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1206 PD: In Step with Scott Stewart

Published on 11 December 2006

Marketing is becoming an important tool to help dairy producers reach maximum profitability. I interviewed Scott Stewart who recently wrote a book, New Times, New Rules – Take Control of Your Farm Marketing, about agriculture marketing. I asked him how dairy producers should approach marketing and how agriculture markets have changed in the last 25 years.

1. In your book, you mention the agriculture business landscape has changed. What changes have you seen in the last 20 years in agriculture and in your dairy clients?

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I’ve seen a couple big changes. One is the growth and consolidation of farm operations, and that is true both on the crop side and the dairy side. It used to be that a 100-cow dairy was considered large. Now, large is 500 or 1,000 cows. I think the same is true on the crop side, too.

I think what has happened is a lot of people are farming more land and milking more cows than they used to, and they are seeing massive changes in their cash flow. The dollars flowing through their operation are dramatically greater than ever before. As a result, the profitability or the swings from red ink to black ink are geometrically bigger than they were before. That is what, I think, has lead to a real need for people to change their approach to marketing.

The markets have become much more volatile. I’ve been in the business for nearly 30 years, and for the first two-thirds of that I’ve always been told we were in a new era. I really don’t think it happened until the last five or 10 years. Now we’re really into a new era.

You can look at the volatility and variability of prices as a curse or a blessing, depending on whether you’re taking advantage of it or letting it run over you.

2. What motivates people to considering marketing?

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There are a lot of things that motivate people to try to do a better job at marketing. For some, it’s just because they’ve always been bad at it and they realize they are leaving money on the table and their neighbors aren’t.

In a sense, I’ve always believed agriculture in the United States is a break-even proposition. We are so capable of producing whether it be corn, soy beans or milk that the government, from a food and security standpoint, wants farmers to stay in business. But they aren’t going to pay the support prices so that anyone will, on average, flourish.

So the challenge is for the producer to be better in every way.

3. In your book, you say you have to be an above-average farmer to survive. Do you think that statement applies to dairy farmers?

I think so. I think there is a certain price out there that if you are able to deliver milk at that price and make a margin, you are going to stay in business. I don’t care if you have 100 cows or 250 cows or even 1,000 or 10,000, if you’ve got a high cost of production you are so much more at risk of extinction. If you are able to be a highly efficient, above-average producer, I don’t care if you’re milking 30 cows or 3,000 cows, I think you can stay in business. I think it all goes to back to managing the economics of your farm operation. And I don’t think that matters whether you’re talking milk or corn.

So my belief is that dairy producers are, in a way, competing against each other to be an above-average producer. If you’re an above-average producer, there is profit to be had. If you’re a below-average producer, you’re going to go out of business.

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4. What motivated you to write a book about marketing?

I feel a little bit like a marketing evangelist or missionary. I wanted to get the message out. The message or the core of the book is that outlook-based marketing does not work long term and that a strategic approach to marketing is what works. I feel that 99 percent of the people in the marketing world, including stock analysts, commodity brokers and corn growers, wake up in the morning and feel prices are going up so they say, “I’m going to hold,” or they expect prices to go down and say, “I’m going to sell.” They have a price outlook, and they make decisions based on that.

In the commodity business, when you have all the information you need to make a confident decision the market move is over. It happens time and time and time again. When someone is the most confident on where they think prices are going, they are most likely to be wrong. The only way to overcome that is to have a strategy and say, “How do I manage this uncertainty?” That involves having a strategy in place that no matter where the market goes you know what you are going to do, when and how you are going to do it and what tools you are going to use. That is pre-planning.

Everything that makes a farmer a good farmer or a good dairyman is their good business decision making. If you apply that same technique to marketing, you are going to fail miserably. Good business decisions are made with good information. In the markets, by the time you have good information, the market move is over and all the opportunity is lost. The whole secret is you can’t wait for certainty to make a move.

So in the book I’m trying to break some lifelong habits and teach people to make decisions in a different way.

5. What would say is the first step for a dairy producer who is not currently using marketing tools but wants to try them out?

Don’t replicate the mistakes grain farmers made before you. The majority of grain farmers have been trying to use futures for decades and have generally done it fairly unsuccessfully. They don’t hedge enough to affect their bottom line or they don’t do it at the right time or they use the wrong marketing tool. There is a whole list of reasons why hedging hasn’t worked for many farmers over the years.

That is why I wrote the book. Generally, people buy at the top and sell at the bottom because the news supports it.

We find the dairy guys are much easier to work with than the grain producers because they don’t have a lot of the bad habits.

6. What are the bad habits of marketing?

The worst habit is waiting until you are highly confident in a decision. By default, when you are highly confident you are making the right decision the market move is over. That is the most common one – waiting for moderate to high confidence in a decision before pulling the trigger. As you become more confident, there is less opportunity.

Every time you wait for more certainty the opportunities are diminishing.

6. So you would say the perishable nature of a milk producer’s product gives him or her an advantage in marketing?

I think so. Like I’ve said, one of the biggest mistake people make is waiting to make a decision. In the milk business, there is no waiting. The milk is constantly rolling off the farm. It’s constantly being priced.

I definitely think that helps people focus on the value and the margin that they can lock in with a forward-pricing program of some type. PD

Walt Cooley, PD editor

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