What Every Market Adviser Wants Clients to Understand
Jan 02, 2012
I have a great opportunity to return to our family dairy farm. I intend to seek much advice for my new career. In turn, I’d like to leave you with some straightforward advice about marketing.
By Steven Schalla, Stewart-Peterson
It is with mixed emotions that I share with you my departure from Dairy Today’s team of Know Your Market contributors to return to the family dairy farm full time. This decision was given much consideration, and I sincerely thank the Dairy Today staff for the opportunity to contribute to such a dynamite publication.
So now, with the start of the New Year and new opportunities for me, I can offer one last column of advice – advice that I will be taking home to the farm with me. When I look back on my years as a market adviser, I consider the points I offer below to be the "hard facts" about marketing that producers struggle to grasp. At first, these thoughts may come across as a bit brash; however, my experience is that long-term risk managers and, moreover, successful dairies understand and follow these principles.
In this, my final column, I have the opportunity to tell it like it is, so here goes:
· There is no such thing as a free lunch. Producers always seem to be searching for a mythical position that protects their break-even or desired margin, and also leaves 100% ability to gain better prices, and costs little to nothing to maintain that position. Of course, this position doesn’t exist. Government programs are funded by taxes, and in the private sector, fellow participants at the CME will appropriately demand compensation for taking on your risk. The simple fact is that you cannot have it all. The more certainty you desire, the more opportunity you will have to surrender.
· Becoming a fully versed marketer takes education and has become more advanced. Learning the available tools and how they work through the CME or government agencies is a time and energy investment, and results in critical skills you will have for the rest of your career. At a minimum, find a trusted adviser and have confidence in the strategies they share. Like everything on the farm, marketing has evolved, even over the past 10 years. Thus, expect to use more advanced strategies that can involve (yes, the dreaded) margin calls to see more attractive upfront premium costs and better final results.
· The bottom line is the bottom line. It is easy to retrospectively get caught up in analyzing individual trades as winners or losers, and whether you really needed to spend money on premiums for a position or on margin insurance. Citing a specific trade or position can be misleading, so analyze results using a weighted average approach to find the cumulative effect of all decisions made. In the end, every decision is a means to an end—that being the financial success of your operation. Cumulatively, if your hedging decisions allow you to meet the goals set out for your operation, whatever they are, your marketing efforts have been successful. Note: Avoid evaluating your success in marketing after an emotional price swing (up or down). Instead, this is the time to remember the next point:
· In marketing, consistency is king. A decision to engage in marketing needs to be at minimum a three- to five-year commitment to see the full cycle of prices. Pound into your head that as a hedger, when prices go up, you will be behind the market price, and that is OK if you remain consistent. Stick to the same type of approach (aggressive or conservative) in an up market and in a down market for best results. For example, if you have used an aggressive forward contracting approach, stay with it, even after prices have gone up, to catch the opposite result as prices come back down. If you are inconsistent in your marketing, you are simply attempting to cherry-pick the right times to be in or out of the market. Which leads to the final point:
· We operate in a global market, and nobody knows for sure what’s next. More than ever before, there are scores of dynamic factors that affect the price on your milk check. The best analysts may be able to guess the correct general trend of prices. However, consistently projecting specific tops and bottoms in the market is impossible. Thus, we recommend having a dynamic plan ready for both extremes—one that protects from the lowest prices and allows you opportunity to capture higher prices. If you are prepared for the market moves, it is much easier to execute positions during those emotional price swings. In addition, it is easy to assume that what’s happening in your backyard is the situation everywhere. From New Zealand milk production to the European debt crisis, keep an eye on the high-level fundamentals and current events around the world. Then strategize for any number of outcomes.
I’m a firm believer that if you want to be successful at something, find those who are the best and learn what they are doing. I will be doing this as I become a dairy producer myself. With regard to marketing, I know that the most successful dairies embrace the marketing principles I describe here, because I have witnessed it. I will be following their example.
I am excited to announce that my friend and colleague, Liz Doornink, will take my place as a regular contributor to the Know Your Market blog. Liz specializes in working with producers who are interested in price opportunity and risk management yet are unsure where to start, or have concerns about how it actually works. Because she has this unique viewpoint, I’m eager to read her fresh perspective about the top-of-mind concerns of dairy producers. Stay tuned for her first post in February!
Thanks again for reading. Happy New Year, and may this be your most successful year yet!
Steven Schalla has been a market adviser for Stewart-Peterson, Inc. The firm can be reached by calling 800.334.9779 or visiting www.stewart-peterson.com.
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