Ideas to consider if milk and feed prices rise or fall.
By Chris Robinson, Top Third AG Marketing
As we head into the fourth quarter of 2014, there are plenty of interesting developments to look at from a risk management and marketing standpoint. How you manage the future risk could impact your bottom line as a producer.
At times like this, it’s very common for clients to want to call in and ask my opinion or the opinion of other senior risk managers here at Top Third. After almost 30 years in the industry as both a trader and a broker, my response is generally the same. We all have opinions. The key is how respond when the market informs us our opinions are faulty. That is the difference between pure speculation and risk management.
As a dairy producer, where do your risks lie? Let’s start with the obvious. Class III milk futures prices have been on a tear since December of last year. From a base level of $14.00 per cwt. back in November 2012, we have seen the price almost double. The last week of September 2014 saw a high print of October milk at $25.30/cwt.
A rally like that is worth protecting via a risk management strategy. By using a long option strategy, we can set a price floor, for a definite period of time for a definite price per contract. The upside, should there be more, is completely open for a producer. That way, you could still sell your milk higher if this trend continues. However, if there is some unforeseen change in the world economy that would result in prices collapsing, you would still have the peace of mind knowing that you captured higher prices via your hedge.
The second area of risk for a producer is the cost of your inputs. Feed inputs, be they meal or corn, are near lows we have not seen since 2009. Think back to 2012 when the price of corn on the spot market was above $8.00 per bu. With corn approaching the $3.00 level on the board today, this is, to put it mildly, a blessing for the dairy producer.
In order to manage that risk, consider a long option strategy, which would gain in value should we have a rapid, unexpected rise in the price of corn. If prices stay low, then you will lose the premium you paid, and that’s all. If prices continue to go lower, you’ll benefit by enjoying still cheaper prices. However, if they spike higher, the hedge will gain value and therefore compensate you when you have to go buy your feed.
The last area of risk would be geo-political. That’s a broad umbrella term that covers every “what if” under the sun. What if China’s economy slows down? What if they change their policy again on the legality for families to have a second child after years of the “one child per family” policy? What if, after we’ve seen the U.S. stock market triple in value since the 2009 lows, we finally do get the “big selloff” so many bears have been predicting?
Sooner or later everyone hits the cover off the ball with a prediction. The thing to think about is how your bottom line will suffer if your opinions prove to be correct.
If you are looking for advice on how to manage your risk as opposed to chasing the advisor with the current “hottest track record,” then consider developing a longer-term horizon for your business risk. Ask your banker or a friend who they trust to help them make risk management decisions. Make the call and start building your own custom marketing plan. As the old saying goes, “Hope is not a marketing plan.” With today’s volatile markets, that expression is truer than ever.
Chris brings over 23 years of experience to his Top Third clients. He began his career as a broker and analyst in 1991 with a Chicago firm which specialized in cash grain trading and hedging. In 1992, Chris became a member of the CBOT. He joined Top Third in January 2010, capping an 18 year career as a floor trader and broker. Today, in addition to his Top Third duties, Chris is a featured grain and livestock analyst for the CME. He is also featured on weekly video summaries with RFDTV. In January of 2013, Chris became the lead broker for the Pit bull division of Top Third. This is a separate branch of the company that is involved with traditional speculative trading and is separate from the hedging arm of Top Third. Chris is a 1988 graduate of Colgate University with a degree in Political Science and Economics. Contact him at email@example.com.
This material has been prepared by a sales or trading employee or agent of (Top Third) and is, or is in the nature of, a solicitation. This material is not a research report prepared by (Top Third) Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that (Top Third) believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.