In the second part of his two-part blog on lenders and marketing, guest blogger Mike Hogan, commercial analyst with Stewart-Peterson Inc., shares comments from ag lenders who participated in a simulated marketing activity.

This spring, I had a unique opportunity to help lenders experience what it’s like to be in the shoes of a producer making marketing decisions. Through a farm marketing simulation activity that Stewart-Peterson created, lenders attending the trade show at the Wisconsin Banking Association’s Ag Lenders Conference in mid-April had the opportunity to market one month’s worth of milk production for a 400-head dairy and one month’s purchases of soymeal.

To help participants experience the risk that occurs in the real world, the activity included three pricing periods and as the market moved (within the three periods) each participant’s weighted average price, or WAP, also moved. We call the simulation What’s Your WAP? and I explained more about it and which marketing strategies faired best in this recent blog post "Simulation activity underscores the difference strategic marketing makes"

In visiting with lenders who participated in the simulation, many agree that the experience gave them great perspective – both in better understanding the market and in grasping the emotional factors that influence decision making.

Jason Lindeman, vice president and agricultural loan officer at AbbyBank in Abbotsford, Wis., valued the exercise because it required making decisions and showed the outcome from those decisions.

Jason shared with me that he liked the tangible learning experience What’s Your WAP? offered compared to simply talking about "what if" scenarios. "The exercise definitely gives participants a better understanding of the impact of your trades made," he said.

Because of this Jason added, "I think producers hesitant on buying into marketing would be more likely to market their milk and feed after doing a simulation like this."

As well, Jason said the marketing activity demonstrates how important planning and consistency are in marketing. "It’s important to have – and remember – your plan in marketing and not get too greedy when the opportunity is there to meet your marketing objective."

Brad Guse, vice president and agricultural banking officer with BMO Harris Bank in Marshfield, Wis., also found value in the activity.

Interestingly, it was Brad’s suggestion about a year ago that prompted us to develop What’s Your WAP? He wanted to see something developed that would help lenders "practice what they preach" and give them a chance to experience what it’s like to make marketing decisions and see the results.

Of his experience with What’s Your WAP? Brad told me, "It certainly put us in the producer’s shoes. We felt the emotions and angst that goes along with making decisions and pulling the trigger."

Because new market information was shared with participants in each of the three trading decisions, Brad said he also felt the pressure of having to make relatively quick decisions, and he admitted he’s now more cognizant you don’t always have enough time to make the best decisions.

For me, this really underscores the importance of pre-planning marketing. Marketers who know what they’re going to do in advance if the market goes up a little or a lot, or down a little or a lot avoid having to make difficult decisions in the heat of the moment. Emotional decisions often turn out poorly.

I asked Brad if he was surprised to learn that those marketers who were active, but not too aggressive, ended up with the best weighted average price (WAP) for both milk and soymeal in the end. He said he wasn’t – and compared it to the tortoise and the hare. "Steady and consistent is important in risk management. That’s the lesson. You don’t want a strike out that takes you out of business."

I couldn’t agree more. Marketing is a marathon, not a sprint. There are no shortcuts

that yield long-term success.

Mike Hogan is a commercial analyst for Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Mike at 800-334-9779, email him at mhogan@stewart-peterson.com

Scott Stewart is CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@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.

Guest blogger Mike Hogan, commercial analyst with Stewart-Peterson Inc., shares what happened when a group of agricultural lenders participated in a simulated marketing activity.

A well-known proverb suggests "There’s no substitute for experience." I think that’s a statement most of us can agree with.

Unfortunately, gaining experience – especially in the marketing realm – can sometimes be a costly endeavor if you don’t understand all the aspects and alternatives available.

It was that premise that prompted Stewart-Peterson to create a farm marketing simulation activity called "What’s Your WAP?" – with WAP standing for weighted average price.

Weighted average price is the net average price received over time for all of your milk production (or paid out for feedstuffs). It is calculated by averaging the value of priced milk per cwt., the value of un-priced production assigned the current market value, and the value of any milk with hedge positions. Averaging these values is important, because the price you receive for your production at any given point in time might be higher or lower than the current market price. It should be your goal to make strategic and incremental sales (or feed purchases) that build the best possible weighted average price for all your production long term.

