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March 2010 Archive for Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

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

You’re Not Alone: Marketing Is Uncomfortable for Many

Mar 30, 2010

By Steven Schalla, Stewart-Peterson


Many in the dairy industry are nervous about the milk market. Considering the financial situation of many farms today, you can’t blame them.


What’s more concerning to me is that many folks seem to be not only nervous about what the market will do, but about what they will do about the market. In other words, producers are uncomfortable about getting more active in their own marketing efforts. 


Marketing can be uncomfortable for many reasons, but we’ve found that marketing success depends on removing a couple of key constraints.


I use the word “constraints” purposefully. The theory has roots in crop production with a principle called “Liebig’s Law”: Growth is controlled not by the total resources available but by the scarcest resource – the limiting factor. A simple example for crops could be rain. Rain shuts off, not much else matters. This is where the phrase “you’re only as strong as your weakest link” comes from.


The same is true for your marketing. Unless you understand your weaknesses, you can’t apply the right solution to improve your marketing. For example, you can spend all the time in the world marketing, but without knowledge or discipline, that time is not well-spent. Or, you can have all the knowledge in the world, but without proper time devoted to developing strategies, you will not be successful.


Here are the three most common constraints that rise to the surface when we walk producers through our Marketing Assessment Profile process:


1.             Time – For many producers, the daily list of tasks, projects and problems is already plenty to handle. In addition, you need to allow time to check the milk and feed markets daily. Many folks struggle to consistently commit the time to develop marketing strategies and thus end up “shooting from the hip” with their decisions. Marketing requires time to learn and to develop the strategies necessary for your farm to be in the best possible position, whether the market goes up or down.


2.             Knowledge – This is a common constraint, since the milk market is still relatively new. To start, learn as much as you can about all of the various marketing methods and tools so that you know what to apply, when and where. Then focus your efforts on learning more about how to make good decisions in a strategic, structured way. 


3.             Discipline – The uncertainty of the markets and emotions associated with making milk pricing decisions can be paralyzing. Our experience shows over and over that developing a structured, strategic approach to marketing will decrease stress and increase your success. To help clients improve their discipline, we use Market Scenario Planning, which analyzes all possible market outcomes and prepares strategies for each potential scenario. What will you do if prices rally a little or a lot? What will you do if prices decline a little or a lot? When you are prepared, uncertainty is replaced with concrete action plans. 


Take stock of your own strengths and constraints. Remember, we are only as strong as our weakest link. Take an honest look at your constraints and consider the areas where you have both an interest and an aptitude to improve on your own. Look also at the areas where you might be better served to hire professional marketing help.


The key will be finding the right approach that maximizes your marketing efforts. When you do, marketing will become more and more comfortable, and nervousness will be replaced with confidence.   


Steven Schalla is a Market Advisor for Stewart-Peterson, Inc. He can be reached at (800) 334.9779 or sschalla@stewart-peterson.com.


The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.



The New Attitude Toward Risk Management: It’s Not Gambling But a Sound Business Practice

Mar 15, 2010

By Jon Spainhour, Rice Dairy

Few dairy producers will look back at the last 14 months with anything other than disdain and confusion. 


Coming out of 2007 and the beginning of 2008, being a milk producer was a pretty good occupation to be in. Prices were very strong, and in some months were establishing all-time new highs. Feed costs were certainly rising too, but in general, making milk was a very profitable business to be in.  In fact, over the last 30 years, due to relatively low production costs and a generally stable output price, there were only good years and really good years. The job of a dairyman was not to worry about prices as much as it was to worry about making as much milk as possible, as efficiently as possible. 


Concepts like risk management and margin management were easy to ignore, and many people did.  For most, the idea of hedging was viewed as a form of gambling. The few that did choose to step into the fold did so without properly understanding the hedging tools they were using.  As a result, the participation from the production side of the dairy industry in the risk management arena was minimal, and even today only a small portion of the annual U.S. milk crop is actively being hedged.


Things changed in the middle of 2008 for most dairy producers when the world economy got caught in a downward spiral that caused commodity prices, which were trading at record highs, to suddenly collapse. Milk was not immune. While trading above $20/cwt in June 2008, milk was trading as low as $9.31/cwt. within only eight months. 


While the price of grains fell too, their decrease was not enough to offset the decrease in milk prices. With the average breakeven for most producers still hovering around $14/cwt, and the average Class III price for the last 14 months being $11.78/cwt., times have been tough. There has been a significant amount of loss bestowed upon the equity and production potential of the dairy community. Several dairy producers are on the verge of bankruptcy and sadly, there will be some that won’t survive.


As a result, many producers and lenders are looking back at the last few years and wondering what they could have done differently, and what they can do in the future to avoid such catastrophic conditions.  While there are many structural changes that can be pointed at, one of the more obvious changes that many people wish they could have made would have been to use risk management tools like futures and options.  Looking back, it is painful for many to realize they could have sold their production for 2009 at around $20.00/cwt during the middle of 2008.  What a difference that would have made!  Sadly, producer participation at those levels was very minimal. 


