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September 2011 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.

Five Thoughts for the Future

Sep 26, 2011

Key agricultural crops, by-products and economic indicators that are influencing your business.

 

Marv Portrait 2By Marv Carlson, Dairy Gross Margin, LLC

World Wheat
 
In the 2011-12 crop year, the world is seeing a substantial increase in feed wheat supplies. Russia had a big rebound in wheat production after last year’s disaster. Currently, Russia is selling wheat to the world at the lowest prices. This wheat is competing with corn in feed rations and has the effect of capping corn prices.  In the U.S., some wheat feeding is occurring in the Southeast (think chickens). Even Canadian feed wheat is moving into that area. China has also purchased feed wheat (think hogs and chickens) from Australia. If Australia has a big crop, more wheat will move toward China and other Southeast Asia destinations. Presently, cash hard red wheat is more expensive than corn. This limits the amount of wheat being fed in the southern feedlots.  
 

Ethanol

The ethanol industry will lose the $.45 per gallon blenders credit in December. The loss of this credit will make it less lucrative to blend ethanol and gasoline.  However, the blenders will still be required to blend 13.2 billion gallons of ethanol in 2012 (up from 12.6 billion gallons in 2011).  This is required by the Renewable Fuels Standard (RFS).  As a historical reminder, Governor Rick Perry asked for a waiver of this standard in 2008 but was denied. The RFS can be changed by the EPA director, but only after much discussion and a 90-day comment period. The perception is the loss of the blenders credit could reduce the amount of ethanol produced, thereby lowering corn prices. On the other hand, ethanol exports have been robust, especially to Brazil, which is dealing with a small sugarcane crop, the principal feedstock for their ethanol industry.     

The Global Economy

The world economy continues to be an issue for all commodities. Europe is still a mess with its own financial crisis. Greece, Italy, Portugal and Spain are main culprits. Many European banks have loaned money to these countries. Guess what? The European banks are under great scrutiny. For over a year, the value of the dollar has been going lower, supporting dairy exports.  In the last two weeks, the dollar has moved higher because of the European problems. This strength in the dollar could be an issue especially if it would move higher at a fast pace, thus reducing exports.

China

What a deal. China (along with Fonterra) has increased demand in China for dairy products. This has significantly helped to soak up excess world supplies of dairy products. China’s newest food inflation crisis is pork. China is trying to increase production of pork after a major disease outbreak. Chinese pork prices are at record highs. Corn prices are $9.25/bu. and soybeans are $18.64/bu. China has started to import wheat to rebuild stocks. Will China import more corn to encourage pork production? 

Margins

Generating net income in the dairy business has been challenging. High milk prices and higher feed costs have taken some of the fun out of being a dairyman. Managing the risk of changing margins can be done with a variety of tools. There are simple choices like cash purchases of feed and forward contracts with your dairy co-op. Or you can use futures to hedge feed inputs and milk. These two choices give you absolute margins. If margins get better (milk prices go up or feed prices go down), you would not benefit.

Options and/or LGM-Dairy can help manage your income over feed and leave the top side open.  For this reason, options or LGM-Dairy should be a part of your risk management program. If margins get better, you will benefit and build up a cash cushion for the future. 

Marv Carlson is with Dairy Gross Margin LLC in Sioux Rapids, Iowa. Contact him at marv@dairygrossmargin.com or (712) 240-8395. Visit the firm’s website for more information: www.dairygrossmargin.com. 

(Contributing to this month’s article is Ron Mortensen, who will be a panelist at Dairy Today’s Elite Producer Business Conference Nov. 7-9 in Las Vegas. Learn more about the conference at: http://www.agweb.com/livestock/dairy/elite_producer_business_conference.aspx)

Will Marketing Make a Difference on My Bottom Line?

Sep 19, 2011

There is no greater point of risk to the operation than when prices reach cyclical highs. Instead of limiting marketing activity, focus should be on maximizing the protection for the next lower cycle.

S Schulla Bio PictureBy Steven Schalla, Stewart-Peterson

As fall and harvest time arrives, fieldwork is in full swing. Chopping silage, readying the combines, spreading manure and fall tillage are all top of mind for dairymen. At the same time, many producers and their lenders remain on high alert when it comes to milk prices and are doing their best to keep in touch with the markets.
 
