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September 2013 Archive for Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

Dairy trading experts offer strategies and practical perspectives to optimize market performance.

Lower Production Costs Bring Dairies New Opportunities, Risks

Sep 27, 2013

With costs down by $2-$3 per cwt., dairy producers should take steps to fully understand how to best protect themselves.

By Will Babler, Atten Babler Commodities LLC

Many dairy producers have struggled to understand the magnitude of the change in cost of production that is on the horizon. As September comes to a close, we have not fully escaped the multi-year draw in grain stocks or the lingering impact of the 2012 drought, but changes are just around the corner. Case in point is Figure 1 (below) that shows the projected drop in cost of production between the final quarter of the 2012/2013 old crop and the first quarter of 2014 when we will be fully utilizing new crop. The median benchmarking data drawn from our customer base indicates as much as a $2.00/cwt. to $3.00/cwt. drop in cost of production.

Babler chart 9 30 13

Despite the good news, some producers’ expectations seem anchored by the extremes of the most recent year or most recent January-June financial statement. They can’t see past the recent market situation to fairly evaluate the forward opportunity. These producers put themselves at risk of not making the right risk management decisions if they don’t re-adjust their expectations and frame of reference for what is a normal or realistic price, cost of production or profit margin.

Profitability Controversy

Figure 1 calculates the break-even cost of production by considering feed costs, non-feed variable costs, fixed costs and financing costs. It also adjusts for milk premiums and other revenue such as cull cow sales, co-op dividends, etc. Profitability and cost of production can vary wildly region to region and producer to producer and are often sources of controversy whenever industry cost of production numbers are put forward. A given producer may disagree with the numbers presented here, but that brings us to our main point – averages or generic assumptions aren’t good enough in a volatile environment and each producer should have an accurate cost of production model for their operation. This couldn’t be more true as we make a transition out of a historically tight feed supply and demand situation.

Moving forward

The change in cost of production is a welcome sign for dairy producers and steps should be taken to fully understand the new opportunities and risks that are now at hand. Producers should consider their ability to answer the following questions:
• What is my current cost of production and profit margin?
• What is my expected cost of production and profit margin for each month going forward?
• How does my cost of production and profit margin change with each daily change in the forward markets?
• At what price levels for milk and feed can I protect a break-even margin?

Producers who have clear answers for the above questions are more likely to see that the situation has changed and are prepared to act decisively. For example, a Midwest producer may think he or she needs near $18.00 to breakeven in 2014 and, in turn, passes up an opportunity to utilize a hedge strategy that may protect profitability in a $16.50 market for Q1 of 2013. Those who struggle with these questions need to move quickly to get their arms around their numbers to avoid misconceptions anchored in past price levels and cost of production metrics.

Risk in purchasing options is the option premium paid plus transaction. Selling futures and/or options leaves you vulnerable to unlimited risk. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. 

Things to Watch: Corn, Catalysts, Complacency

Sep 13, 2013

Milk prices aren’t scary, and they aren’t exciting. Yet even within this range there are opportunities to sell into strength.

Melissa HeaneyBy Melissa Heaney, Stewart-Peterson Inc.

Milk continues to trade in a sideways pattern that has become somewhat of a comfort zone for producers. It has been trading in a range of $16.88 on the downside to $19.50 on the upside since about November 2012. As you can see in the chart below, this past week, we definitely saw some strength, most likely due to increased levels of buying interest in cheese Monday – Wednesday. We were up 37 cents on the week.

2nd Month Milk Continuous Bar Chart
S P 9 13 13a
Source: Stewart-Peterson Inc. and DTNProphetX

This is what we call a "range-bound" market. It is very choppy, not very trendy, and when markets trade this way, people can get complacent and comfortable with the range that it is in. Prices aren’t scary, and they aren’t exciting. Yet even within this range there are opportunities to sell into strength, and we recommend that producers look for these opportunities to sell increments of milk and buy call options, because the market could break out of this range at any time in either direction. Markets do not stay range-bound forever.

Several catalysts could cause milk to break out of its current range:
• A crash in the U.S. dollar would support exports and therefore support milk prices.
• An explosion in the U.S. dollar, which could be devastating to exports and hurt milk prices.
• A dramatic change in the corn price could drive milk up or down, since milk prices are tied closely with corn prices. If the corn price can maintain a "4" in front of the price that could keep the milk market range bound as it is between $16.88 and $19.50.

Speaking of feed prices, the Sept. 12 USDA Supply/Demand Report signaled some opportunity for corn buyers, and yet there is some strength in corn in the big picture. The only bullish news from the report is that old crop ending stocks were lowered 58 million bushels.

S P 9 13 13b

The big news is the increase in the yield of this year’s crop from 154.4 bushels per acre to 153.3. Analysts were expecting a ½-bushel per-acre drop in yield, so the increase was a surprise. Those yield numbers flowed all the way over to ending carryout, as the USDA elected not to make changes to the demand side of the ledger.

Ending carryout is 1.855 billion bushels vs. analyst expectations of 1.697 billion bushels, putting the USDA figure at 158 million bushels over expectations. Corn is down as of this writing, and USDA lowered the average farm price received to $4.80 per bu. With current December futures trading at $4.60 and harvest fast approaching, it may be prudent to look at strategies to book near-term corn needs.

