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Volatility in the Commodity Markets – A New Paradigm

Tim Baumgartner
Educational Opportunities: 
Home > Education & Events > June 2020 > Volatility in the Commodity Markets – A New Paradigm

Agriculture has a long held perspective that if you are going to be in this business, you will face risks beyond your control. For decades those risks where primarily weather, operating expenses like inputs, labor and supplies, and the price we received for our milk.

Over time, we’ve abated some of those risks. New crop insurance programs in the early 2000s helped agricultural producers offset the risk of weather related events. Increased focus in the areas of management led astute producers to focus on strategies like better employee relations, increased retention rates and enhanced farm productivity to offset rising hourly labor costs. New technology in crop genetics and machinery increased efficiency and milk productivity to grow profitability. Many of these areas were once thought beyond our control, but today we have found a way to effectively manage and bring about a level of certainty.

Over the last five years we have seen a level of volatility in the milk prices that we never would have expected. We have seen optimistic forecasts that have not materialized. We saw a surge in prices that we felt was long overdue and would probably last for an extended period of time. Then we saw a collapse in those prices that most of us would admit we never thought would happen or even could happen with the advent of COVID-19.

While none of us can say with any certainty how long the current pandemic will last, or what prices we’ll see from it, we do have tools to protect against this uncertainty. Globalization has changed the way we do business. It also exposes us to risks that are necessarily not confined within our own borders. Tools like DMC, DRP and CME protect price and manage margins, and are better than the tools previous generations had to protect against risk. To have the mindset that these tools aren’t applicable to all of us and choosing not to utilize them puts our individual operations at risk. These tools need to be employed to ensure the success of farms of all sizes.

Here in Wisconsin, we enjoy the availability of a strong infrastructure of academia, professional vendor and supply network, and processing capacity not seen in other areas of our country. For long-term viability, we need to be utilizing those avenues and developing a sound strategy to mitigate risk in all facets of our business.
Historically if we did an exceptional job of taking care of our cows, crops and land, we could reasonably be assured of being successful in dairying. Today, the rules are different. It’s not just about managing our cows, crops and land. It’s the other resources we utilize in our business every day. Managing our people, capital, technology, external relationships and prices, will allow the opportunity for our businesses to continue to be successful. Volatility can be our enemy, but if we are prepared and have a sound management strategy in place to minimize risk and maintain a profitable margin, it can present opportunity or at least the ability to weather a significant catastrophic event.

Managing all these factors can be daunting no matter what size business you operate. It is important to use resources beyond your own businesses infrastructure. Professionals in the industry are available to give you advice to assist in your decision making and have a vested interest in the success of your operation. It is important in these relationships to have a defined set of goals and objectives. Realize when it comes to professional expertise for mitigating risk and creating profitable margins having the right expectation is essential. Mitigating risk is not about hitting home runs. It’s about having a plan to create a level of certainty or profitability and executing a plan consistently. Your risk management plan needs the same type of ongoing monitoring, diligence and attention as you give a newborn calf. Volatility swings in markets have been too large to ignore. You cannot offset losses in price by compensating with just production or cost cutting.

Finally, many of the programs to support businesses through this uncertain time are only beginning to be known. Please make sure to reach out to others outside of your immediate business to see what is available to assist with getting your business to the other side. If you have not had an active risk management plan in place, as they say there is no better time to start than the present.
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