Many dairy owners and managers have recognized the need for some sort of risk management program to navigate through today’s volatile markets. Like anything, you get better with practice and experience. I recently heard a speaker that made me think about how dairy producers can become more adept at dealing with price risks and opportunities – and the consequences of not honing these skills.
The speaker was Mike Richardson, author of Wheelspin: The Agile Executive’s Manifesto . Think about cars, planes, motorcycles – anything that has a driver’s seat. Think about speed, agility and remaining in control. These are the concepts that Wheelspin applies to business.
The danger of invalid assumptions
In the opening pages of Wheelspin , Richardson shares the story of Eastern Airlines Flight 401 from 1972. It is nighttime, and the aircraft is at 2,000 feet on final approach into Miami International Airport .
The captain pushes the lever to put the landing gears down and expects three green lights to confirm they are down and locked. Instead, only two green lights come on; one fails to illuminate.
The captain puts the plane on autopilot, and all three crew members in the cockpit begin to focus on fixing the lightbulb. In the process, one of them nudged the yoke, which disengaged the autopilot from its altitude-hold mode.
But the trio is so focused on fixing the lightbulb that they do not monitor the flight instruments or notice that the plane has begun a gradual descent. And because it is dark, they can’t see the horizon as a reference point.
According to the cockpit voice recorder, at 150 feet one of the crew spotted the altimeter and in disbelief questioned, “We’re still at 2,000 feet, right?” A few seconds later, the aircraft crashed traveling at 227 miles per hour. More than half of the passengers and crew – 101 people – died.
To be sure, pilots have a million and one safety procedures that ensure the safe passage of thousands of passengers every day. I share this story with you because it vividly depicts what can happen when we “put blinders on” and begin to focus on an assumption that may not be correct.
This could happen to producers in 2013. The conventional wisdom is that milk prices have to go higher in 2013 because the cost of production is so high. Some of the chatter out there is for $23 and $24 because the supply side will not be able to keep up with demand in 2013.
What if that assumption is wrong? What if we are focused on the milk price side of the equation and assume feed prices are going to be high for all of 2013?
We could miss thinking about the potential for a serious decline in feed prices and what that would do to the value of our inventory. There are no guarantees that the costs to produce a hundredweight (cwt) of milk are going to stay at current levels for all of 2013.
In today’s uncertain world, predicting prices is a highly unpredictable science. Making an assumption and sticking with it is akin to focusing on fixing the lightbulb while the plane begins to descend. No one wants that for their business.
Plans must be dynamic
As business leaders who are operating in a constantly changing environment, we must learn to navigate chaos – including volatility. Richardson suggests that we can take a cue from fighter pilots, who train in extreme environments.
Air-to-air combat is chaotic, and anything can happen – in 20 seconds you can either kill or be killed. And so, if chaos is the assumption, that assumption is met with training and discipline.
Jet fighter pilots are trained in something called the OODA Loop, which stands for:
• Observe: Observing what is going on around us, using all the senses, to sustain our situational awareness.
• Orient: Interpreting what we are observing – what just happened, what’s happening now and what’s likely to happen next.
• Decide: In that context, deciding what our options are and what we are going to do.
• Act: Acting on those decisions.
This process is a never-ending loop, with the steps happening over and over again in increasingly shrinking timeframes. As pilots train in this sequence, they progressively shrink their OODA Loop, and the process becomes more intuitive and instinctive for them.
The pilot with the smallest loop is likely to win a dogfight because they can get inside their adversary’s loop. You begin to anticipate where that other pilot is going and you have the agility to make quick decisions.
I see many similarities in commodity marketing. There is a lot of uncertainty and many factors influencing the market, but you want your business to be positioned for wherever the market is going – not reacting to where the market has been.
No market adviser has the crystal ball to pinpoint exact market prices. The key is to constantly observe, orient, decide and act in a never-ending loop, without tiring.
Make your decisions like a fighter pilot
Using the OODA Loop concept, here’s how to create a dynamic planning process for your dairy for 2013:
• Observe: What are the possible price scenarios for milk in the coming year? (Hint: Don’t get too tied to one assumption). Due to uncertainties such as weather or global economies, milk could be $12 or $14, $18 or $20 in 2013.
Feed can continue to spiral up or, if production rebounds in 2013, prices could fall, dramatically reducing the value of your inventory. No one knows for sure. These are possibilities we observe.
• Orient: What do each of these prices mean for my dairy operation in 2013? What risks am I willing to take, with how much of my production? What price am I willing to pay for a certain level of price protection?
• Decide: Determine which strategies are best in each possible price scenario. Decide which tools you will use to get the job done.
• Act: Follow through and get it done.
Then repeat. Keep repeating as new market information comes to light or as your dairy’s risk tolerance changes. Continue getting faster and better at it. Then, when turbulence hits, you stay in your decision-making loop, and the centripetal force you’ve created for yourself carries you through that turbulence.
Fighter pilots call this the OODA Loop; I call it market scenario planning. Having a dynamic scenario plan for your business that is also systematic in its approach to decision-making allows you to adapt to market signals with the agility of a fighter pilot.
Volatile conditions in today’s world will continue – and likely even increase – in the future. My premise is: Those who can harness the volatility, by managing through it, will prosper. PD
ILLUSTRATIONS
TOP RIGHT: Courtesy of Mercedes Opheim.
BOTTOM RIGHT: Courtesy of Fredric Ridenour.
Disclaimer: Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results.
Scott Stewart
CEO/President
Stewart-Peterson Inc.
