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Know Your Market

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

Beyond the Fundamentals: Know Your Marketing Tools

Mar 20, 2014

NCAA basketball teams plan and execute their March Madness strategies. So too should dairy producers prepare for when the high-price bubble will burst.

ken harzell   CopyBy Ken Hartzell, Dairy Gross Margin, LLC

It is March Madness time in NCAA basketball, that time of year when favorites prevail, Cinderellas appear, bubbles are burst, and teams fight to play another day. In the dairy industry, the "favorite" is high milk prices, and the big question is when will the high price "bubble" burst?

In the big picture, the dairy market has strong demand supporting it—high cheese prices, strong demand from China and others for Whole Milk Powder and Skim Milk Powder, and an improving economy. There are several areas of the world, however, also increasing production at the same rate (or greater) than the U.S. Remember the old market saying, "The cure for high prices is high prices"?

With this supply/demand situation, according to futures prices, the cash price for milk should decline during the year. Futures prices are determined by buyers and sellers, using today’s information. They are predictions just like the ones ESPN analysts come up with when predicting winners and losers for each game and region.

In the early days of basketball, teams would work on fundamentals of shooting, passing, dribbling and teamwork, but teams would show up and play each other, taking what the other team did and making adjustments as the game went on. But as the game grew, the risks of being unprepared were bigger and coaches adapted. First came scouting the other team in advance so there was better preparation. Then came films, videos and computers to track what opponents were doing. Teams became much better prepared to weather the storm if the opponent started to press full court, or trap, or set ball screens.

The dairy industry has similar features. For years, we have worked on the fundamentals of getting more milk. Then we’d show up at the market and take the price the market gave us. That is still the way 80% of milk is marketed. But, as the investments in the cost of production continue to grow, how do we become better prepared? Is it enough to just work on the fundamentals of producing more milk?

The last five years since the start of Livestock Gross Margin-Dairy (LGM-Dairy), we’ve seen the increased usage of futures and options, increased usage of forward contracting, and we’ve seen some milk plants work on creative ways to help their producers protect prices. In late 2014, producers will have the option of utilizing the Farm Bill’s newest alphabet soup--MPP or Margin Price Protection. At this point, rules have not been written.

Successful basketball coaches are continually learning and improving, and dairy producers need to do the same. Not every coach uses a zone press or a 1-3-1 defense or motion offense in every game, but they are aware of them. They do have some type of offense and defense in place. The point is, they make decisions and then do "something" beyond the basic fundamentals. It is not always right, they don’t always win, but it keeps them disciplined and not losing by as much as they could have.

By 2015, dairy producers will have more tools and more alternatives to help protect milk prices than ever before. Do they have to use all the tools? No. Do they have to use only one? No. Can they combine these tools? In some cases, they can. But the No. 1 thing is to get educated on what’s available, what the marketing tools will do and won’t do, and then do "something." Just like the basketball coach, it may not always be right, and you won’t always "win" (sell at the top), but "something" could make you money and/or protect your operation from a downturn.

Ken Hartzell is an agent with Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products. Reach him at ken@dairygrossmargin.com or visit www.dairygrossmargin.com.

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