There is no greater point of risk to the operation than when prices reach cyclical highs. Instead of limiting marketing activity, focus should be on maximizing the protection for the next lower cycle.
By Steven Schalla, Stewart-Peterson
As fall and harvest time arrives, fieldwork is in full swing. Chopping silage, readying the combines, spreading manure and fall tillage are all top of mind for dairymen. At the same time, many producers and their lenders remain on high alert when it comes to milk prices and are doing their best to keep in touch with the markets.
August milk prices set new records but the subsequent fall in cheese prices back to the $1.75 level has rattled many and reminded us how quickly the good prices can go bad. While milk fundamentals remain generally supportive, U.S. economy concerns, along with international and domestic debt troubles, suggest turbulent waters ahead on the demand side. Price volatility continues to be expected by everyone.
Here’s another take on what that could mean for a producer’s bottom line:
· Over the past 10 years there have been five years that saw the average price for milk decline from the year prior.
· In these five years of declines, the average decline was 18.8%.
· Year-to-date, the 2011 All Milk Price has averaged $20.06, meaning that an 18.8% drop places the calendar average for 2012 at $16.28. However, month-to-month prices could vary widely, as they have in this year.
· With the high cost of inputs, a milk price at $16.28 or below is worrisome for most dairies.
· Where there is volatility, there is both opportunity and risk present. Managing it correctly impacts the long-term health of the business.
More and more lenders are understanding that consistent and disciplined marketing can be a productive response to both opportunity and risk. In fact, just last week in this “Know Your Market” blog, Greg Steele, vice president of AgriBusiness Capital for AgStar Financial Services, shared some excellent insights with Jim Dickrell (see below)
about the business impact and importance of a consistent and disciplined approach to marketing.
One key piece of advice Steele mentions is this: “Understand that risk management is not about price outlook.” Trying to outguess the market leads to decisions based largely on the emotions that are present at the major highs and major lows of prices. When prices are at high levels, a bullish bias is easy to justify and complacency with risk managements follows. “With these prices, we’re better off doing nothing,” is the prevailing thought.
In actuality, there is no greater point of risk to the operation than when prices reach cyclical highs. Instead of limiting marketing activity, focus should be on maximizing the protection for the next lower cycle. Those who keep that focus will be farther ahead of the game than those who did not protect themselves, or even extended themselves by expanding at the high point in the cycle.
At the cyclical low point, the opposite holds true. From a business perspective, there is no greater opportunity than when prices reach major lows. At this point in the cycle, it typically costs less to make investments in your business. Your focus can be there, while light-duty hedging strategies can be used as prices recover.
Of course, day to day, when you’re living through price volatility and feeling the pressure of each individual decision, it’s difficult to see market cycles from this perspective. It’s not fun to work under that kind of pressure, and other duties on the dairy might seem more fruitful. Maybe that’s why some producers are wondering if marketing efforts really make a difference.
The Stewart-Peterson team has put together an analysis that shows the cumulative effects of consistent, disciplined marketing over a period of time. We will demonstrate the results of this analysis at World Dairy Expo. Come visit our booth (#1605 in the Exhibition Hall) and learn more. I hope to see you there.
In the meantime, have a safe and productive harvest season.
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