Tools of the Trade: Manage Financial Risks

milk splash Dean Foods

To state the very obvious: Managing financial risks is challenging.

Fortunately, there seems to be a steady stream of more and better tools for you to use.
That said, as a dairy analyst and forecaster, I remain convinced that one of the oldest tools is still one of the most important. It is a long-range forecast.

Yogi Berra used to say, “It’s tough to make predictions, especially about the future.” Yes, it is tough. To wit, the accuracy of forecasts. Whether it’s the weather or Wall Street or the Class III milk price, forecasting is
always challenging.

Forecasting is an attempt to look around a corner and we all know you can’t look around a corner. But the attempt to look helps us anticipate and begins to give us a basis for decisions.

Thinking through the supply and demand situation gives us a basis for a price prediction. The price we settle on for any given month probably won’t be spot on, but we have a better feel for the trend (higher or lower) and the magnitude (a buck, two bucks) of the price change. This is very helpful information.

With this preamble, let’s take a look at 2016. You’ve probably put on most of your first quarter hedges—maybe even a chunk of second quarter and beyond. But there are still opportunities.
Each month, I review and revise a month-by-month forecast that I put together for clients. As part of this process, I also survey six dairy economists who work for dairy companies and cooperatives. They send me their proprietary forecasts. I summarize these forecasts and share the month-by-month results with each of the six.

I can share some of the results with you. The charts below show the quarterly averages for Class III and Class IV from the most recent forecasts which were submitted to me in early November.
Generally speaking, we expect prices to ease lower (than fourth quarter 2015) during the first quarter of next year and then move slowly, but steadily higher. The low point for Class III will come in March at $13.45, if one of the seven of us is spot on. And there will be a double bottom (February and March) for the Class IV price at $10.88.

On the other end of the spectrum, Class III will put in its high in November at $19.68; Class IV, in October at $17.69.

You might want to run these prices against current futures prices. You just might spot an opportunity to mitigate some risks.


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