‘Be prepared for anything the market dishes out’

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MADISON, Wis. -- Volatility has rocked milk prices and feed costs over the past four to five years.

Expect it to continue, says Scott Stewart, president and CEO of the Stewart-Peterson commodity marketing and consulting firm in West Bend, Wis.

“Be prepared for anything the market dishes out,” he told those attending the Professional Dairy Producers of Wisconsin business conference on Tuesday. “You have to think about the possibilities so you are not blind-sided by unexpected market moves.”

He likened it to an army preparing for battle and anticipating different moves by the enemy.

For farmers, the most immediate thing to anticipate is whether last year’s drought in the Midwest will continue this year or not.

If there’s good weather this year, corn prices could easily be below $5 per bushel ― “into the 4s,” Stewart says. If, on the other hand, there is a weather scare this summer, corn could go to $12, he adds.

The idea is to be prepared either way.

It takes strategic thinking, like an expert chess player who is planning two or three moves ahead. 

Stewart recommended the book “Great By Choice” by Jim Collins. The book describes the kind of strategic planning used by successful companies to thrive in good times and bad.

The same principles can apply to dairy farms. “When I first read this (book), I thought this is dairy marketing all over again,” Stewart said.

The great companies (and farms) rely on evidence, not opinions, he said. They are fanatically disciplined. They accept that change will happen.

To implement an action plan, Steward recommends using “market scenario planning” where the different scenarios are considered. It allows producers to prepare risk-management strategies for multiple price scenarios and helps them determine which strategies will yield the best price using an assortment of risk-management tools, such as put options and forward contracting. Professional assistance is advised. 

“You have to use the right tool at the right time,” Stewart says.

Although Stewart’s theme was to be prepared for unexpected events, he did allude to a couple of things on the economic horizon that may be considered certainties. For one, the U.S. Federal Reserve has been printing a lot of money lately to stimulate the economy, and Stewart says this will likely lead to inflation in the coming years.

Don’t get caught with a big loan balance in an environment where interest rates go to 7, 8, or 9 percent after inflation kicks in, he advised.

Stewart also alluded to the burgeoning agricultural export market, which will strengthen the price of U.S. farm commodities for some time.

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CNY  |  March, 14, 2013 at 02:39 PM

Our financial adviser (Farm Credit) told us that the few clients he has that play the marketing game, although they have an occasional short term success, never do as well over a long period as those who ride the market. The prices are too volatile to really hit the best positions and the expense of paying commissions, etc also eats into returns. He did say that those who are highly leveraged must use the market to stabilize their prices even though their long term returns are less, because of the large obligations they must meet.

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