The extra point in football has been called pointless. The National Football League has discussed getting rid of it because the kick is easy, almost always made and just takes up valuable game time to move the kicking unit on and off the field. What if the NFL decided to add a wrinkle to the extra point kick? Let’s say the opposing team could line up, and when the whistle blew to start the play, they could move the goalpost one way or another to fool the kicking unit.
That would make the kicking team’s job more difficult, wouldn’t it? It also would mean the audience would witness a few more debacles.
Debacles might make for good television ratings, but they aren’t something we want to see on your dairy operation. Let’s apply the concept of “shifting goalposts” to your price risk management activities, and see if we can avoid some of the common problems that occur.
As commodity price management specialists, we meet with new clients at the beginning of the relationship, and the clients share information related to their goals and risk tolerance for price risk management activities. Examples of the things we hear during these initial conversations are:
• “Keep me from being a victim. I can’t experience the losses I incurred in 2009 again.”
• “Help me thrive and grow despite volatility. I want to be able to pass the business on to the next generation.”
• “Help me manage through the highs and lows. I don’t need the highs in the market; I just want to avoid the lows and have more consistency in my revenue and input costs.”
With goals agreed upon, we set out to create recommendations that will meet the goals.
There are times, however, when the goalposts move. This spells trouble for the market adviser and the relationship with the client. It happens so frequently that we thought by sharing the most common reasons why goalposts move, we might help others prevent this from happening.
• Producers decide they want more of the rally. The previously agreed-upon risk tolerance goes out the window when the milk price climbs. And the longer it climbs or stays at high levels, the more uncertain the producer becomes.
For example, at the time of this writing, the 2014 average Class III milk price has rallied 22 percent from its summer low, and with this rally the market is offering a weighted-average price for the year that is around $20.
There are some producers who do not want to protect that price, even though previous discussions about risk tolerance indicated they would want protection when prices reach these levels.
Granted, risk tolerances can be adjusted with good communication along the way about the overall health of the business. If the kicker knows the goalpost is going to move, he can adjust, and the team can work together to make the extra point.
• Producers develop recency bias and forget why they were managing risk in the first place. This point is related to the first one.
It’s worth reiterating because pride and desire to capture a market high are very powerful emotions that cloud the math around measured decisions that build a strong weighted-average price for the year. We’re seeing this happen in feed right now.
Corn has fallen to 52 percent from the 2012 high, and some producers are still hesitant to act. They assume corn will not go higher, so they take the risk and wait for $3 corn rather than ensuring they don’t have to experience $8 corn again. I wrote about the powerful pull of recency bias in Issue 3 of Progressive Dairyman .
• Producers lose their appetite for margin calls. This problem stems from a producer not making the proper connection between their margin account and the cash price. Perhaps we take a market position using a futures contract.
Then the market rallies, and the producer gets a margin call for that position. They see that money going out through their margin account and disassociate it with the higher milk price they are getting for their cash sales.
• Family members or other decision-makers are not on board with the goals and approach. The person in charge of price risk management needs to communicate along the way with the rest of the management team. It is easy to “Monday morning quarterback” after the decisions have been made.
The entire management team should be on board with the goals and should understand how the decisions work to fulfill the goals. Keep in mind that the reason family members or other members of the management team react the way they do is that they have emotions, too.
It will take a strong leader to help these influencers remember the reasons for engaging in price risk management and help them move beyond thinking a month or a quarter at a time. When we talk about using pricing tools to build a solid weighted-average price, we’re talking about protecting and enhancing the long-term health of the business.
In football terms, your vision as team leader is on executing those extra point opportunities when possible, and it’s also about putting together a complete and successful game or season. (And a repeat, or three-peat.)
When I raise these points above, I am doing so with the intention of being a helpful coach. I’m not saying that a market adviser never makes mistakes.
Sometimes, a field goal or extra point is missed because someone on the kicking unit slipped up or miscalculated. When that happens, professionals will own up to the miscalculation and the team will move forward together.
Very rarely do you hear a kicker say, “We missed the mark because someone moved the goalpost.” I want that to be the case for every dairy farm that works with a commodity price management firm – teamwork, professionalism and all the players aligned, working toward the same goal. PD
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Patrick Patton
Director of Client Services
Stewart-Peterson Inc.
