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Dairy Producers Can Benefit from “Productive Paranoia”

Nov 03, 2012

Research shows that business leaders who consistently ask, “What if?” – and then act with productive steps – are bound to succeed.

Stewart Peterson   Mark LudtkeBy Mark Ludtke, Stewart-Peterson

We’ve been getting great response from our discussions of the business book Great by Choice with dairy producers. Jim Collins, the author of Good to Great, offers research-based characteristics of high-performing companies.

In my last column, I talked about “fanatic discipline” as a characteristic of great marketers. This month, I have to talk about “productive paranoia.” That’s because everywhere I go, many dairy producers I talk with, if they haven’t already begun a disciplined risk management program, are unsure what to do right now. There is a large chorus of people saying that the milk price cannot go down. There is also another section of the choir saying that feed prices will only go up. That has producers nervous.

Being nervous for the next year sure doesn’t sound like a fun (or healthy) proposition. And yet “paranoia” is a good thing among today’s top business leaders, according to Jim Collins, when it is “channeled into extensive preparation and calm, clearheaded action.”

In other words, good business leaders can be nervous. And they can turn those nervous feelings into something good by taking action. The “productive” part of paranoia is “preparing, developing contingency plans, building buffers, and maintaining large margins of safety,” Collins writes.

Great marketers recognize that an adverse price move could be right around the corner. They don’t abandon their marketing goals because prices are good. That’s tempting when you are feeding expensive feed and need every dollar you can get from your milk, and everyone is singing The Hallelujah $20 Milk Chorus. If you knew for certain $20 milk would stay around for the next 10 or 12 months, you’d probably do nothing. The productively paranoid among us ask, “What if it doesn’t? What does that mean for my business? What can I do to prepare for a downturn?”

Right now the U.S. cheese price is at a significant premium to world cheese prices. Milk production in the southern hemisphere is said to be going well. What if the European crisis comes to a head and there is a flight of money to the safety of U.S. treasuries, buoying the dollar and hurting exports? What if South America has a big crop and feed prices fall, bringing milk along with it?

For all these reasons, we are recommending that producers put that nervous energy to productive use and get some forms of price protection in place for 2013 milk. The tools and strategies you use can vary depending on your farm’s financial situation.

On the feed side, the trend is still up for corn prices, so there is still the risk of seeing higher prices. Yet, $7.00 and higher per-bushel corn prices have not lasted long in the past. It is said that “high prices cure high prices,” and, in the past, every rally over $7.00 per bushel has eventually been followed by a selloff into at least the $5 per-bushel range. Therefore, there are dollars per bushel of risk and opportunity in both directions from the current corn price of about $7.50 per bushel. Buying the physical corn protects against higher prices, and using tools such as put options can effectively reduce your final price on the physical corn should it sell off.

The point is, Collins’ research shows that those business leaders who consistently ask, “What if?” – and then act on that paranoia with productive steps – are bound to succeed because they are ready for the unlikely events that no one else wanted to think about.

If you’d like a copy of Great by Choice, I’ll be happy to send you one. And, if you’re attending the Elite Producer Business Conference, be sure to look me up there, and we can talk about productive steps you might take for your dairy’s future.

Mark Ludtke consults with dairy producers nationwide concerning their choices for risk and opportunity management. He can be reached by calling 855.334.0700 or at mludtke@stewart-peterson.com.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

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