The simulation allows participants to make milk and soymeal trades in a fictitious market setting. To truly mimic the risk that occurs in the real world, the activity includes three pricing periods, and as the market moves (within the three periods) each participant’s WAP moves. At the end of the activity, participants can compare WAPs with one another and determine how they did.

In short, this simulation provides a great opportunity to gain some practical marketing experience without the risk of real dollars on the line.

I was part of a Stewart-Peterson team that debuted the "What’s Your WAP?" activity during the trade show at the Wisconsin Banking Association’s Ag Lenders Conference in mid-April. The event draws approximately 120 bankers from over 60 banks and is the only bank-focused agriculture conference in Wisconsin.

Bankers who participated in "What’s Your WAP?" were told they owned a 400-cow dairy with an annual production of 12 million pounds of milk. Using futures prices and option premiums, they were charged with marketing one month’s production of milk (1 million pounds) and managing one month’s expected purchases of soymeal (40 tons). Futures contracts were offered, which replicates the pricing activity of a cash sale or forward contract. Cash sales and forward contracts were not allowed since those positions cannot be offset.

The Results?

The response to this marketing simulation activity was overwhelmingly positive. We had more than 100 of the 120 attendees participate and actively engage in marketing their milk and feed. They were asking questions, competing with their fellow bankers, and working hard to improve their marketing.

This was a real opportunity for bankers to stand in the shoes of a producer, make marketing decisions and experience the outcomes of those decisions.

Among the participants in the simulation, we found that 70% beat the market average by using futures or options.

The table below shows the WAP for milk and soymeal. Those participants who were actively managing positions during the three pricing periods finished with a higher WAP for milk than those participants who did nothing.

For this simulation, lenders who took the market average for soymeal got the best price. However, it is also important to note that those who took the market average in milk got the worst price. Notice that the lenders who made pricing decisions for both milk and soymeal in two pricing periods did quite well. Overall, those lenders had the best WAP for both milk and soymeal.

In reviewing the results, it becomes evident that marketing has a "sweet spot" in the middle. If you do too little or are too overly aggressive and border on speculative activity, it can result in a diminished return. For this simulation, those who hedged were 2% better off across all price scenarios than those who engaged in speculative activity.

Marketing can be thought of like applying herbicides to your crops. You need to apply some, but doing three or four times the recommended rate can be detrimental. You need to find the middle ground.

From this activity, I believe two take home messages are clear.

·         First, marketing does make a difference as opposed to doing nothing and accepting the average price. Great marketers manage milk and feed to get the best possible WAP for both over the long haul. By building the best possible price for milk and feed individually, you are also incrementally building the best possible margin for yourself.

·         Second, we can conclude that marketing decisions can’t be a "one and done" deal to achieve the best results. In order to capitalize on every opportunity the market offers, you need to make incremental decisions that gradually build the best possible WAP for milk and feed. The key is being consistent and planning for the long-term.

Producers who consistently engage in marketing to build a strong WAP over time can minimize the unwanted highs and lows in the marketplace and remove the volatility from their revenue and expenses. Consistent marketers won’t always capture the best price, but they position themselves to also avoid painful losses. Think of it as building a financial cushion for the really tough years.

While this exercise was a simulation, it was also a realistic opportunity for participants to examine what great marketing looks like and the strategic focus that is so necessary. Our team at Stewart-Peterson can offer "What’s Your WAP?" as a free, educational activity to other groups as well. Contact me if you are interested.

Mike Hogan is a commercial analyst for Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Mike at 800-334-9779, email him at mhogan@stewart-peterson.com

Scott Stewart is CEO of Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@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.

No business owner likes the thought of higher interest rates. But rate hikes and inflation are not something to be ignored – and both are a very real threat that I see looming on the horizon for dairy operations and all businesses.

At the pace that the Federal Reserve is printing money – more so than at any other time in history, the likelihood of having higher interest rates down the road is really high.

