This week, I had a chance to attend a dairy financing conference in Visalia, Calif. More than 20 banking and financial advisers shared their insight on the state of the dairy industry.
China, Russia and New Zealand were mentioned repeatedly. It was pointed out that we are now in a global era of dairy and there is no going back. We have to move forward as an industry if we want to thrive. Information was shared on how processors need to innovate and develop products that are demanded on the world market.
For the most part, the future looks pretty good. But every speaker was quick to point out, no matter what opportunities might exist in the market, extreme volatility would be the new constant.
The word volatility might worry you some, but, as Robert Hodgen with JD Heiskell points out, the same thing that causes volatility causes high prices. Volatility is not a bad thing for American agriculture, he says. Understand that the volatility wreaks havoc on the markets and can be painful, but it also creates a lot of opportunity.
In order to take advantage of the opportunities, you must have a risk-management plan in place.
You might not be as concerned with risk-management right now, because prices are hitting around the $18 per hundredweight mark, but that doesn’t mean that prices are going to stay that way.
If you’re that person who believes you can sit back and wait for policy to solve the dairy industry problems or mitigate the risk for you, you will be at a disadvantage to those who are actively managing risk, says Tiffany Lamendola with Blimling & Associates.
In order to be successful today, you have to have a risk-management strategy in place. The unfortunate part is there is no magic tool or formula that works for everyone.
But when it comes to risk-management, the basics will get you 90 percent there, says Hodgen.
And, if you aren’t currently using risk-management tools, now is the time to educate yourself. Go to seminars, sit down with an adviser or find a risk-management consultant with whom you are comfortable. It may also be a matter of just getting started somewhere. “You don’t have to plunge in at 100 percent, but you do have to start somewhere,” Lamendola says.
Before you start, make sure that you understand your cost of production and breakeven prices. You also need to work through what-if scenarios, says Michael Edwards with Frazer Torbet.
You also need to be looking forward more than you would have in the past. On the feed side, you need to be looking nine to 12 months out, says Eric Meyer, independent risk-management consultant. On the milk side, you should be looking at a rolling 12 months.
Just because you’re looking that far forward doesn’t always mean you’re doing something, but you have to keep your finger on it, says Lamendola.
All the panelists agreed if opportunities present themselves ,which they will, you have to be willing to take advantage of them.
Trying to outguess the markets is a loser’s game, notes Hodgen. Have a plan and execute it.