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Scenario planning pays off for Wisconsin couple

Angie Molkentin Published on 14 May 2010

The road to better marketing continues for Dave Geiser and Deb Reinhart of Gold Star Farms. After choosing a marketing consultant in November 2009, Dave and Deb began their journey. The destination: Better control of their business through better marketing.

Travel log entry: April 2010

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“We’re really celebrating here. Our March contracts were worth $6,000 more than what we would have gotten from the milk plant without a contract. That is a biweekly payroll. Or a load of protein. Or a week at our favorite all-inclusive resort in Playa del Carmen.”

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Earlier this year, Deb Reinhart described their decision-making processes about marketing as “moving forward on faith.” As they begin to see some of the results of those decisions, the couple says they are building some confidence and understanding of marketing strategy.

Deb describes the difficulty of those first few decisions to sell milk contracts: “We went forward in December with those contracts when everyone in the industry was still optimistic about the milk price going up, so we weren’t really sure about those decisions then. We decided to go ahead, very much relying on the advice and trust of our adviser and the desire to meet our cost of production goals.”

Deb and Dave’s adviser, Matt Mattke of Stewart-Peterson Market360, says that most people back in December were very optimistic about 2010 milk prices, including others on his consulting team. “The market was trending upward at the time, and could likely have continued,” he recalls.

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But what if that outlook was wrong?

It’s the “what ifs” that make decision-making agonizing, Mattke points out. That’s why he counsels every client to have a “Plan B” in place in case prices don’t go up. “We call this ‘market scenario planning,’ and it’s something we do on a regular basis when dealing with the uncertainties of commodity markets.”

Market scenario planning helped Deb and Dave

Market scenario planning has its roots in ancient Roman military strategy. Battlefield strategists tried to predict what the enemy might do and then prepared their action plan. They envisioned all the possible moves, so they were ready to act if and when a particular scenario played out.

Beginning in January, with Mattke’s counsel, Deb and Dave began to put milk pricing strategies in place that would lay the groundwork for good decision-making, whether the market continued to trend up or began trending down.

“Matt sent us thorough e-mails with charts and trigger points and explanations of at what point action should be taken,” Deb says.

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Those triggers are essential to good decision-making because they are part of the overall strategy which is agreed upon in advance of the need.

Only now with the benefit of hindsight are Deb and Dave beginning to fully understand why those triggers were important for those first few sales and how having them in place helped them make better decisions “in the moment.”

“Before we were going on faith; now we’re starting to understand the why,” Deb observes. The couple continues to learn and absorb. They are reading everything Mattke sends, plus taking a commodity marketing class offered through Professional Dairy Producers of Wisconsin.

Key learning this past month came from a tutorial Mattke provided on “stops” and how they are used in the decision-making process.

Mattke says a “stop” strategy is an important part of positioning yourself well, no matter what the market does. Having stops in place allows the client and adviser to discuss scenarios and decisions before they occur, preventing the “mad scramble” to make a decision in the heat of a market move.

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A tutorial on stops

What is a STOP?

“A stop is a mental price level that we are watching, located at a price level we deem to be ‘support’ or ‘resistance,’” Mattke says. “If that stop is broken, it could be an indication of a changing price trend.

“For instance, say milk prices are in an uptrend and the current price is $15,” he continues. “We look at the charts and decide that as long as milk holds above support at $14.76, the trend is up and no hedging action needs to be taken. We place the stop at $14.76.

“Let’s say the next day milk drops 30 cents and closes below $14.76.” Mattke says. “That would signal to us that the trend could be changing from an upward-trending market to a downward-trending market, and action needs to be taken to get milk priced.”

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The key motivator behind using a stops approach is uncertainty, Mattke says. There is no way of knowing how high or low milk prices can go.

“Look at 2009,” Mattke says. “How many people thought milk prices would drop from $21 to $10? So instead of trying to guess where the market is going to top or bottom out, which is a futile effort, we wait for the market to give us a signal that the market could be topped or bottomed out. Stops provide us that signal.”

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Mattke points out that using a stops strategy often means recommending a milk sale on a down day. “This is often difficult for new clients like Deb to understand. Why would we price after the market has dropped? The answer is that we’re letting the market tell us when it’s time to use the safety net. If we do this methodically over time, we can reap the rewards of disciplined strategizing and decision-making.”

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Gold Star Farms well-positioned
Mattke says it’s essential to make sales in increments over time, and that’s the approach Deb and Dave are taking. Sales have been made in 200,000-pound increments. As of April 1, 40 percent of the farm’s production was priced through June.

The first quarter of 2010 was a downward-trending market, reversing the upward trend at the end of 2009. Gold Star Farms did make use of call options during the downward-trending market. After contracting some milk in December and January, the farm got some safety call option protection in place in February for the milk they had previously contracted. Call options give a milk seller the opportunity to “re-own” that milk if prices climb sharply and a seller wants to “call” that price opportunity back again. Only a few call options were bought, though, because the chances were relatively slim that prices would climb quickly during that time period, Mattke says.

“The methodical stops strategy means we don’t have to spend a lot of money on put and call options,” the adviser notes. “We simply use them where needed as additional safety nets.” PD

Angie Molkentin is a freelance writer from Oconomowoc, Wisconsin.

Gold Star Farms is a client of Market360, a service of Stewart-Peterson, Inc. Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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How we mapped out our feed strategies

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