Jul 29, 2014
Home| Tools| Events| Blogs| Discussions| Sign UpLogin


April 2012 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.

Market Cycles and Class III Price Patterns: A Closer Look

Apr 30, 2012

The Class III milk market reveals a pronounced, three-year-cycle low pattern, which has become an accepted pattern of milk price behavior. Here's a closer look at how price patterns have unfolded since 1996.

Carl BablerBy Carl Babler, Atten Babler Commodities
 
As a commodity price rally rolls over, and a trend or cycle price high is identified, attention shifts to evaluating how low prices may fall. A number of sophisticated technical price analysis tools are available for evaluating potential price objectives based solely on price and time data. 
 
We have chosen another technical evaluation approach. Price-pattern history is a simple approach to evaluating forward price objectives fully based on price patterns of the past. The Class III milk market portrays a pronounced three-year-cycle low pattern, which has slowly become an accepted pattern of milk price behavior.
 
We will look deeper into the cycle pattern. See the chart below. The monthly Class III milk futures price shows the cycle’s high and low price for all cycles since 1996. When looking at past price history of a commodity, it is often debated that fundamental factors have changed in a given market; thus, the patterns of the past are not relevant. Market participants often continue to discount price patterns even as those patterns continue to unfold.   
 
Carl Babler Edairy Today    Article 4 23 12 1 CHART
 
First off, be reminded that no one knows where any commodity price is going at any time in any market, myself included. However, we can define producer price risk in terms of where milk prices could go, based on patterns of the past. Our analysis requires only observation. 
 
Such observation reveals that prices dropped off the cycle highs as indicated:
 
• 1997 -- a drop of $10.70/cwt. off the $21.70 futures high
• 2000 -- a drop of $8.90/cwt. off the $17.40 futures high
• 2003 -- a drop of $6.31/cwt. off the $15.89 futures high
• 2006 -- a drop of $9.90/cwt. off the $20.60 futures high 
• 2009 -- a drop of $12.16/cwt. off the $21.43 futures high
 
This small sample of five cycle occurrences of the past 15 years is not statically significant. There is indication, however, that the current cycle low -- based off the 2011 high of $21.62 -- could be anywhere between $15.31 and $9.46, if the 2012 price falls in the range of cycle price drops of the past. The Olympic average of the five price drops is $9.83/cwt. Thus, such a price drop this year could project a 2012 Class III milk-cycle low of $11.80/cwt.  
 
Defining risk may cause those with milk-price risk to accuse the messenger of being negative, cynical or pessimistic. This message is not about gloom and doom. It is about what prices have done in the past. It should also be noted the average price for the cycle low years of the past are also worth noting. The average USDA announced Class III Milk price for the cycle low years in discussion:
 
• $12.05 average price for 1997
• $9.74 average price for 2000
• $11.42 average price for 2003
• $11.88 average price for 2006
• $11.35 average price for 2009
 
Managing the risk of a 2012 Class III milk price cycle low using strategies to protect a price of $15.00 Class III or better are fitting.
 
Risk Disclosure
Risk in purchasing options is the option premium paid plus commissions and fees. Selling futures and/or options leaves you vulnerable to unlimited risk. Transaction cost used throughout this report includes both commissions and fees. 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. Unless otherwise stated the information contained herein is meant for educational purposes only and is not a solicitation to buy futures or options.
 
Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at cbabler@attenbabler.com or 877-259-6087. 
 

Milk Market Fundamentals and Technicals: Your Map and Compass for the Marketing Frontier

Apr 23, 2012

Using them together is a crucial start on the journey toward disciplined and consistent marketing.

 
Rocky GinggBy Rocky Gingg, Stewart-Peterson
 
Milk production and moving averages, cold storage and crossovers, slaughter and support levels. There are numerous fundamentals and technicals that provide market insight and shed light on developing trends. At the end of the day, which should drive key marketing decisions?
 
For producers, analyzing charts can be intimidating and time consuming. And yet, with unrelenting volatility, many producers are exploring what marketing knowledge, strategy and skills might mean for their dairy operations.
 
Here’s a quick primer on fundamentals and technicals, because using them together is a crucial start on the journey toward disciplined and consistent marketing.
 
How fundamentals relate to technicals
Fundamentals are best described as a map which gives us the lay of the land or the landscape of the market. The map gives us our bearings and provides the backdrop of where peaks or valleys may arise. Technicals can be viewed as the fine-tuned compass which we use to navigate and make key strategy decisions. Both the map and the compass are individually important, and to make decisions efficiently and effectively, they are needed together. Without a compass, we are less confident and even a little complacent on making decisions. Without a map, we can be too caught up with particulars and end up not seeing the forest through the trees.

