Although it is easier to strategize about protecting profitability when times are good, a sound risk management plan applies to all margin environments and is especially important when the outlook is bad. When margins are low and opportunities are hard to find, producers may not consider it worthwhile to initiate margin coverage, preferring to stay open to the market.

Recently, many dairy producers have seen their revenues decline as a result of milk check deductions. Dairy risk managers who want to protect their profitability must account for these deductions as they calculate their forward margins and consider adjusting existing margin management strategies.

Today, many dairy operations find they need the flexibility of exchange-traded options, which allow you to not only protect attractive margins, but also capture future incremental improvements.

The year of 2016 has brought a cash crunch for many dairies as extremely low milk checks through the first half of the year led to negative margins. The recent rally in milk prices, combined with now-depressed feed costs, is finally bringing some relief – along with more attractive forward margin opportunities.

Most readers are probably aware that the recent rally in milk prices is historically significant in that the nearly-$3-per-hundredweight (cwt) climb in futures prices is quite rare. The last time we witnessed milk prices and underlying spot cash cheese values this high during January was back in 2008.

When analyzing projected forward profit margins for cattle feeders, it is important to distinguish between opportunities based upon cattle that have already been placed in a yard versus potential opportunities for cattle that may be placed in the future but have not yet been purchased at auction. Looking at the issue from the former perspective, breakeven levels can be calculated where costs have already been assumed on feeders that have been purchased and placed on feed – especially if feed costs have also been fixed on those animals. Analyzing margins from the latter perspective, though, neither costs nor revenues have been realized, and forward profit margin potential is therefore based upon a dynamic matrix of changing values among the prices of feeder cattle, corn and fat cattle.

The profit margin landscape continues to look favorable for dairy producers as we head into the second half of the year. While down around $1 per hundredweight (cwt) from their highs back in April, forward margin projections remain very strong from a historical perspective, existing at or above the 80th percentile of the previous 10 years through the first quarter of 2014.

As the first quarter of 2013 comes to a close, the outlook for dairy producers remains extremely hopeful for the balance of the year into early 2014 as forward margin projections are very strong.