Know Your Market
To Act or Not to Act? It’s Your Question to Answer
Feb 26, 2012
Sideways markets tend to keep many producers on the sidelines when it comes to risk and opportunity management. That’s not going to protect your equity.
By Liz Doornink, Stewart-Peterson
In the sessions and the hallways of the Dairy Business Association meeting in Wisconsin last week, I talked with dairy producers about their opinions of the current dairy markets. Here’s my general takeaway: Sideways markets tend to keep many producers on the sidelines when it comes to risk and opportunity management.
In the days since that conference, as the markets started to head south, producers I talk with are starting to question whether or not they ought to be "doing something," and what value they would get for the time and cost of marketing. I’ll address that, but first, here is a summary of the recent market trends:
- January milk production was up 3.4%, which had the markets all a-buzz last week. That is the largest year-over-year increase for January milk since the 5% increase seen in 2006.
- The last two months cow numbers have seen strong increases with 10,000 head added to the herd in December and another 13,000 head added to the herd in January. This is the highest rate of growth over a two-month stretch since Dec. 2010 to Jan. 2011, when 35,000 head were added to the US herd. Total cow numbers are still 99,000 head below the 2008 high of 9.335 million head.
- Total cheese stocks for January were estimated at 977.835 million pounds which is down 7% year-over-year and down 1% month-over-month. This is the lowest January figure going back to 2009 when total cheese stocks came in at 865.259. January is now the fifth consecutive month that stocks have declined year-over-year.
- The January Livestock Slaughter report showed 264,000 head removed from the herd. This was unchanged compared to the previous month and up less than 1% compared to January 2011. This marks the third consecutive month slaughter has been up compared to the previous month, but the rate has declined during the same time period.
- Looking forward, watch for the March 9 dairy export report, as exports remain crucial to sustaining milk prices. The next commercial disappearance report comes out the morning this column is distributed, Tuesday, February 28.
What to be thinking about:
Those producers who are engaged in a strategic, disciplined marketing program for milk and feed are likely prepared for a market downturn. Typically, at this point in a price cycle, a strategic marketer will want to get more aggressive about pricing, to try and protect the best price possible, for as much milk as possible, for as long as possible. How you do that depends on a variety of factors:
- your risk tolerance,
- your cash flow,
- your level of comfort with the various tools available.
On the feed side, we’re continuing to watch the spread between milk and grains, looking for opportunity to book feed.
Should I act?
Producers always ask us why they should act now vs. later. I always tell them that we’re not in the business of predicting, we’re in the business of informing and preparing. Up until this week, we’ve had the kind of up or sideways markets that create indifference when it comes to preparing marketing strategies. We can’t always predict with 100% accuracy, but we know from history that the market has the potential to go from sideways to down in a hurry.
I can’t tell you whether you can ride out a downturn or not. That’s a business decision that may involve your lender. And that reminds me of another conversation I had at the DBA meeting.
A lender talked with me about the changing face of agricultural credit and that loan officers now want to see that dairy producers have some sort of strategies in place to protect their prices. That’s the point I want to drive home. Sitting on the sidelines is not going to protect your equity. What’s more, dabbling in the market to protect a certain price for a certain period of time is not a sound, long-term business strategy.
To be fully prepared for whatever is next, I encourage producers to sit down with your lender and business partners and talk about your business goals, your risk tolerance, and what opportunities lay ahead if you manage your risks and opportunities well. Then decide whether marketing has a place in your business.
Of course I’m biased because I believe it does have a place. In my experience as a producer, a consistent approach to marketing is what saved us during the ‘09 downturn. Aside from my own experience, I can show you charts dating back to when Stewart-Peterson Inc. first started advising dairy clients, and those charts depict how consistent, disciplined marketing over time protects against the devastating milk price lows even as you track close to the market on the way up.
Marketing is not something you decide to do with a little bit of your production for a short period of time. It’s a management philosophy. So, if you’re wondering, "Is creating a risk management plan worth it? Will I be OK if I just ride this out?" sit down with your lender and a strategic advisor, assemble the facts and prepare to take control of an uncertain situation.
Liz Doornink is in Dairy Business Development for Stewart-Peterson, Inc. Liz can be reached by calling 800.334.9779 or at email@example.com.
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