While there is no sense crying over spilt milk, it is certainly alright to recognize what could have been done then and how that can be used in the future.  With that in mind, many producers are starting to switch their attitudes about risk management, from it being a form of gambling to it being a sound business practice.  They are beginning to learn how risk management tools like futures and options work and how they can use them to better run their business.  That is an attitude I applaud and one that I hope to help foster through my contribution to this column.


My hope is to educate producers, lenders, and anyone else who has risk pertaining to dairy prices, about the basic mechanics of futures and options through this column.  On a monthly basis, my point will rarely be centered around my market opinion, but more focused on explaining in a very straightforward way about risk management tools and the different strategies you can employ to better your bottom line.  I hope you will join me and learn from our efforts. 


Jon Spainhour is a broker/trader with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot, and forward markets. You can reach Spainhour at jcs@ricedairy.com. Visit www.ricedairy.com.



This column is part of the Dairy Today eUpdate newsletter, which is delivered free to your inbox every Tuesday morning. Dairy Today eUpdate provides the latest in dairy markets, policy, management and production, and news. Click here to sign up.


How Should You Approach Marketing?

Mar 01, 2010
By Steven Schalla,

There’s always plenty to talk about when it comes to the milk market.

February’s USDA Milk Production Report pegged cows numbers up 3,000 head in January, while national production was down 0.6%.


The Cold Storage report on February 22 stated that January cheese inventories were up a hefty 11% from a year ago, but that seems to be improvement from December’s figure of 13% higher than the year prior. With a mix of fundamental figures out there, should milk prices be going up or down?


People ask me all the time, “What is the market going to do?”  The real question is, “What are you going to do about the market?” There are countless things to study and analyze when it comes to the milk market, and a solid knowledge base can be useful.  However, while information is great, it’s what you do with that information that matters. How will you make marketing decisions to affect your operation in a positive manner?


To get started marketing well, I highly recommend implementing what we call “strategic marketing.” When we take this approach, we are not as concerned about how or why the market is moving up or down. Instead, we are proactively prepared ahead of time with specific actions to respond to whatever the market does.


So, good strategic marketing is less about what you think the market will do (outlook) and more about the strategic decision-making process you implement.


Let’s take a closer look at what good, strategic marketing actually looks like. With this approach, the focus is on the weighted average price* of your milk, say for a given month. (See explanation below for finding your weighted average price.)

Considering this weighted average price, the goal is to accomplish two objectives:


·                     First, to maximize the separation between your average price and the market price when prices are low (bear markets). 

·                     Second, to minimize the separation between your average price and market price when prices are high (bull markets).


This approach is much more strategic than the typical “buy low and sell high” mentality. It acknowledges right away that the key is not hitting the highest high price (which is incredibly difficult to do), but focusing on your entire milk production with a weighted average price that takes advantage of market opportunities while still removing downside risk.  


To accomplish both of these objectives, flexibility in your marketing strategies is critical, in order to be prepared for whatever the market does. It is more important than ever to learn about and utilize futures and options (and the various contracts offered by your milk plant). These types of contracts can defend activities you’ve done, or hedge activities not done, as you work to build the best weighted average price. 

When done correctly, a strategic marketing approach can add stability to your milk price and reduce stress caused by volatile markets. There are many tools and strategies to get the job done, so you need to either be an expert, or hire one.


If you choose to work with a consultant, make sure that consultant isn’t relying on a market outlook as a basis for decision making. It’s less important what you know about where the market is going; it’s the strategic decisions you execute that really set the best marketers apart.


Steven Schalla is a market advisor for Stewart-Peterson, Inc. He can be reached at 800-334-9779 or sschalla@stewart-peterson.com.



Find Your Weighted Average Price *


To find a weighted average price for milk, each milk price value (or forward contract value) is assigned a weight to help determine the relative importance of each quantity to the overall average. 


For example, say you’ve made a forward contract on 20% of a month’s total production at $14.25, and 30% at $14.00, with rest open to the market price at $13.50. To compute the weighted average price, take 14.25 times 0.20, 14.00 times 0.30 and 13.50 times 0.50. Then add these individual amounts to find your weighted average.


14.25 x .2 = 2.85

14.00 x .3 = 4.20

13.50 x .5 = 6.75



So, in this example, your weighted average price is $13.80. This method is more accurate than finding the simple average, which is calculated by adding the three prices and dividing by three. The simple average would be $13.92. However, the simple average does not account for how much milk was sold at each of the various price levels.


This column is part of the Dairy Today eUpdate newsletter, which is delivered free to your inbox every Tuesday morning. Dairy Today eUpdate provides the latest in dairy markets, policy, management and production, and news. Click here to sign up.

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