useful starting point is to identify which category of milk producer you fall into – high, medium or low cost.
This will help you to decide on the most appropriate strategy to cope with price volatility.
