Milk producers can opt for DOPP

By LORI COPE | East Texas Edition

Mike Webb

July 12, 2001 -- Using tools to create greater profits within a business is nothing new. Neither is the Dairy Options Pilot Program (DOPP), which helps the nation's milk producers learn about insuring the price they get for their product.

What could be a great highlight for this round of DOPP is the speculation that milk prices will drop this winter. Currently, milk prices are good, around $15 per hundredweight. Some speculators forecast milk prices could drop to $11, maybe even $10, later this year.

"We've definitely seen a high point recently," said Dr. Blake Bennett, Extension economist, about current mlk prices. "And you know what happens when milk gets up that high."

The adage of what goes up must come down often comes into play on the futures market.

DOPP has trained hundreds of dairy farmers on hedging milk prices through hands-on put option trading. Not only is the training free to the farmer, but the government also picks up the tab on 80 percent of the premium values of purchased put options and up to $30 in commission costs.

That's a good deal according to Hopkins County dairyman Mike Webb. Webb has been involved in DOPP before. This is the third time for the program.

Webb expects to do well because he understands more language and philosophies of dealing within the futures market.

"It's like insurance," Webb said. "We treat it like an insurance policy. You buy insurance on your house and hope it doesn't burn."

The same goes for hedging a future price for their milk.

"I think producers really need to do this," Webb added. "There's some of it I don't understand, but I know it's a good tool to get a hold of."

Any milk producer should know what their "break even" price is. Does it take $11.40 milk to break even on their farm (to cover all debt); or does it take $11.80 or $12.30 milk to break even?

Then, looking at the futures prices for milk, the producer can determine if an upcoming milk price "futures" price will cover their needs.

Say in August the dairyman buys December milk at $12. When December rolls around, and milk is $13.50, well, the dairyman will lose the money he spent on buying the premium and the broker fee. (But remember, in DOPP, the government is paying the majority of the costs. And the broker fee is going to be lost no matter what because he/she has to be paid.)

But if December rolls around and milk is at $11.20, then the dairyman can breathe a sigh of relief because his "insurance policy" says $12.

"You can lock in your floor price," said Webb. "There's no much (money) to lose compared to what you could."

Milk producers in designated states and counties can participate in DOPP. In Texas, producers in the counties of Hopkins, Wood, and Van Zandt, plus Archer, Comanche, Erath, and Johnson are eligible. Dairymen also have to be generating at least 100,000 pounds of milk over six consecutive months.

"I believe Hopkins County has the biggest participation in the state," noted Larry Spradlin, Hopkins County Extension agent. "We've got more dairymen in Hopkins County than Wood or Van Zandt, but I believe we have more dairymen participating in DOPP than in the counties out to our west."

Webb, 54, has been dairying since 1967. In his years of experience, he feels DOPP offers producers valuable training for what just may become "the way it's done."

Webb also locks in a milk price for some of his production in a program offered by his milk cooperative. "You lock in your feed price, you can also lock in your milk price," he suggested.

Webb and wife Sandra use the Internet daily to check milk prices and feed prices. Staying informed is part of the plan to keep profits within their dairy business.

Although the DOPP training was held in June, producers interested in the program can do "distance education" training via the Internet (www.rma.usda.gov).

"Once producers get the training, they are definitely more familiar, more comfortable with the futures/options market," said Bennett. "This program provides the education - the chance to get their feet wet and get to know what options are all about."

For more information about DOPP, contact Bennett at 972-231-5362 or Lon Burke at 202-720-5265.