Analyzing recent events
For illustration purposes, let’s look back at the volatile month of March and see how a combination of fundamental and technical analysis would or could have played out (while, of course, realizing that hindsight is 20/20).

We start by gaining our bearings, looking at some key fundamental trends. As 2011 came to a close and the calendar flipped to 2012, the three-year cycle was fresh in everyone’s mind. These thoughts and concerns were quietly confirmed with December milk production posting a year-over-year gain of 2.4%, which was the 23rd month in a row with year-over-year gains. The herd size came in at 9.22 million head, which was up 82,000 head from the previous year. The supply side of the equation is telling us to proceed with caution.

Continuing our fundamental analysis, now let’s take a look at the demand side of the equation. December cold storage revealed total natural cheese stocks were down 6% from the previous year, which was the fourth consecutive month posting a year-over-year decline. It was also the first December to post a year-over-year decline since 2007. Analyzing two key fundamentals provided a very mixed picture but did show what could be on the horizon.

Now let’s take a look at our compass, the technical side. Once again, for illustration, let’s look at a few March 2012 charts and imagine how technical analysis could have helped a dairy producer make key marketing decisions.

CHART A
Gingg chart A 

Chart A is a daily bar chart with each bar representing a day’s worth of trading. The green and red lines are key moving averages that measure momentum and direction. The green line is a shorter-term average and the red line is a longer-term average. When the shorter-term average (green line) crosses above the longer-term average (red line), momentum is bullish. When the shorter-term average (green line) crosses below the longer-term average (red line), momentum is bearish. In Chart A, the indicators are pinching at a key psychological price level of $17.00. Our compass is showing we need to respect the indicators and sell a portion of our milk, say, 25%.
 
CHART B
Gingg chart b 

Following this first sale, the indicators then snapped back and assumed the upward climb toward $18.00, as depicted in Chart B. With 75% of your milk open to the higher trending market, you’re feeling pretty comfortable. Then the contract reaches new highs above $18.00 and posts what we call a strong bearish reversal, meaning the contract traded above the previous day’s high but closed below the previous day’s lows. You then might decide to sell the next portion of your production, perhaps another 25%, at $17.00.

CHART C
Gingg chart c

Now with 50% sold, you might be patient on making further sales. When the key moving averages cross bearish, however, as on Chart C, technical analysis suggests that there could be further downside ahead. You decide to respect the crossover and sell another 25% for a total of 75%.
 
CHART D
Gingg chart d
 
So, as you can see, with our map and compass as our guide, we were able to make key strategy decisions when we saw forks in the road. The result in this illustration was a net weighted average milk price for March of $16.72 compared to the Class III Settlement of $15.72, as summarized in Chart D.

Keep in mind that this was a simplified example. Many other decisions are part of a comprehensive marketing approach, such as how much of your production to sell, and what tool to use at what time at what cost. That’s a lesson for another time.

For many producers who are already efficient producers and managers, commodity marketing is the final management frontier to be explored. Educate yourself on fundamentals and technicals, and you will give yourself a starting point for your journey into marketing.

If you’re looking for a review of the current fundamental picture for the dairy markets, click here to view the Dairy Market Week in Review on AgWeb.com.  
 
Rocky Gingg is a Market360® Advisor for Stewart-Peterson Inc. He can be reached by calling 800.334.9779 or at rgingg@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 2012 Stewart-Peterson Inc. All rights reserved.

Livestock Gross Margin Dairy Policies Are Now in the Money

Apr 16, 2012

For policies purchased on Nov. 18, 2011, the first three months of a potential policy--January, February and March--are indicating an indemnity payment.

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin LLC
 
The Livestock Gross Margin-Dairy (LGM) policies are doing what they were designed to do. If milk prices drop and/or the price of corn and soybean meal moves higher, the LGM policy creates an indemnity payment. For policies purchased on Nov. 18, 2011, the first three months of a potential policy--January, February and March--are indicating an indemnity payment, depending on the deductible. 
 
The Nov. 18, 2011 policies gave you the choice to cover any of the months between January 2012 and October 2012. In order to receive the premium subsidy, you would have needed to cover milk in at least two months.
 
It is interesting to note the USDA recently announced the first MILC payment since April 2010. The MILC payment for February is $.3896 per cwt. The Daily Dairy Report suggested MILC payments from April to July would top $1.00/cwt. The estimated MILC payment for March would be just above $.80/cwt.
 
On Nov. 18, the LGM policy established a Guaranteed Gross Margin. This is using a three-day average of milk, corn and soybean meal prices from the CME. The Actual Gross Margin is established after the milk is settled for each month and the corn and soybean meal are settled. The price of milk has dropped enough to trigger an indemnity for January, February and March. In the case of March, the corn did move higher increasing the indemnity payout.
 
