Harness Dairy Market Volatility
Sep 10, 2011
The key is a sensible risk management program, based on an understanding of the markets, your dairy’s cost structure and a disciplined, rational approach to marketing.
By Jim Dickrell, editor, Dairy Today
“Volatility in the markets isn’t always bad. If you understand it, you can make it work for you.”
That’s from Greg Steele, vice president of AgriBusiness Capital with AgStar Financial Services based in Baldwin, Wis.
The key is a sensible risk management program, based on an understanding of the markets, your dairy’s cost structure and a disciplined, rational approach to marketing. “We truly believe winners in the dairy industry are those who adopt successful risk management programs,” he says.
The keys to such a program include:
- A reliable and accurate accrual accounting system.
- Reliable and accurate dairy production management systems, such as DairyComp and EZ-Feed.
- Understanding your cost of production and what influences it. For example, if the relative feed value of your forage declines due to poor growing or harvesting conditions, what impact will that have on your purchased feed costs?
- Updated budgets, including a marketing plan, that are monitored against actual performance.
- Understanding monthly cash flow requirements, and when cash needs are greatest. Also understand breakeven milk prices for your business.
- Working with multiple expert resources such as a financial consultant, market advisor, broker and lender.
- Having a working knowledge of marketing, and taking classes to improve that understanding. Understand that risk management is not about price outlook but margin management.
- Using a hedge line of credit, if you qualify, to maximize marketing flexibility.
- Understand marketing tools offered by your processor, and realize they can be a significant tool to achieving goals.
- Avoid making marketing decisions that are not inter-related to your cost of production or tied to your business goals.
- Execute your marketing plan with consistency and discipline. “Be satisfied with singles and doubles, and don’t expect home runs with every transaction,” says Steele.