Know Your Market
Education: The Bridge Between Milk Marketing Tools and Applied Marketing
Jan 10, 2011
A common question is, “Why didn’t dairy producers use the milk marketing tools that were available to them to manage their milk price risk?” The answer is easy. They have not had commodity market education.
By Carl Babler
First Capitol Ag
First Capitol Ag has accepted the invitation to author a series of columns for Dairy Today eUpdate. Our goal in these upcoming columns is to share with readers key milk marketing principles and common traits held by successful milk marketers we have worked with and observed from our position as commodity brokers in the dairy markets.
We look forward to presenting a number of topics that range from simple commodity marketing definitions all the way through comprehensive structured risk management approaches that focus on managing dairy net margins.
To start the process, we want to highlight what we have found to be a critical requirement for commodity marketing success: education.
Recently those inside the dairy industry, and those outside looking in, have observed dairy market conditions and commodity price volatility negatively impact a dairy producer’s bottom line. Stories abound detailing operational losses, equity burn, and inability to service or secure debt as a result of low milk prices.
The lament of “I woulda, shoulda, coulda done something with milk price” is common as many producers endure financial hard times. A common question is raised: “Why didn’t dairy producers use the milk marketing tools that were available to them to manage their milk price risk?” The answer is easy. They have not had commodity market education.
Consider the role of market education in the case of dairy producers. Producers have discussed commodity markets, watched milk price, read about marketing tools, attended one-day workshops, and received recommended marketing strategies. Well-intended lenders and agribusinesses who serve dairy businesses encourage dairy producers to use price risk management. Awestruck dairy producers want to use dairy marketing tools, but where education is lacking, confusion takes place, leading dairy producers to inactivity.
In this time of extreme financial pressure, milk price volatility and uncertainty in the dairy industry, an unprecedented appetite has surfaced for milk-price risk management strategies and solutions. The reality is that without education, the strategies and solutions available to producers will go unapplied again.
As instructors of a comprehensive commodity marketing course covering market principles, price behavior, the mechanics of cash and futures markets, along with the marketing tools and the strategies for applying the tools, we at First Capitol Ag have observed dairies around the country that have put a high priority on education and dairy price risk management.
The understanding of risk management does not happen overnight. We have observed that most dairy businesses spend three to five slowly adopting new tools before their management culture changes toward consistently acknowledging risk and applying management strategies. These dairies openly acknowledge that formal commodity market education has been essential in their successful development and launch of a beneficial milk marketing plan. These engaged dairies also resist the argument that “commodity marketing is to complex for a dairy producer to understand” and that “dairy producers do not have the time to direct the marketing for their milk.”
- Milk price and margin volatility drive a dairy’s financial performance.
- Tools are available in the cash and futures markets to manage earnings volatility.
- Education is required for dairy producers to understand and strategically apply these risk management tools. Education is thus available. It is the critical bridge to apply dairy marketing, seek it out.
We at First Capitol Ag are committed to do our best over the next months to provide, via this column, commodity marketing learning opportunities relative to dairy markets. Openly admitting that we are still learning ourselves, we look forward to learning with you during this upcoming year.
Carl Babler is Senior Hedge Specialist with First Capitol Ag in Galena, Ill. You can reach him at 800-884-8290 or firstname.lastname@example.org.