Stearns County selected for dairy options pilot program

This article submitted by Linda Stelling on 8/25/98.

There are 42 counties in seven states eligible for the program. Other Minnesota counties taking part in the program are: Morrison, Ottertail, Todd, Goodhue and Winona.

The Dairy Options Pilot Program (DOPP) is the first options pilot program to be launched under the 1996 Act. Its purpose is to help farmers manage price risk, according to Ray Eggleston of the Minnesota Risk Management Agency.

The federal Risk Management Agency (RMA) is coordinating with the Minnesota Department of Agriculture to mail announcements and application materials to dairy producers in Stearns and Morrison counties. Producers will have two weeks to review the material and decide whether to participate. RMA will notify selected producers of the time and location for the required training and also notify producers who were not selected that they will be given pre-ference in the next round of DOPP.

The program will offer producers first-hand experience in trading option contracts for a period of six to eight months. Option contracts create for the producer a price floor by providing the right to sell at a specified price.

The program is being implemented because the USDAís phase-out of milk price supports has been accompanied by unprecedented price volatility.

ďThe program is an effort to provide farmers with the experience of marketing their dairy products on the commodity market,Ē Eggleston said.

The states selected for the program have a high concentration of dairy farms and are geographically diverse.

Dairy producers who produce at least 100,000 pounds of milk over a six-month period are eligible for the program. This translates into a herd size of 20 to 30 cows, allowing the program to be available to large and small dairy operations. Also, licensed brokers who are in good standing with the National Futures Association are eligible to be part of the program.

The program is scheduled for a maximum of three years. However, each trading period will last only for six to eight months for any individual producer.

The USDA feels the six to eight-month term is sufficient time for producers to become knowledgeable of market practices, establish a relationship with a trained, participating broker and execute the option contract.

One objective of the DOPP is to orient producers to the milk market. This is accomplished in part by requiring that all options by deferred at least two months. The producers would then follow the market position until the contract could be sold or allowed to expire.

The USDA will pay 80 percent of the premium and up to $30 in transactions costs (broker fees). Like producers, all participating brokers will also be required to attend a DOPP training session. Sessions last about four hours. Each eligible producer will open a separate brokerage account with a private brokerage firm. Brokers will report trading data to RMA and bill the agency for services.

Producers can not hedge more than the documented amount of milk he or she produces. Therefore, the producer with 425,000 pounds of milk marketing will be able to purchase only 400,000 pounds worth of options under DOPP.

For more information contact Ray Eggleston of the Minnesota RMA office at 612-290-3304 or Joe Connor of the USDA at 202-720-4232.

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