Hedging, risk management, margin management—whatever you call it, it’s a pain in the butt.
But like it or not, volatility in the milk and feed markets pretty much requires us to find some way to protect our bottom line. There are many tools available on the Internet and on mobile phones to help you with margin management. First, let’s talk a bit about the process.
Simply stated, margin management is about setting a minimum price for your milk and a maximum price for your feed on some future date. In my experience there are four phases in the process: education, budgeting, tracking trends and execution.
Education: Futures, margin calls, options, puts, calls and the like are complicated concepts, and you should educate yourself first before implementing a hedging strategy. The best approach is to take a class. Many brokerage firms offer classes, but if none are available in your area, take them online.
There are educational materials on www.CMEGroup.com and lots of videos on YouTube. The University of California, Davis, also has a Futures and Options course available on iTunes U.
Budgeting: Dairy is a complicated business. Finding your break-even point using a cash accounting system can be tedious. This usually requires an accountant, a financial consultant or specialized cost-accounting software.
I created a simple spreadsheet using Google Drive that tracks my fixed costs, homegrown feed costs, purchased feed needs and expected milk production. I can apply these costs to future months and compare them to the price of Class III milk, Class IV milk, corn and soymeal. Then I have a reasonably good idea of what margins I might be able to lock in.
Several companies have taken this to a much higher level and are offering web-based margin projection modeling. These programs are updated multiple times a day and take into account the specific details of your business, including basis risk and income price formulas.
Since they are web-based, you can access the information via your mobile phone and tablet. Two such companies are Atten Babler Risk Management LLC and CIH.
Tracking Trends: Midwest drought, China running low on corn, butter accumulating in storage—all these fundamental movers of the commodity markets need to be considered in order to know your risk. Market news and information is available from lots of sources, and many have great apps. The AgWeb app is available for most platforms and contains market news and some commodity price quotes.
For dairy specific information, I like the Daily Dairy Report App. For technical market information, including chart analysis and options quotes, I use the CME Group mobile website and www.barchart.com.
Execution: If you know what you are doing, many brokerage houses offer online trading and have some pretty advanced mobile apps. I just call my broker for trades.
Even if you don’t end up trading in the futures and options markets, going through these four steps should help you understand your business a little bit better. And if nothing else, it should give you something new to talk about at the coffee shop on Monday morning.
- December 2013