S P 9 13 13c

Taking a closer look at the chart below of U.S. corn ending stock levels sorted from lowest to highest, you can see that U.S. corn ending stock levels were historically tight for 2012-13, with ending supply at 661 million bushels vs. the 2013-14 estimate at 1.855 billion bushels. Note that 2013-14 ending stocks are estimated as the fourth highest levels going back to historical data from 1995.

Although this can seem extremely bearish to corn prices, when we take a look at the U.S. Corn Stocks/Use Ratio (below), which is calculated by carryout/usage, we can see the overall shift in supply and demand isn't as bearish. What also helps to build some support for corn is the world stocks to usage ratios. The 2012-13 crop posted the lowest ratio in the last 19 years. This has increased for 2013-14 based on current estimates, but still sits at the lower end of the range.

S P 9 13 13d

Soybeans were the most watched going into the USDA Supply/Demand Report. U.S. 2013-14 ending stocks came in at 150 million bushels. Trade estimates were 165 million bushels vs. August’s ending stocks of 220 million. U.S. soybean ending stocks for 2012-13 are also tighter at 125 million bushels. As you can see in the charts below, world ending stocks paint a bit of a different picture and could limit upward movement to a certain extent. Outright world soybean stocks are estimated to be an all-time high for 2013-14, while the stocks/use ratio is the third highest in 19 years.

S P 9 13 13e

With world soybean supplies tight, buyers are expected to watch the upcoming harvest and aggressively buy when needed.

The growing season is not over and so harvest result is still one of those catalysts that could cause a change in the feed market. Milk markets are tied closely with the corn market. Prepare in advance now what you will do if there is change in the price of milk or feed. Preparing your action plans in advance will keep you from reeling when a catalyst causes the market to break out of what may be a "comfort zone" for you right now.

Melissa Heaney is a dairy market advisor for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Melissa at 800-334-9779, or email her at

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, promoting the use of marketing tools, including futures and options. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Copyright 2013 Stewart-Peterson Inc. All rights reserved.

Don’t Panic – Prepare

Sep 06, 2013

Preparing ahead of time will help eliminate the panic-mode reaction that kicks in when the milk prices start to decline.

Katie Krupa photoBy Katie Krupa, Rice Dairy

This may come as no surprise, but my phone rings most often when the market takes a drastic turn lower. The producers on the other end of the line are without doubt asking, "Is it too late to hedge? Have I missed the good prices?"

My answer is always the same: No one knows what tomorrow will bring, but rather than leave it to chance, let’s create a plan that will protect your business’ profits. Preparing ahead of time will help eliminate the panic mode reaction that kicks in when the milk prices start to decline.

Risk management should be proactive, not reactive. Given the recent decline in the Class III futures prices trading on the Chicago Mercantile Exchange, below are a couple tips on being proactive in your risk management plans.

Know your financials

While it is possibly the least glamorous part of risk management, it is critical to know what a "good" price is for your business. The current hedging opportunities may be better (or worse) than you think, depending on your unique financials. Knowing your break-even price will enable you to know where you need to hedge. Hedging at break-even may provide adequate coverage to keep the business stable and your personal finances satisfied. Given the opportunity, you may be able to protect a profit that will significantly benefit your business. And for some, protecting a price below their cost is similar to catastrophic insurance against a worst-case scenario situation. Every business has different needs, so don’t be afraid to create your own unique strategy.

Place a standing order

Once you know what a "good" price is for your business, allow the market volatility to benefit you.

Many brokers and cooperatives will allow you to place an order for a hedge that is higher than the current market price. This is most commonly called a "Good ‘Til Cancelled" (GTC) order since the order will work until it is filled or cancelled. For example, if you wanted to sell a futures contract for October (fix your price) at $18.25, but the current market price is $18.00, you can place your order as a GTC order and the order will work daily until filled or cancelled. That way, if you are busy and not able to watch the markets, your order will be active and filled if the market should move high enough to get the contract filled.

Often times we will see the market quickly move higher and then lower again in a matter of minutes. If your order is not working, there is no chance of it being filled. Obviously, sometimes the price you want or need may be several dollars higher than the current market price. If this is case, it is important to be realistic on the market expectations, and review other types of strategies that may provide adequate coverage at current market prices.

Manage a margin

Knowing your financials and what milk price you need may depend heavily on the feed prices. If that is the case, I strongly recommend reviewing your milk-feed margin and hedging both your milk and your feed risks. If you are only hedging milk, or only hedging feed, you are just managing one side of the equation and not reducing your risk.

Just last week a producer asked me which I thought was more important: milk or feed hedging. I told him that a complete risk management strategy includes both milk and feed risks. The volatility exists in both the milk and feed markets, so not hedging your risks on both is leaving you vulnerable to market fluctuations.

The future outlook for the milk and feed prices are uncertain. Avoid the panic and protect your business by taking a proactive approach to your risk management plan.

Katie Krupa is a broker with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. You can reach Katie at There is risk of loss trading commodity futures and options. Past results are not indicative of future results.

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