January 1, 2018

New Year's Tip: Weigh Market Expectations Objectively

 |  By: Mike North

The start of the New Year is likely to bring analysts out of the woodwork providing opinions of what the market will do in 2018. Your job is to weigh those opinions objectively and then take appropriate action.

Analysts can explain what all of the fundamental and technical data suggests.  That’s their job.  You may even have a favorite.  Many of them will find their way to an agenda at some meeting you attend this winter.  Most certainly, there will be a lot of questions from the audience asking where prices will go.  Many in the crowd will take their response as gospel.  They will rely on that outlook as they go through their year without giving consideration to the fact that market conditions will change like the weather.  The problem is, like a weatherman, if an analyst’s guess is wrong, they'll still have a job. But if you put your entire farm on the line by following one analyst’s guess or another, you might find yourself in a tough spot.  

Evaluate Your Situation. In the midst of all the analyst noise, you will need to deal realistically with today’s price.  Ask yourself ‘If these guys are right what does that mean to me. If they're wrong, what does it mean to me? How do I manage today’s price? Remember, that this is a representation of what the real buyers and sellers believe to be the value of your production at some future point in history.

Take time to understand the risks and potential opportunities that lie ahead in your market.  Remember to be realistic.  Just because your cost of production may be higher than what the market is currently offering you does not mean that prices must move upwards.  Move beyond your feelings to understand the potential risks and opportunities that lie ahead and how they impact your operation.  Once you have a grip on that, you can begin to devise a plan for moving ahead.

Formulate A Plan.  Ask yourself some important questions.  Do I need to more aggressively protect current prices or can I take a more passive approach? Am I going to make this transaction with the plant or can I do it through my own hedge account? Does my cash flow limit me from using futures or more margin heavy strategies versus zero margin strategies like buying an option for example? How do I want to be postured in case the market turns around again?

Upon building a strategy, it is time to take action.  This is where you must really stay true to your observations and sort out the noise.  There are countless stories of the one that got away.  A dairyman made a plan, was in the midst of taking action only to be talked out of it by a good friend, a broker, a news story, or some other voice.  This is exactly why your strategy must remain flexible. Stick to it and then plan to revisit it as time advances and things change.

Once all of this is put together and acted upon, one thing remains.  Follow up, follow up, follow up.  Like anyone, your guesses will be likely met with a slightly different reality.  This is exactly why you can’t hang your hat on some 2018 outlook offered in January….things change.  Make it a goal to review your marketing plan at least once per week. This will also be helpful as you make auxiliary decisions. Can I buy that piece of land? Should we expand? There are many peripheral decisions that come easier by knowing approximately what that revenue situation will look like the next few months.

In all of this, it is important to remember that this is an active process.  Be engaged and don’t rest all of your outcomes on someone else’s guess of the future.  Own your risk, accept your reward.

This block is broken or missing. You may be missing content or you might need to enable the original module.