MANAGING DAIRY RISK
When dairyman Roger Kukowski from Polk County, Wisconsin, walks into the bank every winter for his annual business review, he has in hand financial documents that would warm the heart of any financial officer.
Feb 20, 2001 - If industrious chefs demand "proof in the pudding," Roger Kukowski believes the proof of his business solvency is in bottom line income. While acknowledging work is needed on the farm's cost control and debt reduction, he said, "When I walk through the door, I want to show our banker that our dairy business does have a guaranteed minimal income for the upcoming year. I have a balance sheet, inventory, profit/loss statement, and a spreadsheet that shows how much we will be earning from forward contracting up to a year out and what income my futures options will guarantee."
He protects prices through a combination of forward contracting with regional creameries and purchasing put or call options, depending on the market price of milk. Though Polk County hasn't been included in the Risk Management Agency's Dairy Options Pilot Program (DOPP) yet, Kukowski has been taking advantage of available educational resources for years.
With local Class 3 prices recently bottoming out at the minimum $8.57 (without premiums), Kukowski adds, "I don't know how anyone can milk cows these days without practicing risk management strategies and protecting their prices. I buy call options to cover rising prices and put options if prices are going down. Also, by February or March, I've contracted most of my production for the year."
He credits Extension farm management classes at Wisconsin Indianhead Technical College with helping him learn more about the business and production aspects of farming. WITC's Farm Business and Production Management program provides classroom and on-the-farm instruction. "The classes have covered accounting and dairy and farming crop production. I also learned more about futures markets from a broker friend I met at the World Dairy Expo in Madison."
Kukowski came from a farm family and had been farming on his own for 15 years before partnering with his Dad, Norman Kukowski, in 1996 to form a corporation. His sister Julie Zipperer keeps books for the business.
Most of the 750 acres of feed crops grown on the family farm crop insurance have been covered by crop insurance since the mid 80s when local bankers required clients to buy it. These crops feed the 200 head of dairy cows and 200 young stock. Kukowski grows 75 acres of row crops, 300 acres in corn, 200 acres in soybeans, and the remaining in alfalfa and new seeding. He continues, "I buy multi-peril crop insurance for the corn and alfalfa and rain and hail insurance for the soybeans. I want to protect my planting investment -- I've collected two or three times on the corn and alfalfa."
Kukowski's voice mellows when he talks about his herd. Holsteins make up 80 percent of the herd, but he favors his 40 Guernseys. "I grew up with Guernseys and they do have a better temperament than most cows, higher butter fat content in their milk, and are more efficient producers. Since 1991, we've doubled the size of our herd to around 200, but that's it. We've reached capacity."
The farm provides gainful work for his family, but Kukowski doesn't expect it to continue beyond this generation. "Labor is in short supply here, and developers are encroaching on farmland."
Like many farmers faced with low prices for their product, he is making a hard decision to liquidate some assets. "I sold a couple of lots to buy some cropland a few years ago, but will be selling more soon to use for debt reduction. With the current low prices, we need to minimize operating expenses. I want to reduce our debt load."