Marketing: When analysts split on predictions prepare for anything
By Matt Mattke
Leading up to the 2013 Super Bowl, analysts were split as to who would win the big game. Many market analysts are sizing up the feed situation this coming year with the same ambiguity: Corn could be $4/bushel or $12/bushel in 2013, depending on growing conditions. What is a dairy producer to do in the face of such extremes and uncertainty?
This year is a prime example of how critical it is to be prepared for multiple scenarios – wherever the market goes.
Let’s look at the decline of milk prices from the October 2012 high to the recent January 2013 low as an example (see Figure 1). In the aftermath of the worst drought in the U.S. in decades, the conventional wisdom was that milk prices couldn’t go lower. In fact, milk prices had to go higher because high feed prices and questionable availability of feed supplies were going to result in massive nationwide herd liquidation. All of the supply-side concerns led to prognostications of $25-$30/cwt. milk prices in the not-too-distant future.
Instead (as of Feb. 1), nearby milk prices were trading between $16.80- $17.25/cwt., and had declined more than $4.00/cwt. from the highs over the last several months. Instead of massive herd liquidation over the past two months, 27,000 cows were added to the U.S. dairy herd.
‘Fundamentals’ change constantly
All of this is a prime example of the difficulty of marketing based on a fundamental outlook. The fundamental landscape is constantly changing, and often changes in the exact opposite of what intuition says should happen.
It is easy to recite in the past tense why milk prices fell from $20.00/cwt. to $17.00/cwt., but to be able to predict what the next catalyst will be – the one that takes milk prices from $17.00/cwt. to $20.00/cwt., or from $17.00/cwt. to $15.00/cwt. – is not easy.
Just think about the end of 2007: Whose fundamental outlook called for a major economic crisis to occur in 2008 and into 2009, cutting milk prices in half? Whose fundamental outlook in January 2012 called for a disruption in the previously highly predictable three-year milk price cycle, due to the worst drought in decades, causing feed prices and production costs to explode?
It is fundamentals that ultimately drive the direction of prices, but determining which fundamentals are going to be the key market drivers, and identifying them in advance, is the extreme challenge.
It is still worthwhile to look at fundamentals and come up with plausible scenarios. However, it is better to spend more time coming up with strategies for those possibilities. What if milk does go to $25.00/cwt.? Conversely, what if milk goes to $16.00/cwt.? What needs to be done to be prepared for each scenario? Scenario planning asks these critical questions and, in response, strategies are developed to account for each.
There simply is no way to know which scenario will play out, and that is not a barrier to successful marketing. I spend much of my day creating “if-then” strategies with my team. I suspect there are many football coaches who do the same thing. In the face of consistent uncertainty, marketing can be done well over the long term, and scenario planning is the key.
• Matt Mattke, Market360SM dairy advisor at Stewart-Peterson, Inc., can be reached via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.stewart-peterson.com.
