Mobility and Volatility: There’s No Going Back
Jun 24, 2013
‘Producers who fail to keep up with financial risk management tools and trends may cease to be able to compete with those who do.’
By Patrick Patton, Stewart-Peterson Inc.
At a 2010 tech conference, Steve Jobs declared that we are entering the "post-PC era."
Some thought he was crazy because they couldn’t imagine a world without personal computers. Others thought he was prophetic. Which is it? This year, PC shipments are expected to decrease almost 8 percent, replaced in large part by mobile gadgets.
Some point out that mobile devices like tablets and phones lack the computing power to do all the things a computer can do. Those in this camp say tablets are a fad.
Whether the future is in tablets, PCs or some other combination, there is no getting around one simple truth: the mobility of society. Tech companies have had to take this into account as they transform their product lines and businesses. Those who can’t find a way to transform will fall behind or fade away. (Think of companies like Intel, whose bread-and-butter is selling chips for PCs.)
There is an almost parallel evolution going on in agriculture when it comes to financial management. In a white paper recently published by BMO Harris Bank, Director of Agriculture Banking Sam Miller says, "The agriculture industry is becoming more educated and sophisticated in terms of price risk management. Those who actively implement risk management strategies to minimize costs are the ones most likely to see improvement in margin security. Perhaps more significant, however, is that producers who fail to keep up with financial risk management tools and trends may cease to be able to compete with those who do."
Unfortunately, there are some producers who see risk management as a fad. They believe volatility will ease and there is no need to learn the tools and strategies that help a business manage through volatility. I can understand that sentiment, and yet I invite you to consider this: We live in a post-predictable world.
There is always something going on that fuels volatility, whether it is global economic news, weather news, or political news. Last summer, prices were driven by the drought. This spring, we saw the effects of a drought in New Zealand – the worst that country has had in 30 years. Now we are seeing prices come off the April highs, and rest assured plenty of other things are out there than can continue to make them move – in either direction:
• Will demand hold?
• Milk production domestically is up and we are adding to cheese ending stocks. Will this drive down price?
• Will planting delays make feed hard to come by and drive prices up?
Producers need to prepare themselves for the possibilities. With how quickly we share information these days (thanks in part to all the mobile devices out there!), we will continue to see price swings as people share and digest information. And, given that the farm bill was being defeated in the House as this column was being written, we can’t rely on a government program passing anytime soon to change the pricing landscape.
Just like you can’t put the brakes on tech consumers’ desire to be mobile, there is no stopping markets from continuing to be volatile. That high-speed train has left the station. (See chart below.)
Volatility remains: This chart represents the percent change of the annual average All Milk Price from year to year. For example, the average All Milk price in 2001 was 17.7% higher than the average in 2000. In 2002, the average All Milk price dropped 23.6% from 2001.
Whether you are a tech company or a farm operation, innovation is what propels you through the change. Sure, you could sit on a pile of cash to ride out the ups and downs, but that’s not a long-term solution. Just ask Cisco Systems or Apple or Intel if that strategy worked for them. Innovation saved Apple, and it will likely save Intel, too. (Read about the new Haswell chip.)
In the commodity business, innovation in your financial management will be necessary for long-term survival. It doesn’t necessarily matter which kind of risk management tool you use or prefer; in fact, no one can predict which tool or tools will be the most appropriate for the coming year. What matters is that you achieve what you are trying to accomplish for your business. A good advisor would ask those questions and help you match the tools and strategies to your business needs.
My last piece of advice: If you do decide to splurge on an iPhone, don’t count on Siri to tell you when to sell milk. I’m pretty sure she’s not a licensed advisor. Just say, "Siri, call my advisor." (And hopefully I’ll hear my phone ring!)
Thanks for reading.
Patrick Patton is Director of Client Services for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Patrick at 800-334-9779, or email him at email@example.com.
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