Marketing: A case for being prepared
By Matt Mattke
Here are two excerpts from my column written for the May 2012 issue of Eastern Dairy Business:
“Attempting to forecast how high or how low feed prices will go in 2012 and where prices will be at year’s end is a misuse of one’s time. Unless a person is able to predict what the weather will be come spring, summer and fall with extreme accuracy, there is no way of knowing where prices will go and where prices will end up when all the dust of the 2012 crop year settles. The only thing that a person can really count on for 2012 is volatility; prices are going to continue to be extremely volatile.”
“A person can expect volatility to continue to rear its ugly head in the feed markets in 2012, because nothing will be different in 2012 from any other year. The Funds haven’t gone anywhere. They are still a major presence in the marketplace with hundreds of thousands of contracts positioned in the corn, soybean, and soybean meal markets. Weather is a factor that will continually come into play through the growing season.
Changes in weather forecasts, changes in actual weather experienced, subsequent changes in crop conditions, and subsequent changes in USDA supply/demand forecasts will fuel rollercoaster-type price movements. Frost, drought, flood, etc. are all weather events that can potentially come into play and wreak havoc with feed price direction.”
The reason for referring back to the May article is to emphasize to dairy producers 1) how imperative it is to have a feed strategy in place that is prepared for massive price volatility; and 2) to emphasize how important it is to not get complacent or caught up in the fundamental(s) of the moment, because things can change extremely fast.
At the time of writing this (the first week of July), the June low price of December corn has rallied 42% to its current high of $7.13/bushel. The price of December soybean meal has rallied 27% from its June low to its current high of $447.00/ton.
Producers who weren’t proactive in implementing a strategy to protect their feed price risk, purchasing feed on a hand-to-mouth basis, have seen their feed bill increase in a dramatic fashion over the last several weeks.
To be prepared for feed price volatility does not require psychic abilities. In the May article, there were no prognostications made about where feed prices would go, or what specific driving factor(s) could take corn and protein prices substantially higher or substantially lower. It just said that the key ingredients for volatility were still around, and to expect – and get prepared for – another extremely volatile year for feed prices.
Prepare for volatility
Running what-if scenarios is the best way to prepare for volatility. It is an approach that removes the guesswork and futile task of trying to predict which way the market is going to go. Nobody knows which way the market is going to go, and the sooner that reality is accepted, the closer one is to truly being prepared for extreme feed price volatility in either direction.
Ultimately it comes down to a change in the line of questioning. Instead of asking: “Where is the corn price going to go?” you should ask: “What if the corn price falls to $3.00/bushel or rallies to $10.00/bushel? How do I prepare and protect myself against either corn market scenario?”
Ditching the biases, expecting the unexpected, and having a strategy in place for substantially higher and substantially lower price scenarios are necessary to handle the extreme feed price volatility we are likely to continue to see going forward.
Here was the closing line from the May 2012 column: “So what will feed prices do in 2012? Who knows. The better question to ask is how well prepared am I for volatility?”
The same holds true today.