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The Milk House

How to overcome risk management hurdles PDF Print E-mail
Dairy basics - Management
Written by Angie Molkentin   
Thursday, 03 February 2011 16:27

0311pd_molkentin_3Beginning hurdlers are often afraid of the hurdle. When they approach it, they slow down, then jump over it awkwardly. Sometimes they hit the hurdle, fall and do not wish to attempt another one.

The same is true of dairy marketing. Producers are being told that using risk management tools will help make their financial road smoother.

Yet each risk management decision presents a hurdle: How do I make this decision? Should I or shouldn’t I jump? What if I fall?

Coaches will often teach beginning hurdlers by removing the hurdle and replacing it with a flat stick, and adding tape on the ground that marks the proper take-off point.

They encourage the hurdler to run hard, practice their stride and gain confidence. After practice and drilling, the athlete actually begins to approach hurdles without hesitation. 

A similar exercise regimen could help dairy producers gain confidence making marketing decisions, says John VanSickle, Director of the International Agricultural Trade and Policy Center at the University of Florida. VanSickle facilitates a trading simulator called Financial and Agricultural Commodity Trading Simulation – or FACTSim for short.

“One of the biggest hurdles dairy producers face is learning the concepts well enough to get comfortable executing,” VanSickle says.

FACTSim uses real-time data and helps a producer see the impact of each decision.

Less than 10 percent of U.S. milk is currently being hedged, estimates Mark Ludtke of Stewart-Peterson. “Lenders and business consultants are advising that producers use tools, yet these tools are unfamiliar,” Ludtke says. “Learning by reading or in a class setting is a start, and then you just have to do it to gain experience.”

Ludtke believes practice in a “safe” environment like FACTSim could give producers the confidence they need to do the risk and opportunity management being prescribed by lenders and business consultants.

He wants to help producers get started on FACTSim and take their marketing knowledge to the next level. (See details about the dairy trading peer below.)

Florida producer ready for take-off
Keith Shiver, a third-generation dairyman from Mayo, Florida, has been using FACTSim for nearly two years in an effort to build his knowledge of how marketing tools work.

“I have a degree in ag economics, and I studied the marketing terminology – puts, calls, long, short,” he says. “It’s the process of actually doing it that teaches you.”

Shiver logs in to FACTSim and reads the commentary on the markets, then makes decisions in his simulated trading account. “It’s almost like Fantasy Football – I’m checking it often, making decisions and trying to improve my standings.”

“Fantasy” is a good word to describe a FACTSim trader’s account, which can be seeded with $100,000 of fictitious money to cover margin calls and fees for executing trades. And if the trader goes broke? Players can apply for a fictitious loan to try and get out of the situation.

Or VanSickle can hit the reset button and your money magically reappears.

While FACTSim is a financially safe environment to learn, it has produced real-world results for Shiver.

“I’ve done a better job booking feed,” he says. “When you practice long enough, you get a feel for the market cycles.”

In addition to better marketing, Shiver says he’s built the confidence necessary to explain marketing decisions to others who are in business with him. “This is a family operation with multiple generations involved,” he says, pointing out a hurdle common to many dairies today.

One of the added benefits to Shiver’s experience with FACTSim is the group of dairy producers who participated with him in the simulation. Early on they met regularly to learn, share ideas and experiences.

“We ask each other, ‘Did you have a strategy in mind when you made this trade?’”

The group participation and friendly competition has helped him and fellow participants develop discipline, a key to successful marketing.

“Many who try without knowledge fail,” Shiver observes. “They may take a position, have to come up with margin money they didn’t plan for, and suddenly their banker is not comfortable either. Then they quit the position, the market changes, and they miss the opportunity.”

Shiver believes dairy producers are going to need to learn how to use these tools for future success.

0311pd_molkentin_1“Right now it’s tough to plan where we’re going to be 12 months from now, to go to a bank with a plan in hand. Where will demand be next year? Where will prices go? We can’t handle another 2009.”

Since participating in FACTSim, Shiver has developed a more optimistic view: He believes becoming good at marketing may mean opportunity for dairy producers.

“Speculators in our marketplace offer an opportunity a lot of other businesses do not have. The local hardware store is completely dependent on customers walking through their door. We have an opportunity to meet buyers in the markets, lock in when we want to, trade when there is opportunity.

That’s not to say there is opportunity all the time, but we have to think about how we can benefit from their interest in agriculture.”

Shiver and VanSickle both say that FACTSim is not a silver bullet – it’s a learning tool. The important next step is application of decision-making confidence to the marketing program on the farm.

That’s where Shiver is headed. His next step is to put together a plan of action with goals for his marketing that address the farm’s debt service needs and risk situation. “It will be a plan to execute on specific triggers so there’s no guessing anymore,” he says.

Ludtke says Shiver’s approach will serve him well. He cautions producers not to measure the success of their marketing on the balance in their trading account, which is FACTSim’s main measurement metric.

“Success in marketing is measured against overall goals set for the farm over a period of time, not by each individual trade,” he points out. “Producers participating in FACTSim should use it as one learning vehicle on the road to overall proficiency in marketing.”

A little like tape marks and sticks on the ground, before scaling the real hurdles.  PD

Angie Molkentin is a writer from Oconomowoc, Wisconsin. She has special access from Stewart-Peterson to observe the FACTSim dairy trading group and the interactions of producers in the program.

PHOTO
“Right now it’s tough to plan where we’re going to be 12 months from now, to go to a bank with a plan in hand. Where will demand be next year? Where will prices go? We can’t handle another 2009.” Photo by PD staff.

Join a trading peer group!

Progressive Dairyman
has set up a peer group through FACTSim to help producers learn by doing and sharing with each other. For the first 30 producers who join the group in 2011, all fees will be covered through a sponsorship from Stewart-Peterson.
Mark Ludtke will serve as mentor for the group.

To join, e-mail Ludtke at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call him at (800) 334.9779. By participating you will:

• Learn the language, concepts and typical positions in commodity trading.
• Learn how to move in and out of positions.
• Experience the impact of decisions made.
• Develop the discipline to execute decisions.
• Share experiences and ask questions of those in your peer group.

Who should participate? Join a peer group if you:
• Have a basic working knowledge of marketing terms, and want to put the tools into action.
• Are willing to commit the time to study the markets and maintain positions within your FACTSim account.
• Are willing to share experiences with others in your learning group.
• Are not afraid to fail – simply ask your mentor to hit the reset button if you run out of “fun money.” What a way to learn!

Click here to view a related video! Want to see more "Road to better marketing" articles? Search here.

 

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