Preparing for Black Swan’ Dairy Market Moments

2/9/2013 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

Charlene M. Shupp <\n>Espenshade

LANCASTER, Pa. — Dairy prices go up, dairy prices go down, but how the market goes can be anyone’s guess according to one dairy marketing specialist.

Scott Stewart of Stewart-Peterson, an agricultural commodity marketing firm, kicked off the 2013 Pennsylvania Dairy Summit with a dairy market outlook.

Stewart called these extreme unexpected events “black swan” moments. One example is the 2008 financial banking crisis. For a dairy farm, an example would be the low milk prices and high feed prices of 2009.

“You need to be prepared for anything the market dishes out,” he said. “Generally, people feel these extreme events seldom happen. But extreme events are much more common than people believe.”

Statistics show that the “half-life” of corn and dairy producers is about 13 years, according to Stewart. About half of the dairy and corn producers will be out of business during each cycle.

“The reason is, when markets tend to average the average cost of production for the average farm. So if you are below that average, you are heading to extinction,” he said.

Although his talk was titled dairy outlook, Stewart said decisions should not be made based on what is happening in the markets.

“The best thing to become a better marketer is quit trying to predict where the market is going to go and accept you do not know where the market is going to go. And (instead) be prepared for the market no matter where it goes,” he said. “We look at all of the possibilities and prepare and plan for all possibilities.”

For example, what happens if a farmer locks in a milk price of $19 and prices climb to $21 per hundredweight. Stewart said that when he works with farmers he asks if they will be OK if that situation occurs. If not, they have to come up with a different solution.

“Most people farm because it’s their way of life. People grew up farming, and people accept the risk of farming,” he said, adding, however, that farmers need to “be the victor not the victim of volatility.”

Margin management, or locking in feed and milk prices to secure a farm around its break-even price, leaves the operator in a tougher financial position, Stewart said.

Instead, the operator should try to maximize the difference between the farm’s milk price and the market price during a price downswing and minimize the difference during an upswing.

“I am here to argue when the market offers you a big profit, you deserve it,” he said.

In contrast, you can dig a really big hole in times when the market offers a lot of risk and unprofitability.

“The only way to avoid the big hole is before you get to it,” he said, and “to have strong financials that when the markets are tough, you are making money.”

Stewart referenced the book “Great by Choice” by Jim Collins, which looks at businesses that thrive in uncertain markets, something he said dairy farmers can understand.

“Accept without complaint that you cannot predict and nothing is certain,” he said, and instead focus on managing through volatility.

Another of Stewart’s core concepts is to be fanatically disciplined, making decisions based on information, not opinion. This can also involve productive paranoia, or acting like the next downswing is coming.

The final point Stewart made is that successful businesses do a “20 mile march” by looking to make steady, measured progress over time — doing what is right for the farmer, he said, and not reacting to outside pressures such as milk price.

Stewart touched briefly on what is happening in the markets for feed and dairy.

Feed will depend on weather he said. U.S. corn ending stocks are at their lowest since 1996. World corn ending stocks are at their lowest for 38 years.

“Worldwide, we do not have much of anything laying around,” he said.

If there is a good start to the spring season, prices will drop, he said. But if it is dry, prices could jump dramatically.

Hay is looking like the grain commodities, and dairy producers in the Midwest are purchasing or renting more farmland for hay production because it is harder to purchase hay.

Most dairy farms are at breakeven right now, he said, and dairy exports have been weak.

Stewart said he believes the three-year milk price cycle will continue after being disrupted this past year because of weather.

He said he expects the milk market to be bearish for this year, but the weather could also create a more bullish market.

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