Control the Emotions and Impulsive Decisions that Milk Market Volatility Can Produce
Jun 13, 2011
In a roller coaster market, producers often feel they should do something, like jumping in or out of positions. This can lead to all kinds of impulsive decisions--and often poor results. So when do you step in, and when do you ride it out?
By Steven Schalla, Stewart-Peterson
Milk prices chugged higher for three straight trading weeks leading up to last Tuesday, June 7.
Roller coasters are sure a lot of fun at the amusement park, but there was very little amusement on June 7, when the milk market fell 75 cents, its daily limit. If anything, Tuesday’s ride left you feeling quite queasy! Trade that day was indeed roller coaster-like, with swings both up and down, drawing in even those who think of themselves as disciplined marketers in it for the long haul. Total volume for the July contract totaled over 1,000 contracts, about three times a normal day’s trade for the second month contract.
As a dairy market advisor who monitors price action in the milk markets every day, it was very apparent to me that emotions ran high and boiled over at times, as both buyers and sellers rushed to establish or exit milk contracts. At times it felt like watching a tennis match, with the ball flying back and forth between the two competitors.
The timeline below summarizes the volatility and emotion of the session, tracking the July 2011 milk contract:
- 9:05 a.m. – July Milk opens the day trading session at $20.13/cwt., off 4 cents from the day before.
- 10:45 a.m. – Heading into the daily cash cheese session, July drops a minimal 4 cents from the open to $20.09.
- 10:48 a.m. – Cash cheese session closes with no action seen in either the Block or Barrel market. This spooks the milk market, and the July contract free-falls to $19.87, 22 cents lower than just three minutes earlier.
- 11:07 a.m. – Within another 10 minutes, additional traders see the drop and pour into the market. Volume builds, sending July down to $19.51. In just over two hours, July has dropped 62 cents.
- 11:11 a.m. – Milk buyers have waited long enough, and jump in fast! Big buy orders throw prices back higher to $19.89, a 38-cent swing back up in 5 minutes.
- 11:30 a.m. – The push higher is short-lived, and sellers step back in. This works the July price back down to $19.42, a new low for the day and down 47 in less than a half hour.
- 12:30 p.m. – Buyers are willing to make one more stand after the sharp set-back and bounce the July price up 18 cents to $19.60.
- 1:10 p.m. – At the close of the day session, worries prevail and the July prices slide lower to the daily limit at $19.42.
Exhausting! Can you image trying to decide what to do at any one of these points with only a few minutes to pull the trigger? Fortunately, this much volatility within one day rarely takes place.
Regardless of how fast it happens, there is always emotion tied to seeing milk prices make sudden swings. Each of these price points could realistically represent one day’s trading session and the emotion would still be there.
Recent conversations with producers we work with demonstrate just how emotional milk market decision-making can be. Producers feel like they should be doing something, whether it is jumping into positions or jumping out. You can feel the level of concern and tension as they search for a feeling of security. This emotion can lead to all kinds of impulsive decisions, which usually do not yield good results.
So when do you step in and when do you ride it out?
The simple fact is that today’s markets change fast, and not always for logical reasons. In fact, the July milk contract is averaging a daily trading range of just over 41 cents in the past two weeks. Some moves warrant your attention while others may not. Last Tuesday’s move was largely offset by Wednesday’s trade, where milk prices came back sharply higher, including July gaining 45 cents, as cash cheese prices continued to gain.
The key to knowing whether you should step in lies with advanced planning. Look at key factors like where we are in the milk price cycle (which I’ve written about before), what percent of my milk is protected, and which tools will do the best job if the price goes up, down or sideways. Then, when the price does go up, down or sideways, you have thought about what you will do. You can react faster than if you had done no prior planning.
There are many producers who would rather get a tooth pulled than work on their risk management strategies. Yet working through different strategies and how they will perform in any price direction is key to having the confidence to know when to step in and when to sit tight as the market moves. It will also give the confidence to hold established positions, since you’ll know what your price will be in any scenario. We call this process Market Scenario Planning, and it’s a tool we use every day, to help clients stay focused on the long haul.
As we work through summertime, chances are that volatile and emotional trading days will happen, especially with milk prices reaching historically strong levels. With that in mind, a little prior planning will go a long way in making disciplined decisions and forming a successful marketing strategy.
Steven Schalla is a Market Advisor for Stewart-Peterson, Inc. He can be reached at 800.334.9779 or firstname.lastname@example.org.
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