August milk prices set new records but the subsequent fall in cheese prices back to the $1.75 level has rattled many and reminded us how quickly the good prices can go bad. While milk fundamentals remain generally supportive, U.S. economy concerns, along with international and domestic debt troubles, suggest turbulent waters ahead on the demand side. Price volatility continues to be expected by everyone.
 
Here’s another take on what that could mean for a producer’s bottom line: 
·         Over the past 10 years there have been five years that saw the average price for milk decline from the year prior. 
·         In these five years of declines, the average decline was 18.8%. 
·         Year-to-date, the 2011 All Milk Price has averaged $20.06, meaning that an 18.8% drop places the calendar average for 2012 at $16.28. However, month-to-month prices could vary widely, as they have in this year. 
·         With the high cost of inputs, a milk price at $16.28 or below is worrisome for most dairies.
·         Where there is volatility, there is both opportunity and risk present. Managing it correctly impacts the long-term health of the business.
 
More and more lenders are understanding that consistent and disciplined marketing can be a productive response to both opportunity and risk. In fact, just last week in this “Know Your Market” blog, Greg Steele, vice president of AgriBusiness Capital for AgStar Financial Services, shared some excellent insights with Jim Dickrell (see below) about the business impact and importance of a consistent and disciplined approach to marketing. 
 
One key piece of advice Steele mentions is this: “Understand that risk management is not about price outlook.” Trying to outguess the market leads to decisions based largely on the emotions that are present at the major highs and major lows of prices. When prices are at high levels, a bullish bias is easy to justify and complacency with risk managements follows. “With these prices, we’re better off doing nothing,” is the prevailing thought.
 
In actuality, there is no greater point of risk to the operation than when prices reach cyclical highs. Instead of limiting marketing activity, focus should be on maximizing the protection for the next lower cycle. Those who keep that focus will be farther ahead of the game than those who did not protect themselves, or even extended themselves by expanding at the high point in the cycle.
 
At the cyclical low point, the opposite holds true. From a business perspective, there is no greater opportunity than when prices reach major lows. At this point in the cycle, it typically costs less to make investments in your business. Your focus can be there, while light-duty hedging strategies can be used as prices recover.
 
Of course, day to day, when you’re living through price volatility and feeling the pressure of each individual decision, it’s difficult to see market cycles from this perspective. It’s not fun to work under that kind of pressure, and other duties on the dairy might seem more fruitful. Maybe that’s why some producers are wondering if marketing efforts really make a difference.
 
The Stewart-Peterson team has put together an analysis that shows the cumulative effects of consistent, disciplined marketing over a period of time. We will demonstrate the results of this analysis at World Dairy Expo. Come visit our booth (#1605 in the Exhibition Hall) and learn more. I hope to see you there.
In the meantime, have a safe and productive harvest season.
 
Steven Schalla is a Market Advisor for Stewart-Peterson, Inc. He can be reached at 800.334.9779 or sschalla@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. 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. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.

Harness Dairy Market Volatility

Sep 10, 2011

The key is a sensible risk management program, based on an understanding of the markets, your dairy’s cost structure and a disciplined, rational approach to marketing.

By Jim Dickrell, editor, Dairy Today
 
“Volatility in the markets isn’t always bad. If you understand it, you can make it work for you.”
 
That’s from Greg Steele, vice president of AgriBusiness Capital with AgStar Financial Services based in Baldwin, Wis.
 
The key is a sensible risk management program, based on an understanding of the markets, your dairy’s cost structure and a disciplined, rational approach to marketing. “We truly believe winners in the dairy industry are those who adopt successful risk management programs,” he says.
    
