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Know Your Market

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Dairy trading experts offer strategies and practical perspectives to optimize market performance.

Know Yourself

Aug 16, 2013

Dairy producers may fall into one of four categories when it comes to marketing behavior.

Carl BablerBy Carl Babler, Atten Babler Commodities, Principal

As this column’s title indicates, dairymen are encouraged to "Know Your Market." Working to improve one’s understanding of milk, feed and energy market fundamentals and price behavior implications is a worthy endeavor. Increased market and marketing understanding can be directly associated with improved pricing and hedging success and reduced frustration. It is also observed that market knowledge alone does not ensure price and hedge action is taken. Marketing requires a person to execute the action.

Dairy producers may fall into one of four categories when it comes to marketing behavior.

1. Disinterested. This producer:
• embraces hard work, productivity, self-sufficiency and equity position as a means of managing cash flow volatility. He or she has a "so far, so good" attitude;
• believes that price will average out over the long haul and is not interested in contracting milk or feed needs or missing out on better prices;
• has heard bad things about the futures and options market and is cynical regarding market information and price forecasts;
• gathers financials as required by lender and tax accountant.

2. Outside Looking In. This producer:
• embraces hard work, productivity, self-sufficiency, and equity position as a means of managing cash flow volatility;
• is very interested in exploring means to improve financial aspects of the dairy operation;
• knows his or her dairy’s financial condition and cost of production;
• follows commodity markets fundamentals and prices closely;
• has attended many commodity marketing meetings and workshops but has not contracted milk with his or her milk plant and has not opened a commodity brokerage account;
• expects to take pricing action with milk and feed at some point but not now.

3. Involved. This producer:
• willingly aligns with outside resources to provide specific expertise, i.e., lender, business consultant, nutritionist, commodity advisor;
• has regularly scheduled meetings of the ownership-management team and outside-expertise providers to establish managerial direction of the dairy;
• has come along a commodity marketing learning curve through workshops, classes, self-study and discussions with cash and futures market contacts;
• follows commodity markets closely and has a commodity brokerage account. Takes cash and futures market positions in response to market price behavior;
• does not have a formal written commodity risk management policy;
• wishes to be flexible and, as a result, is willing to shoulder responsibility of marketing decisions, good or bad;
• commonly makes individual commodity price decisions not focusing on a net margin outcome.

4. Margin Manager. This producer:
• believes that the financial condition of his or her operation is the highest priority, or equal in priority with production, and as full time Chief Financial Officer is part of management team or, as manager, assumes the role of CFO. He or she has the ability to know and monitor net margin current and forward and that this is a must;
• has engaged other outside resources to provide specific expertise to enterprise, including a Commodity Risk Manager;
• has a comprehensive, written, ownership-approved Commodity Risk Management Policy that directs all commodity price management activity with a focus on net margin;
• is or has a Commodity Risk Manager who provides internal education, advice and management of the net margin model for executing contracts and hedging;
• fully acknowledges commodity price exposure and its impact on the financial well-being of the dairy;
• has a comprehensive, written, ownership-approved, Commodity Risk Management Policy that directs all commodity price management activity with a focus on Net Margin Management;
• has secured a dedicated line of credit for executing futures and options strategies approved by policy;
• is fully engaged in contracting milk and feed in both the cash and futures and options market simultaneously to manage a margin for the dairy;
• understands that to remove a portion of financial risk in operating a dairy enterprise may come with a cost of hedging line on his or her financials.

This commentary is not to define dairies by size, region or type, nor is it to say a given behavior makes one person a better individual than another. Rather, this discussion highlights differences that exist from dairy to dairy regarding managerial style and varying levels of focus on financials and marketing.

In a dairy environment of volatile prices and margins, it is paramount for dairy producers to be honest with themselves in regard to their behavior across the full spectrum of managerial and marketing issues. Dairies fall in all four categories relative to managing commodity price and margin. Whether you’re disinterested, outside looking in, involved, or a margin manager, "Know yourself."

Risk in purchasing options is the option premium paid plus transaction. Selling futures and/or options leaves you vulnerable to unlimited risk. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. Contact Atten Babler at cbabler@attenbabler.com.

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