“Why Did I Do That?” and Other Natural Emotions in Milk Marketing

11:33AM Sep 14, 2010
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When the markets get aggressively moving one way or the other, don’t let emotion prevent you from remembering your short-term and long-term goals.

By Steven Schalla, Stewart-Peterson Inc.
As we look at August, September and into October, we’ve seen our milk prices make an impressive run higher. The August Class III settlement price of $15.18 is the highest price we’ve seen since December 2008, which a lot of people are really excited about, and should be.
September has also offered an impressive rally, a dollar per cwt. over the past five weeks and two dollars above the low in June. That’s a relatively short time for prices to rally this significantly.
Over the past weeks, our conversations with producers have changed course right along with the markets. There are two main themes in our conversations when the market is going up:
First, for people who are active marketers, there’s often the question of, “Why did I do that? We’re so behind now, what was I thinking?”  Oftentimes, these producers are beating themselves up when they shouldn’t. The bigger problem is that this emotional response usually leads to, “We’re at high prices now, therefore I’m not going to do anything more” (or start marketing at all, for those who have not been doing so). This line of thinking typically triggers a cycle that gets producers into marketing trouble.
When rallies come this fast, you are likely to be behind in your marketing positions, leading to the feeling of regret: “The price went up and I missed it because I contracted too early.” I understand the emotion. Yet, as advisors, it’s our job to point out that producers who are using a strategic marketing process made the best, pre-planned decision they could at that point in time, with the information they had, in order to achieve the goals they have set out to accomplish.
For example, in late July when the September futures contract was challenging the May high prices at $15.48 but looked unable to break that major level of selling resistance, based on what we knew at that point in time, it was a logical point to be selling some of your milk. For a lot of people, a $15-plus base price was a break-even or profitable level where the balance sheet started to make up for the lost ground of 2009. Remember, if you made your decision with your marketing goals in mind, then the fact that prices rallied higher should be icing on the cake. Namely, if you’ve been making your sales incrementally or utilizing a call option strategy, you still have opportunity ahead.
Second, in upward trending markets, we spend a lot of time helping producers keep their eyes on their goals for marketing. The emotions described above can easily distract from a producer’s big picture goals. Instead of dwelling on one specific month or sale you’d love to have back, it is much more useful to look at your weighted average price for the particular month, and then look at it from a big perspective, say for the quarter or year.  From this perspective, you can often see that you’ve given up very little opportunity in relation to what the market has given you, and you managed risk in the process.
When you slow it down and step back from your emotions, you can also look for the other opportunities a rally in prices offers. For example, this current rally offers us improved prices for the fourth quarter months. Instead of spending energy on the “woulda coulda shoulda” for one or two months, ask yourself, “How will I take advantage of the other opportunities this milk price rally is giving me?”
Whether the market trend is higher or lower, a strategic marketer is now addressing several questions to keep natural emotions in check:
  1. What signals is the market giving us that something is changing?  Using technical or fundamental signals can be useful and objective action points.
  2. Do I know what my available marketing tools are and how to use them? By using different tools to complement one another, it is easy to add flexibility to your strategies.  
  3. Is my strategy prepared in advance?  Maintaining discipline and executing a prepared strategy is much easier and productive than scrambling after it’s too late. 
  4. What were my goals going into this marketing year? For example,one of the most popular goals among our clients is price stability for cash flow. However by actively minimizing downside risk, the consequence can be starting to limit you upside potential in an aggressive rally. Even if we are behind a little at this time, are we meeting our big picture goals?
When the markets get aggressively moving one way or the other, don’t let emotion prevent you from remembering your short-term and long-term goals. Remember that the market always presents opportunity and risk; therefore, keeping perspective and maintaining discipline will allow you to have long-run success. 
--Steven Schalla is a Market Advisor for Stewart-Peterson Inc. He can be reached at 800.334.9779 or [email protected].
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