By Matt Mattke
Producers don’t want to dwell on it, but a marketing strategy must have contingency targets built in to provide a safety net.
Many dairy producers tend to shape their marketing strategy around the notion milk prices will go higher and provide better marketing opportunities in the future.
The marketing strategy might be to place offers through the milk plant to forward contract if the price hits $15.00/cwt. Maybe the strategy is to buy $14.50/cwt. put options if their cost falls to 25¢. Or, perhaps, the strategy is to get $15.00/$17.00 bear fences in place if the market reaches $15.50/cwt.
Whatever the strategy specifics, the important question needing an answer is: “What if the milk market fails to reach any of these higher targets and starts to fall apart?” Is the producer’s marketing strategy equipped to deal with that situation?
Unfortunately, being fully prepared for any adverse price situation means having to contemplate milk prices trending in a direction no dairy producer really wants to dwell on – downward. But for milk marketing to be successful, that’s exactly what is required. A successful marketing strategy needs to have contingency targets built in to provide a safety net – a “Plan B” of action – in case milk prices don’t trend higher or don’t reach the targeted price levels.
Ultimately, a successful milk marketing strategy is prepared for whichever direction the market trends, higher or lower. Preparing for the downward trend is more difficult. It requires analyzing milk prices and trying to identify the crucial levels of support that, if broken, could signal the overall milk price trend has shifted from “up” to “down.”
Even if the dairy producer has successfully established Plan A for an upward-trending milk market, and Plan B in case a lower-trending milk market develops, the next big hurdle is following through and having the discipline to act on Plan B.
If downside triggers have been hit, signaling Plan B needs to be put into action, that likely means milk prices are down and have fallen below support. After milk prices have started to fall, it’s always the most difficult for most dairy producers to pull the trigger and take action – but often when taking action is the most crucial.
The milk market in late 2008 and into 2009 is a perfect example. Once milk prices topped out in May 2008 and started to fall, it provided no opportunities to sell on a bounce. Prices steadily eroded week after week, until the market had shed 50% of its value.
Finding the confidence and discipline to execute on Plan B of the strategy – after milk prices have already started to fall – is garnered from Market Scenario Planningsm.
Market Scenario Planningsm is all about contemplating the “what ifs.” It is about thinking of every possible way milk prices can move, not only to the downside, but to the topside, as well. It is thinking about the possibility for extreme milk price moves, as well as more benign moves. It also looks at the impact any marketing decision has on the bottom-line average price, and analyzes the decision under a number of different price scenarios.
In next month’s article, I’ll detail how Market Scenario Planningsm can provide the confidence to take action, even in a falling market.
Market Scenario Planningsm is a service mark of Stewart-Peterson, Inc.