Management Brief: Harness Volatility

October 3, 2011 02:13 PM

Make market fluctuations and risk management work for you

"Volatility in the markets isn’t always bad. If you understand it, you can make it work for you."
That advice comes from Greg Steele, vice president of agribusiness capital with AgStar Financial Services in Baldwin, Wis.

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More on managing volatility

A sensible risk management program is one that is based on an understanding of the markets, your dairy’s cost structure and a disciplined, rational approach to marketing. "We truly believe that winners in the dairy industry are those who adopt successful risk management programs," Steele says.

The keys to creating such a program include:

  • A reliable and accurate accrual accounting system.
  • A reliable and accurate dairy production management system, such as DairyComp or DHI-Plus.
  • Understanding your cost of production and what influences it. For example, if the relative feed value of your forage declines due to poor growing or harvesting conditions, what impact will that have on your purchased feed costs?
  • Updated budgets, including a marketing plan, that are monitored against actual performance.
  • Understanding your monthly cash flow requirements and when your cash needs are greatest. Also, understanding what the break-even milk prices are for your business.
  • Drawing on expert resources such as a financial consultant, market adviser, broker and lender.
  • Having a working knowledge of marketing, and taking classes to improve that knowledge. Understanding that risk management is not about price outlook but margin management.
  • Using a hedge line of credit, if you qualify, to maximize your marketing flexibility.
  • Being familiar with the marketing tools that are offered by your processor, and realizing that they can be a significant help toward achieving your goals.
  • Being careful to avoid making marketing decisions that are not related to your cost of production or tied to your business goals.
  • Executing your marketing plan with a professional level of consistency and discipline. "Be satisfied with singles and doubles, and don’t expect to hit a home run with every transaction," Steele says.
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