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

Who Is in Control Here?

Jan 04, 2013

Advice for dairies looking to actively manage input and milk prices.

Stewart Peterson   Mark LudtkeBy Mark Ludtke, Stewart-Peterson

As 2012 drew to a close, our advisory team was getting very few questions about what dairy prices would be like in 2013. No, most of the questions coming into our office had to do with whether or not the farm bill would be extended or reforms would be enacted.

It seemed like the whole world has been waiting to see what the New Year would bring public policy-wise. Taxes, estate planning, insurance. “Just tell us what to expect so we move on with running our businesses” seemed to be on everyone’s mind.

Well, just as the crystal ball in our office does not have a clear picture of future prices, it does not have a clear picture of what politicians will do when driving toward a cliff or a debt ceiling. And so, while we all await a clearer picture of what might happen with respect to dairy policy, we continue to give our farm clients this advice: Take control yourself.

This message of taking control is not foreign to American dairy producers. In the last decade in particular, we have seen dairy producers take control of their own destiny and do what they need to do to remain leading suppliers in the world. They have become masterful at both production and business management. Some of that mastery was born out of adversity, such as prolonged low milk prices or drought. To be sure, we’ve seen consolidation; however, many of those changes were made so that producers could bring in another generation, or accomplish the lifestyle and career choices they choose.

Even as we await more meaningful results out of the farm bill and dairy policy reform debate, price risk is present. Those businesses that cannot absorb risk in some other way, or those looking to actively manage input and milk prices in search of additional advantages, can be looking at a few key things right now:

- Feed: Look for seasonal buying opportunities on any further price weakness to start getting 2013 protection in place. If any physical product is bought, we recommend setting upside targets to get put option coverage in place on these purchases. Using a combination of tools like this allows you to bring down your weighted average price for a purchased commodity over time.

- Milk: Downside sell stops should be put in place so that if seasonal strength does not materialize, there is a Plan B ready and waiting and your milk can be protected. This kind of “scenario planning” is what we are recommending for all of our clients to help build confidence in an uncertain environment.

There are balanced reasons for caution, optimism and opportunity in the coming months:

- Caution: Politicians kicked the can down the road again, which means more uncertainty and more political battles in the months ahead regarding the debt ceiling and budget cuts. Much of the debate will be just noise and posturing, however, economic strength directly feeds demand and the ability to fund farm programs, so we’ll be watching.

- Optimism and Opportunity: Recent price action in whey futures and cash cheese suggests that a bottom is forming. Higher moving product prices would provide opportunities to get milk covered at higher levels.

New beginnings

Speaking of optimism and opportunity, I have some of my own to share. After eight-plus years with Stewart-Peterson, I have decided to take a position with Nutrition Physiology Company. It’s a position that will likely mean less travel for me, which I believe my family will appreciate. And so, as the calendar turns to a new year, I find myself both optimistic and also reflecting on what I have learned in this dynamic business.

In my years with Stewart-Peterson, I have seen an increase in volatility that most certainly will continue. I have seen so many dairy producers rising to whatever challenge came their way, including price risk. I have also heard the “woulda-coulda-shouldas” from those dairy producers who wish they had done more to manage price risks. Those things only become clear in hindsight. Even though I am moving on to other pastures, I still believe that taking control is the right thing for dairy producers to do when it comes to price uncertainty. These days, whether you are a politician or a business person, everyone is in the business of managing or shifting risk. Dairy producers are no different.

Thank you for listening to my ideas for the past year in this column. Tom Mongoven, who has been bringing you the Dairy Today Market Week in Review, will bring you next month’s column on behalf of the advisors of Stewart-Peterson.

Finally, I and everyone at Stewart-Peterson wish you a great 2013!

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 2013 Stewart-Peterson Inc. All rights reserved.

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