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Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

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

4 Initial Steps to Risk Management

Oct 26, 2012

Whether you're beginning -- or revamping -- your strategy, winter is a good time to make sure you’re making the best decisions for your dairy.

Katie Krupa photoBy Katie Krupa, Rice Dairy

As the harvest comes to an end and the winter months approach, now is a great to begin your risk management planning. Unlike the changing seasons, risk management opportunities are much less predictable, so you can’t always implement your strategy at the same time each year. But it is good to have a set time to review strategy each year. I recommend setting aside some time in the upcoming months to review your risk management strategy or discuss your options if risk management is new to your operation. Below are some steps to get started or revamp your risk management strategy.

1. Find the right professional to work with.

I put this step at the beginning because finding a professional to work with can make the proceeding steps much easier. When looking for a professional, I would suggest asking the following questions:
• Does he or she understand your dairy and the dairy industry? It is important to understand the variables that impact your business’s success or failure, including farm financials, dairy policy and the commodity markets.
• Does he or she understand all of the hedging strategies that are available? Regardless of whether you are working with a broker, cooperative employee, extension agent or independent consultant, your professional should be able to analyze all hedging strategies that are available to your business.
• Does he or she fit well with your personality? That may sound trivial, but you are building a relationship that should last for many years, and good communication and understanding between both parties is very important to a successful relationship.

2. Determine your break-even milk price.

For many of you, I know that hearing this is similar to nails on a chalk board, but unfortunately it is a very critical step. When you start looking at your hedging opportunities, you need to know how those prices relate to your farm’s financials. The good news is that I don’t think it’s essential to get these numbers down to the penny, but you do need to get a rough idea of what is a “good” price for your unique business. More good news is that there are many people and resources available to help you with this calculation. If you need help, look for counsel from a professional.

3. Determine what feed commodities you need to hedge.

Again this is something a professional can help with. Don’t be overwhelmed! As we have seen in recent years, feed price volatility can be just as detrimental to a business as milk price volatility. It is very important to determine your feed price risks. For those of you who grow a portion of your feed, your risks are less than an operation that purchases all its feed, but both operations still have a risk. It is important to determine your risks, and create a strategy that works for your farm business.

4. Make sure you are considering all of your options.

Your risk management strategy may be as diverse as an investment portfolio, with strategies ranging from insurance programs available through the government, milk plant forward-contracting, and hedging on the exchange. As the markets evolve, so will the hedging opportunities available to your dairy business. Again, it is important to know all of you options and/or work with a professional who can analyze these strategies for you and be sure you are properly using all the tools available to your business.

While the professional you work with may not change, your farm’s financials, feed risks and strategies available will most likely change and evolve. That is why I think it is important to review and make sure you are still making the best risk management decisions for your business. Regardless of whether you are new to risk management or already have an established plan, take some time this winter to review your strategies to make sure you are still making the best risk management decisions for your business.

Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. You can reach Katie at klk@ricedairy.com.Visit www.ricedairy.com. There is risk of loss trading commodity futures and options. Past results are not indicative of future results.


 

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