The keys to such a program include:
 
  • A reliable and accurate accrual accounting system.
  • Reliable and accurate dairy production management systems, such as DairyComp and EZ-Feed.
  • Understanding your cost of production and what influences it. For example, if the relative feed value of your forage declines due to poor growing or harvesting conditions, what impact will that have on your purchased feed costs?
  • Updated budgets, including a marketing plan, that are monitored against actual performance.
  • Understanding monthly cash flow requirements, and when cash needs are greatest. Also understand breakeven milk prices for your business.
  • Working with multiple expert resources such as a financial consultant, market advisor, broker and lender.
  • Having a working knowledge of marketing, and taking classes to improve that understanding. Understand that risk management is not about price outlook but margin management.
  • Using a hedge line of credit, if you qualify, to maximize marketing flexibility.
  • Understand marketing tools offered by your processor, and realize they can be a significant tool to achieving goals.
  • Avoid making marketing decisions that are not inter-related to your cost of production or tied to your business goals.
  • Execute your marketing plan with consistency and discipline. “Be satisfied with singles and doubles, and don’t expect home runs with every transaction,” says Steele.

Look Beyond This Summer’s Strong Milk Prices to Plan and Protect

Sep 02, 2011

It’s time to think about using some of the current income from higher milk prices to establish your risk management strategy for future months.

 
Katie Krupa photoBy Katie Krupa, Rice Dairy
 
The start of a new school year means crisp new books, pens, a clean backpack and, most notably, a fresh start. A fresh start to put your best foot forward, not get behind in your work, and maybe keep that new backpack relatively clean. With the milk price peaking and fall approaching, there are numerous similarities between the current dairy situation and a new school year.
 
Dairymen have had several good months of milk prices, and in spite of rising input costs, a lot of folks have some extra money in their pocket. The extra money can be used to pay down debt, update facilities or equipment, or even buy a shiny new tractor. Now is the time dairymen have the opportunity for a fresh start: get on good terms with the lender by paying down debt, upgrade the farm and make the facilities a little more modern and efficient, and buy some new tools.
 
A fresh start should also include a risk management strategy to avoid potential troubles down the road. With a new school year comes a new study schedule, a strict bedtime, a health check-up and other preparations to be well prepared and healthy for the year ahead.
 
Dairy farmers should be doing the same for their business. Set schedules for workers, projects, and payments, get the farm healthy by making necessary updates, and most importantly make preparations to avoid potentially hazardous situations. One very hazardous situation is a decrease in revenue due to declining milk prices and/or increasing feed costs.
 
Over the past several years, many dairymen have steered away from risk management strategies because their desired strategy may have a cost or require funds be utilized upfront. Now is the time to think about using a portion of the current income from higher milk prices to establish your risk management strategy for future months.
 
One popular strategy where this works is buying put options for Class III milk. This strategy allows the dairy producer to protect his or her Class III price at a desired level for an upfront premium payment. The premium payment is made, and the milk price is protected. If the milk price should move higher, the producer will not miss out on those higher prices, just the premium payment.
 
Additionally, the current milk prices enable many dairymen to protect their business’ breakeven (some can even protect a profit margin). I suggest working with a professional to review your farm financials and establish a risk management strategy for both milk price and feed costs that will enable your business to maintain profitability in future months.
 
Many dairymen are overwhelmed by the idea of doing these calculations on their own. If you fall into that category, find a professional who is familiar with these types of calculations and use their service. Due to historically high milk prices and the numerous risk management strategies that are currently available to dairy producers, now is a great time to review your options.
 
We don’t know what this new school year – or the milk market -- will bring, but we can take proactive steps to protect against potential hazards down the road. We don’t know if the 2012 milk price will be more like 2009 or 2011, but you have the opportunity to prevent a 2009-like milk pricing year for your farm. If the milk price should decline drastically a risk management strategy can protect your profitability and your operation.
 
As the kids head out to school with their new cloths, crisp supplies and, hopefully, smiling faces, they are equipped and ready to bring home good grades even if they hit some bumps in the road. As the cows head out to milk, the farm managers should be preparing the business to be profitable in the future, regardless of potential price volatility.
 
From the numbers I review, this summer has been profitable for dairymen. Now is the time to get a fresh start and review strategies to protect profits for the future.
 
Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. If you are interested in learning more, Katie offers monthly webinars on the basics of risk management. You can reach Katie at klk@ricedairy.com.Visit www.ricedairy.com.
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