I’d like you to meet Joe Stewart. Joe is a personable, second-generation dairy producer from Idaho. Joe manages the family’s 750-cow operation and is always looking for ways to set up systems for better results. When it comes to management of the details, Joe Stewart shines.

No, Joe Stewart is not related to anyone here at Stewart-Peterson. In fact, I’d like to focus on his first name instead. Because for the purposes of this article, Joe Stewart is “Joe Dairy Producer.”

Joe allowed us to analyze how Stewart Farms can take its commodity marketing to the next level and share our analysis with Progressive Dairyman readers. Joe’s woes with respect to commodity marketing are not unlike many dairy producers out there. You may find your own story in this story of Joe Dairy Producer.

Start with an assessment
With any management challenge, it is wise to start with an assessment of your strengths and areas of opportunity. So I administered a Marketing Assessment Profile (MAP) for Joe. The assessment is a 20- to 30-minute series of questions designed to reveal what, if anything, is holding Joe back from achieving the results he wants from his farm marketing.

Because good farm marketing is always rooted in the producer’s personal and business goals, the MAP process starts with a conversation about the producer’s goals for their operation and their farm marketing. Joe’s goal for the business is essentially to produce high-quality milk with the right team of people and systems in place to do that. For marketing, his goal is to increase price predictability so that wild price swings do not hamper his ability to manage the business.

The interview then continues with an assessment of five key areas integral to effective marketing. In our years of experience with producers, these areas have proven to have the most impact in terms of becoming an effective marketer.

Here’s a snapshot of Joe’s scores (in parenthesis next to the topic) in the five areas:

Knowledge (3)
The use of many marketing tools available to producers is crucial in today’s markets. Joe’s specific knowledge levels with respect to the various tools are:

• Knowledgeable about forward contracting and hedging with futures contracts.

• Limited knowledge of options and various options strategies, which limits flexibility. •

A limited understanding of basis, in that he has only experienced basis affecting his marketing in a negative way. What must be understood is that basis changes regularly and is not always an extreme negative.

Risk Ability/Tolerance (3)
Although the overall debt position is very good, Joe is concerned because at this time the farm is acquiring debt due to negative cash flow. An advantage is that Stewart Farms owns a great majority of the land it operates, which allows the farm to produce about half of its total feed needs. This means less exposure to rising feed prices.

Time (4)
Few dairymen say they have enough of this precious commodity. Yet, Joe has both the personnel and technology in place to allow him to spend time in areas in which he works best and enjoys most. Time seems to be available for marketing, if necessary. (But due to past experiences, Joe is not encouraged about spending more time marketing.)

Discipline (3)
This is typically one of the biggest constraints dairy producers have when it comes to marketing. Joe’s answers reveal the emotion that has resulted from making marketing decisions. Joe’s decisions are made based on his best evaluation of where the market will go, rather than structured around trigger points in the market. This approach does make decision-making more stressful.

Experiences-Control (2)
Past experiences with advisory services, consultants and marketing decisions tend to heighten emotion and affect future decisions. In Joe’s case, the experiences he has had with the negative and often volatile basis in his area has caused him to crave more control over his marketing. He is seeking a formula contract from a processor that will ensure a more consistent revenue stream. In the absence of such a contract, however, Joe has done minimal marketing. He has not applied structure and discipline to a significant enough portion of his production to impact his overall price per hundredweight.

Logically, this reveals his chief constraint. The frustration over not being able to have more control over basis has resulted in significant amounts of his milk being unpriced or at risk. His goal of a more consistent revenue stream remains unaddressed.

With the chief constraint of “control” revealed, we need a prescription for removing this constraint. For this we examine Joe’s next-lowest scores in the impact areas of knowledge, discipline and risk tolerance. Joe scored “3” in these areas.

Subjectively looking at his situation, I would have to elevate knowledge and discipline as more serious constraints. Stewart Farms does not have much debt to service, and my sense is that Joe is not a totally risk-averse guy. But his tolerance for risk has gone down recently due to negative cash flow that has resulted in operating deficits being incurred each month. With each passing month, Joe (understandably) becomes more anxious and concerned about making the right marketing decisions and staving off the mounting cash flow issues. I believe this added emotion has skewed what would be a higher risk tolerance score.

Furthermore, I believe this anxiety could be alleviated if we work to improve the knowledge and discipline areas. The absence of structure and discipline in his approach to marketing, along with a limited knowledge of options strategies, has allowed the frustration to take control.

Are you like Joe?
Joe’s knowledge and discipline constraints are probably like those of many dairy producers right now. Everyone wants the top price the market offers. But with uncertain markets both for inputs and for milk, and with increased volatility, it has become more important to use tools and strategies that will tame volatility, help minimize negative cash flow months and maximize opportunities when the market makes those available. Yet dairy producers are relatively inexperienced with these tools and strategies. For example, Joe is very knowledgeable about forward contracting and hedging with futures contracts. That’s a strength. But his knowledge of options strategies is limited. With today’s markets, forward contracting or futures contracts alone limit your flexibility. To be effective, Joe will need more knowledge in options strategies. This also carries over to the feed side of the business.

But Joe is also busy managing other aspects of his business. It is common for dairy producers like Joe to not have the structure and discipline in place to systematically use the tools that minimize price risk and maximize every price opportunity. Until Joe’s wishes come true for a formula pricing contract with a processor, the onus is on him to use marketing to aid in cash flow. The tools are available to help him do that (namely options strategies). He needs to, then, create a disciplined program for himself in which marketing decisions are based on market trigger points, rather than emotion and best guessing.

The absence of a disciplined marketing program allows emotions to reign over the opportunity for a consistent revenue stream. These volatile markets call for the courage of a new approach and the discipline to manage through financial difficulties.

Like most dairy producers, Joe Stewart has risen to the management challenges placed before him. His analytical management style has led him to identify marketing as an important aspect of his operation’s success. His innovative thinking has him turning over stones to find the right approach. We certainly hope that our assessment has helped him take stock of his progress, his strengths and his opportunities.

And we especially thank Joe for his graciousness in sharing the story of his MAP assessment with other progressive dairy producers. PD

Mark Ludtke
Dairy Business Development Manager
at Stewart-Peterson
mludtke@stewart-peterson.com