Surprisingly, in my conversations with dairy producers who have expansion plans, many have not really thought about the impact or risk of higher rates that are likely to be present 10 years from now when those loans come up for renewal. This is something to pay close attention to and plan for, especially if you’re considering expansion plans any time in the next 10 years.

During my visits with dairy producers at the beginning of the year, I noted that about a quarter of them had no expansion plans; a quarter of them planned to update facilities but not expand; a quarter of them planned to expand moderately by adding a few hundred cows; and the rest of them had significant expansion plans.

This is drastically different from five years ago when 80% of the dairy operations I visited had plans to double or triple their herd sizes within a couple of years.

Whatever stage you are in with regard to expansion, just be very cognizant that rates are low now and are likely going up.

Consider this scenario: A dairy producer takes out a 10-year, $3 million expansion loan with a 20-year amortization. It has a fixed rate and a balloon after 10 years.

What happens when the loan comes due 10 years from now if there’s still $1-2 million in principle due on the loan and interest rates are at 8% instead of 3%?

Well, all of a sudden the dairy operation that’s been doing well the last 10 years and looked like it was totally profitable finds itself completely incapable of servicing its debt and could be out of business in a blink.

That said, you would be wise to analyze your expansion plans for the next 10 to 20 years. You might consider coming up with several different "what if" scenarios; at Stewart-Peterson we call this Market Scenario Planning^sm. Brainstorming in this manner gives you a chance to evaluate and strategize how your operation might prepare for the future – especially if interest rates start to climb.

Plan ahead and make sure you are not in a position where you need to borrow money when the rates are high – because if you have to borrow expensive money, you may end up out of business. My advice is to borrow all the money you want at cheap rates and absolutely have that money paid off at the end of the fixed term.

Scott Stewart is CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@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.

Five years ago, many dairy producers felt very good about life. They felt good about their long-term business prospects. Then 2009 happened. 

Since then, milk prices have climbed back up – and even reached record highs, but I’ve noticed that the feeling of bold confidence among dairy producers has not returned.

In my travels and visits with dairy producers earlier this year, it was clear that the mood has shifted. As a result of high feed prices and constant volatility, dairy producers today seem much more aware – and respectful – of the market forces.

With high feed costs and unreliable availability, dairy producers realize they don’t have control of their own destiny – especially if they are not raising most of their own feed. They realize that even though milk prices have been really attractive, their margins are not high. They recognize it wouldn’t take a very big change in the milk price to make their profit disappear pretty quickly.

Most of these producers never imagined losing money when they were selling $18 milk, but now they are realizing it could actually happen.

I saw a similar awakening in the grain market when corn went to $8. Large grain producers who had been very confident before that happened sold at $5. When corn went to $8, they were scratching their head – and their wallet – and questioning, "Maybe this marketing thing is getting a lot more challenging than it once was?"

Other industries from agriculture to Fortune 500 companies have seen similar scenarios.

While missing the market can be a costly mistake, it can also be a valuable wake-up call. The lesson is that understanding marketing alternatives must always be a priority – and there is always more to learn. I am seeing this mentality emerge among dairy producers today. Many of the producers I visited with this winter felt it was worth their time to improve their marketing. Whether they had minimal marketing experience or were pretty seasoned, the dairy producers I visited with saw value in becoming better.

The risk in the marketplace today is a very real threat to all businesses. It is important to use the tools available to manage that risk.

Looking Forward

The increased risk and higher costs that the dairy industry has had to adapt to over the past five years are very similar to what Fortune 500 companies are also experiencing. Monthly, I meet with business executives who are members of The Executive Committee (TEC) – a group who share their collective knowledge and experiences to help each other generate better results for their businesses. They represent businesses worth $5 million dollars to nearly a billion dollars.

Since the recession hit in 2008, many of them have cut overhead and streamlined their businesses – and several of their companies have become more profitable than ever before. You would think they would have that confident, "life is good" mentality that I saw in the dairy business five years ago – but they don’t.

They too have a new-found respect for how quickly the market can change and how much risk – and uncertainty – exists.

