Price volatility management strategies

Managing a feed company during extraordinary prices swings like those seen in 2008 and early 2009 is no easy task.
John Scheuers, vice president of feed operations for United Cooperative, based in Beaver Dam, Wis., says the overall key ingredient to successful management when prices yo-yo on a daily basis is to pay attention to detail.
“There were times when we changed prices daily on our feeds instead of weekly,” Scheuers says. “We went to a daily price concept as we made our way through the volatility.”
He and his cooperative, which serves mostly dairy producers in south-central Wisconsin, also paid closer attention to risk management.
“We took smaller positions more often rather than larger positions less often,” he says. That gave United Cooperative more flexibility and helped it cost-average in and out of the various grain and oilseed markets.
“In such volatility you are either on the right side or the wrong side of the market,” Scheuers notes. “Taking smaller bites helps spread out risk.”
On the feed side of the business, United Cooperative buys basis and manages for basis versus doing a lot of hedging or position taking, while the grain side of the cooperative takes more positions in the futures markets.

Dairy industry struggling
With the dairy industry in one of its deepest and longest slumps in years, volatility has also hit the co-op through sales.
“People have cut back on volume and on the level of nutrition being fed. They are in survival mode versus thriving mode,” Scheuers notes. “That affects income, so we’ve become more cost sensitive in the operations of the company.”
Overall, both producers and those in the feed industry have become more conservative since the 2008 commodity bubble popped.
Buyers want shorter contracts, and in general livestock producers are living more hand-to-mouth with their feed needs.