Who manages the risk manager? …typically no one. In most operations, the owner manages both the milk marketing and input purchasing decisions.

To whom does he/she answer? Some would argue that they answer to the banker. Others would suggest that they answer to their children or the legacy they are leaving them. Still, others would report that they answer to their spouse.

But let’s face the facts. The risk manager is often unchecked. Largely, this can be attributed to a few basic things. Perhaps it is their understanding of the marketplace. They may lack the knowledge to have a firm grasp of market behavior.

Maybe it’s the time they have to commit to the process. Perhaps the producer is too busy to watch the market. Sometimes it is the producer’s very own personality. Perhaps he or she is not equipped to make risk management decisions.

My father imparted a piece of wisdom to me that has had very good returns in my life. “Do what you do best. Hire the rest,” he used to say. It is crucial to identify your strengths and weaknesses. Not everyone is equipped to make risk management decisions. Some owners/managers do not have the personality conducive to success in the realm of risk management. Some are eager to participate in the process. Others avoid it at all costs.

Use the following “personality profile” to help identify your risk management “personality.” Are you a “reluctant” or “willing” risk manager?” (See Table 1*.) If you find yourself identifying more with the “reluctant risk manager,” consider the following: Delegating the risk management responsibilities to someone within your management team that possesses the necessary skills and identifies with the “willing risk manager.”

Not everyone enjoys risk management. If that person is you, find someone who does enjoy it (your spouse, your manager, a new employee, a risk management adviser, etc.). Teaming with someone to help you develop the discipline of the “willing risk manager.”

You may have some of the characteristics, but are uncomfortable about the process. Find a coach that can walk you through the marketplace and give you the necessary advice to feel comfortable with your decisions. Though it is often talked about in terms of a producer’s knowledge of the market, my experience has been that the real hurdle in understanding the market is often one of desire.

I have yet to meet a producer who isn’t passionate about their operation, their cows, their production efficiencies or something relating to their involvement in the dairy industry.

Ask a guy who is passionate about his operation and he can tell you all the statistics of the herd. He will share about the different struggles that they have overcome. He will explain the newest management and technology that has been implemented into the operation to create greater cow comfort, handle manure or manage employees. He will tell you about the future plans that are being constructed around current research that they are doing. He is passionate about the subject and has spent a great deal of time feeding that passion with the necessary understanding and education to help him advance and achieve greater levels of excellence. He has done whatever is necessary.

Risk management, marketing, purchasing and other pricing activities often are not attractive subjects for producers. They may understand the significance of the activity with their head, but have yet to give it their heart. As a result, they lack the understanding required to navigate the marketplace or appropriately use the tools available to manage price risk. Once the desire is there, the education will follow.

The CME offers great information on their website to help producers understand the marketplace and the tools available. But don’t underestimate the value of experience found in veteran participants. General information may do a good job of introducing the subject, but cannot bring it into your world like someone with first-hand experience.

Talk with your broker, your buyers, your vendors, and especially risk management advisers. They are also great sources for information and understanding. Resources are in abundance. It is the desire that is often lacking.

By now, everyone has heard the expression, “Time is money.” If that is true, what would it cost to get back some of your time? In other words, how much would you have to pay someone to assist you with the marketing and purchasing activities necessary to your operation? …$50,000, $80,000, $100,000? Maybe more. Maybe less.

Perhaps adding another employee hasn’t made it to your “to-do” list. You could solicit the help of a broker. What would that cost annually? …$5,000, $10,000, $20,000. Speaking from experience, that number will vary based on a given company’s fee structure, the volume of business transacted, and the degree of assistance you demand. You will have to ask some questions to determine the cost to you.

But let’s get back to the point. Busy schedules usually do not allow for consistent market focus. In times such as these when price volatility is high, markets can move quickly and often leave their participants asking “What happened?”

Unfortunately, this question almost always comes after the movement has created some sort of lost opportunity. Considering the violent price movements often experienced in the milk market, what would an extra 50 cents per hundredweight per month mean to the average 1,000-cow herd with an average daily production of 75 pounds per cow? Accepted math would suggest a number north of $135,000 per year.

Regardless of whether you are hiring an employee or a broker, a simple 50-cent gain (not to mention the price opportunities that have come and gone in the past year) above the realized market price would more than justify their existence. How busy are you?

So how do we accommodate the busy dairy entrepreneur who has acquainted himself with the risk management tools at their disposal? We design a risk management plan that takes into consideration the dairy’s budget, access to credit, risk tolerance, and comfort level with different strategies.

Obviously, more sophisticated risk managers who are willing to accept greater risk will implement a different strategy than a more novice risk manager with a smaller budget. However, the market is flexible enough to allow both types of risk managers to participate.

The next step is implementation. It is one thing to talk about your ‘plan’. It is something completely different to talk about how it was followed. Nearly every producer that I have talked with over the years has had the best of intentions with regard to their risk management “plans.” Where many fell short was the execution. Though they identified with the “willing risk manager” and had a plan to guide them, they were unable to follow through on their thoughts and decisions.

What’s the solution to this? …Creating flexibility and accountability. Your plan must be flexible enough to accommodate market movement. Too many times I have been approached by producers who tell me what they will do when the market gets to a certain point. When that never happens, they are left adrift with no action taken and essentially no plan to follow. The plan must be written down.

A good plan in one’s mind is often hijacked by emotion or the “mood” of the marketplace. Coffee shops have become a morgue for many a risk management plan. Write your plan down in tablets of stone.

Lastly, there needs to be an environment of accountability. Sharing your plan with your management team (spouse, partners, lenders, consultants, risk management adviser, etc.) not only keeps them informed of the pertinent things that are taking place inside of your operation, but also keeps you accountable to the decisions that you have made.

These are all steps that you can take to manage the risk manager in your operation and secure better results in your margin management efforts. PD

*Tables omitted but are available upon request to editor@progressivedairy.com

UPDATE: Since the publication of this article, Mike North has left First Capitol Ag and is now the president of Commodity Risk Management Group. Contact him by email.

Mike North
Milk Marketing Specialist
First Capitol AG