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Know Your Market

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

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

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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COMMENTS (1 Comments)

Free info like this is an apple from the tree of knolwdege. Sinful?
4:02 PM Oct 31st
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