Know Your Market
Long and Short New Year’s Resolutions
Dec 31, 2012
In this new year, it's time to create your own personal resolution list called the "Manager's List."
By Ron Mortensen, Dairy Gross Margin, LLC and Advantage Ag Strategies, Ltd.
As we flip the calendar to 2013, we also flip our minds to the New Year and a fresh start. The New Year’s resolution list is still on your desk (or maybe in your head). Although New Year’s Eve is past, how about your own personal resolution list called the "Manager's List"?
As part of the 2013 Manager's List, I suggest you really write two lists--one short term and one long term. Why two? It will allow you to work on the short term issues and check them off. There’s a feeling of accomplishment—got in done, check it off. The second list is for long term issues and the big picture. This one will take longer to get done.
Short-Term Manager's List
Review your cash flow by looking at accounts receivable and accounts payable for current month. Generate a short term cash flow by projecting receivables and payables for the next three months.
Look at forward milk prices versus your cash costs for the next three months. Can you make your operation’s cash flow more predictable by using forward contracts on a portion of your milk? If you cannot lock in a profit, then look at using options or LGM-Dairy.
Brainstorm with employees, spouse, stakeholders and family members about how to be more productive in 2013. In particular, challenge everyone to list tasks/items that can be eliminated. Many times we do things just because we have always done them. A fresh start for the year means simplification. This benefits everyone!
Control risk. Controlling risk is probably a three-pronged strategy in a dairy operation—there’s production risk, revenue risk and expense risk. So, think about the balance of maximizing production with an eye towards improving herd health. Since this is a short-term list, don’t make big risky decisions. Make a lot of incremental decisions about milk marketing and inputs. If you are comfortable with the situation for the next three months, for example, look out to the second quarter of the year.
Long-Term Manager's List
Take care of your health and your family’s health. It is important. Enough said.
Think strategically. Consider making at least one BIG decision in 2013. Possible topics: Estate planning, life insurance, succession planning. Or maybe allow employees to make more decisions. Or a significant change in herd size. Some of these decisions reduce your "worry" list and some can make your operation more profitable.
Think equity and working capital—two keys of financial stability. Develop a strategy to improve these financial benchmarks.
Learn more about option strategies for managing risk. Options are cushions or little pieces of price protection for your operation. They can help reduce your risk and, as such, are often compared to insurance. Options can be frustrating, as a farmer pays option premiums and often does not get anything in return. Then it becomes time to step back and realize that, like your property and liability insurance, you should not expect a price "accident" all the time. Options can, however, significantly lower your price risk, whether it is corn, meal or milk.
Learn more about LGM- Dairy and how to integrate option strategies with LGM. LGM for Dairy is an insurance product which functions like a set or bundle of options, protecting you from significant changes in milk and feed prices. It can be a "one stop" shopping approach to risk reduction.
(Comment about LGM margins: Front month LGM margins have been slipping because milk prices have been moving lower. Milk prices are still very strong from a historical stand point for February 2013 through June 2013. In addition, the month of November shows historically high margins.)
Have a Great 2013 from all of us at Dairy Gross Margin, LLC.
Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Strategies, Ltd., a commodity trading advisor.