Despite the challenges and uncertainty, I remain an optimist. With a focus on learning, improving and planning market strategy, I believe any business can have the opportunity to thrive in the new era that lies ahead.

Scott Stewart is CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@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.

An article in the Wall Street Journal a couple months ago bore the title "Learning to Love Volatility." In the ag industry, can we learn to love volatility?

I hope you answer yes, because in today’s world I believe the ultimate path to business success means managing price risk and finding a way to embrace volatility. My premise is you can either be a victim or a victor in the marketplace.

If you choose to say, "Poor me," volatility can kick your butt. Or, you can step up to the plate, harness the energy – and opportunity – from a volatile market and put it to good use.

The author of the Wall Street Journal article touting a love for volatility was Nassim Nicholas Taleb, who is a professor of risk engineering at New York University’s Polytechnic Institute. Taleb is also credited with developing the "black swan" theory a decade ago as a means to refer to large events that are unexpected, but profoundly shape our world. World War I, 9/11, the dot com crash would be examples.

Building on his black swan research, Taleb’s newest theory is that we must learn to benefit from variability, stress and disorder. In his Wall Street Journal essay, Taleb writes, "We should try to create institutions that won’t fall apart when we encounter black swans – or that might even gain from these unexpected events."

Taleb outlines this concept in his newest book titled Antifragile: Things That Gain From Disorder. I don’t’ know if "antifragile" will become as commonplace of a term as black swans – and portions of Taleb’s book are challenging to grasp – but I do fully support the theory that with the right tools and preparation businesses can benefit from disorder – or stress – in the marketplace.

Stress Can Be Good

I think all of us can admit that sometimes stress can be beneficial. For instance, an impending deadline on a project usually provides the right amount of stress to prompt you to complete the project.

As another example, to get the full benefit from an exercise workout you need to push yourself – exercise a little harder to create stress that will strengthen your muscles and cardiovascular system. If you go to the gym and always lift 2 lb. weights for 10 minutes, eventually your body won’t gain from that. But what if you hire a fitness coach, learn to use new tools, and push yourself to a higher level of fitness?

Taleb proposes, and I agree, that growth can come from stressful experiences.

That said, you need to prepare your business to do so. In my opinion, that means you either need to become an expert on volatility, or you need to align yourself with professionals who can assist your business in using risk management tools that are impactful.

Using the fitness analogy again, if you lift weights and you do it wrong or without proper training you can hurt yourself. The same is true of marketing. If you do it without proper knowledge or using the wrong tools, you can hurt your business.

Likewise, you want to consult with a marketing professional who is going to push you a little. You don’t want to hire someone to do things the same way you’ve always done them. You’ve got to be pushed outside your comfort zone to become better.

Ready For The Next Black Swan?

Although black swans are unpredictable, we do know they’re coming. For instance, I can predict that a massive earthquake will eventually occur in California and that the volcanoes in Yellowstone National Park will erupt at some point – the Discovery Channel frequently features programs about these future natural disasters. Thousands of black swan scenarios exist.

What we don’t know is when a black swan will occur. However, in our global, quickly changing, interconnected economy, I hope you’ll recognize that black swans are not rare, once in a lifetime events. Black swans happen frequently; once in a decade or even every five years.

I’m 54 years old. In the next 20-25 years of my life, I could witness three to six more catastrophic world events. How many significant boom-boom-and-bust cycles will you experience in your lifetime? How many more droughts? How many more economic collapses?

I don’t believe that any of us should sit back, wait and see what those events are and then react to them. Rather, as Taleb suggests, I believe we should plan and prepare our business strategies now so that we might gain from these unexpected events. Be antifragile!

Input costs are high, and price swings are many multiples of what they used to be. That’s why I believe you’ve got to maximize every price opportunity and benefit from each major price swing using risk management tools. With a consistent, strategic and disciplined approach to marketing, you can capitalize on the opportunities that come from volatility and position your business to gain ground and move ahead.

Can you love volatility? In these volatile times, you can’t cower from it and do nothing. As Taleb suggests, embracing volatility is key, and with proactive market planning we can learn to gain from disorder.

Scott Stewart is CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@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.