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

Dealing with the Internal Struggles of Risk Management Decisions

Jun 03, 2013

Tips to help make risk management decisions and implement a plan that will work for your dairy.

Katie Krupa photoBy Katie Krupa, Rice Dairy

When it comes to making risk management decisions, many producers struggle with the decision-making process. Risk management can often be emotional, the information can be overwhelming and, simply put, producers don’t want to miss out on potential higher prices. The volatility has many producers asking themselves if risk management is right for them, but they still struggle with the process.

Below are a couple of tips and tactics to help make risk management decisions and implement a plan that will work for your business.

Emotion

I often find the emotional aspect of risk management is the hardest hurdle to overcome. Because the dairy is a huge part of their life, many producers are emotional when they have to make important financial decisions for their dairy. Is this the right decision for the business? Will this help financially? Will this help reduce stress, or increase stress? Will the other mangers of the business be happy? These are just some of the questions producers wrestle when reviewing their risk management opportunities.

Firstly, these emotions are normal and healthy. You care about your business and you want to make sure you are doing the right thing for your future. Secondly, don’t struggle with this alone. Bring in an outside advisor/consultant to help guide you through the process and keep you on track to making a good financial decision. Be sure to discuss your goals and strategies with the full management team rather than make the decision alone. And lastly, make your decisions based on the financials for your business; try to eliminate emotions such as fear and greed from the process.

Don’t want to miss opportunity

No one wants to miss out on any income potential, but we have to weigh the risks and the rewards. Dairy farming is naturally a high-risk business not for the faint of heart, so removing some of the risk may seem unnatural. But with the increased price volatility, many producers are finding that risk management is a vital survival tool for their business. While I certainly don’t know what the future will bring, I can almost guarantee that if you utilize risk management tools on a consistent basis, you will miss out on some of the market’s upside potential.

The good news is that, with the many diverse risk management tools available to producers, your missed upside opportunity may be minimal, and you are still protecting against the downside if prices should decline. The risk you are protecting should outweigh the reward you are potentially giving up. But figuring that out can often be emotional, so don’t struggle with that decision alone.

Not comfortable enough with all the available strategies and market insight

In recent years, the number of risk management strategies available to producers has grown significantly. While this is ultimately a good thing, it can be overwhelming to producers who do not have a substantial amount of time to dedicate to risk management. I am seeing more and more producers outsourcing their risk management needs to an experienced broker, consultant or advisor.

At first, I was very surprised by the producer’s desire to hand over the responsibilities, but after working with several dairies, I have found that the producer is more satisfied knowing that the risk management plan was created and executed based on financials of the business rather than emotion. Your broker/consultant/advisor should be making the risk management decisions based on your farm financials, upcoming needs (such as expansion), and even taking into consideration your personality. Having a third party execute the strategy removes the emotion of the farm and allows the decision to be based on numbers rather than feelings.

No one ever wants to hear "I told you so," especially when you are telling it to yourself. If you are currently sitting on the fence not sure if risk management is right for you, get off the fence and get some guidance from a professional. Getting the process started will help you make decisions down the road, and will calm that uneasy feeling you may currently have.

Katie Krupa is a broker 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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