Participation lags as Dairy options begin fourth year

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COLUMBUS – The federal Dairy Options Pilot Program has been approved for a fourth year, but many milk producers are unaware of the program or are ignoring its potential benefits.

This year, 742 dairy producers nationwide, in only 27 of the 40 authorized states, took advantage of the subsidized opportunity to buy milk put options.

According to Cam Thraen, dairy marketing specialist with Ohio State University Extension who serves as state coordinator for the program in Ohio, many eligible dairy producers have been hesitant to participate. And federal administrators are now trying to figure out why.

There are a variety of reasons why Ohio producers are not participating, Thraen said.

Many are too small. To be eligible, producers must have a minimum production of 100,000 pounds of milk over six consecutive months.

Others have expressed a politically-based opposition to futures trading.

Process daunting. But Thraen believes, by antidote more than by documentation, that many dairy producers found the process of getting involved in the futures market too complex.

“The process of enrolling is relatively simple,” he said. “And many producers did attend the introduction and training sessions. But when they initiated contact with a broker and found out what was involved, most backed out.”

He said when they were faced with multiple forms and the financial disclosures that are involved in establishing a brokerage account, the process seemed too daunting and more than a little threatening.

Only 16 producers. In 2001, only 16 Ohio producers – of 1,900 invited to participate – were active in the program, buying 41 options, subsidized at $44,672. That was less than 2 percent of the options purchased nationally and of the total subsidies paid.

Pennsylvania had 60 producers participate in 2001, purchasing 165 options, subsidized at $147,768. That was still only slightly more than 6 percent of the total.

Wisconsin and Minnesota were the most active dairy options states, with 244 Wisconsin producers purchasing 994 options, and 177 Minnesota producers purchasing 691. Together they equaled nearly 64 percent of options purchased, and producers in the two states received $1.5 million in federal producer subsidies, 59 percent of the total federal expenditure.

Of course, Thraen said, there are four or five times as many producers in Wisconsin as there are in Ohio.

More options. While Ohio and Pennsylvania producers were buying an average of two options each, the Wisconsin and Minnesota producer average was four.

The cost-share program is operated by the USDA’s Risk Management Agency to let dairy producers get their feet wet in the options market without taking as great a risk.

The options ensure a selling price on Class III and Class IV milk that will be produced in the future, reducing the risk for producers that prices will fall below their cost of production.

Producers who enroll in the dairy options program buy the options from a participating broker. The Risk Management Agency then pays 80 percent of the premium for that option and a $30 broker fee per transaction.

Thraen said the smaller number of options purchased by each producer in this area can be explained by the fact that Wisconsin and Minnesota producers are more reliant on the Class III price. It totals more than 90 percent of their milk check.

“Our producers have more of a buffer in the added value of the Class I market, and often don’t see a need to protect prices,” he said.

Since 1999. The dairy options program was established as a pilot in 1999, operating in only 37 counties in seven states nationwide. In Ohio, that was only Mercer County. In Pennsylvania, producers in Berks, Bradford, Chester, Crawford, Franklin, and Lancaster counties were eligible.

In 2000, the program was expanded into another 24 counties, totaling 61 counties in 32 states. Ashtabula and Wayne were added in Ohio, and Lebanon and Tioga in Pennsylvania.

A major expansion in 2001 brought the total number of counties to 275 in 40 states.

In Ohio, this brought in Ashland, Auglaize, Carroll, Coshocton, Columbiana, Darke, Holmes Knox, Logan, Mahoning, Medina, Richland, Shelby, Stark, Trumbull, and Tuscarawas.

In Pennsylvania, new counties were Bedford, Butler, Centre, Cumberland, Erie, Fayette, Huntingdon, Juniata, Lawrence, Mercer, Perry, Somerset, Susquehanna, Union, Westmoreland, and York.

Fourth round. The fourth year of the program in 2002 will add only 25 counties to hit the legal limit of 300. In Ohio, new counties will be Licking and Lorain.

There will be no new counties in Pennsylvania. Each state is limited to a total of 25 counties, and Pennsylvania reached that number in 2001, as did New York, Minnesota and Wisconsin.

The program is currently authorized through 2003.

Thraen believes that the key to expanding the number of participants is in education. An initial training session is required for all participants, but he would like to see a much more intensive approach to training farmers with a full range of price risk management education programs.

Too low now. “With milk prices so low, there is no real advantage to buying futures options right now,” he said. “The guaranteed price gives producers a free federal put at $9.90, which is better than any they would be able to buy.”

But there are producers who were able to protect themselves through this period with futures purchased earlier.

Kevin Fisher of Tri Hickory Farm in Botkins, Ohio, used the 600,000 pounds the program allows, to protect puts for September through December production.

The September and October options of 100,000 each were a wash, he said, but his 200,000 puts for November and December have paid off. He made $2 on his November production, and is getting 65 cents for December.

“And if I had laid off in September and protected myself a little more in December and January, I would be even better off,” he said.

On his own. Now Fisher has begun doing some hedging and buying options on his own. He said at least 40 percent of his 2002 production is already priced.

“I really believe in this now,” Fisher said. “It sure got me through that period when prices got so low.

“I guess I just got tired of standing here and watching the market go into a freefall, and feeling so helpless.”

To help dairy producers interested in buying futures, Thraen is now beginning to offer an OSU course on marketing milk and dairy products directly to dairy producers at distance locations. He taught it last year in Lima, Ohio, and is offering it again, starting in January at OARDC in Wooster. A grant from the Risk Management Agency will cover most of the course registration fee for active dairy producers.

(You can contact Jackie Cummins at 1-800-837-3419, ext. 23, or by e-mail at jcummins@farmanddairy.com.)

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