An example for the Nov. 18, 2011 policy is shown below. It includes the Expected and Actual Prices and the potential indemnity payment for January, February and March.
 
Mortensen chart 2 EDairyToday4112012
The above example uses average corn and soybean meal. We used 1,560 cwt. of milk, 20.5 tons of corn and 6.0 tons of soybean meal. The indemnity payment for January is estimated to be $.25/cwt. if you used a zero deductible. The February payment estimate is $.84/ cwt., and the March payment estimate is $1.33/cwt. The average of the three months is $.81/cwt.
 
If you had just insured January, February and March with a zero deductible, the indemnity would be the $.81/cwt. times the amount of milk insured. If you insured 10 months, you will need to wait to see what the indemnities are for the next seven months. The premium cost of January, February and March with a zero deductible was $.63/cwt. A zero deductible policy for 10 months would have cost $.75/cwt, a $.50/cwt deductible the policy would have cost $.48/cwt and a policy with a $1.00 deductible would have cost $.25/cwt.
 
The University of Wisconsin’s Dr. Brian Gould has a website called “Understanding Dairy Markets.” It is a great source to evaluate your LGM-Dairy policy. Go to future.aae.wisc.edu and click on LGM-Dairy. You can also access the site by going to www.dairygrossmargin.com and clicking on “premium estimator.”
 
If you need assistance in calculating an example or your policy, email Marv Carlson at marv@dairygrossmargin.com or call 712-240-8395.
 
Ron Mortensen is a founder of Dairy Gross Margin, LLC, which was formed in 2006 to sell Livestock Gross Margin Insurance to dairy producers. Mortensen’s firm is now licensed in 23 states. He is also president of Advantage Agricultural Strategies, Ltd., which he founded in 1985, to provide individual risk management advice for farmers and agribusiness using futures, options and cash trading strategies. Contact him at 515-570-5265 or ron@advantageag.com.
 

How Far into the Future Should You Hedge Your Milk Price?

Apr 09, 2012

It all depends on one other major component of your dairy operation.

Katie Krupa photoBy Katie Krupa, Rice Dairy
I am frequently asked, “How far into the future should I hedge my milk price?” Although there is no simple answer for everyone, my answer is typically longer than they think.
Historically, most people would hedge their milk price for three to nine months, but I would be willing to hedge for a longer time period with one caveat: Hedge your feed prices along with your milk price.
Recently there has been a strong focus on the milk-feed margin, and it has been for good reason. Since the recent low in February 2009 to the most recent high in August 2011, the variation in the milk and major feed prices has been drastic. Regardless of which formula you analyze for the milk-feed margin, you will notice a significant difference between 2009 and 2011.
The one thing that has remained relatively steady for each month is that there was, at some point in time, an opportunity to hedge a decent margin for each month. Keeping in mind that farm financials are drastically different, I use the historical average margin as a benchmark (which is currently around $9.70 for the past five years). Using the average is effective on a broad scale because we are taking into account the change in milk price and the change in feed price, which is typically the biggest variable for input costs.

 
Class III Milk
Corn
Soybean Meal
February 2009
$9.31
$3.87
$293.28
August 2001
$21.67
$6.88
$349.60
Percent Change
133 %
78%
19%

 
 
 
 
Class III milk futures trade on the Chicago Mercantile Exchange for roughly 24 months before the contract settles, and typically corn and soybean meal futures trade even longer. Therefore, we can look at where that margin has traded for 24 months before the contract settles. It is important to note that although a contract may trade for 24 months, the first several months the contract is available the interest may be so small that it is not feasible to get a trade done at the price listed.
In the graph, I have the historical trade margin for February 2009 – that is, milk minus a specific amount of corn and specific amount of soybean meal. Again, every milk-feed margin contract is different, but the underlying concept and subsequent price variation is similar. As the graph shows, the opportunity to hedge a margin above $8.00/cwt. existed until December 2008, and most of those months the margin traded above $9.00/cwt.
I show the graph for February 2009 because that was the worst month in recent history for the milk price and the milk-feed margin. There are many other months like February 2009, where the opportunity to hedge a higher price existed, and there are months where the margin increased consistently until settlement, meaning that any hedges placed would have resulted in a loss of upside opportunity.
 Krupa   Feb09 MarginTradeData 4 9 12
My point in showing you this graph is to challenge your ideas on when to hedge your milk price. Your decision on how far out to hedge should not be based on the milk price being at $15, $20, or even $25/cwt., but it should be based on the milk-feed margin being at a profitable level for your farm. And when you are hedging your milk, be sure to hedge your feed risk as well. You would not be hedging if you leave one side of the milk-feed equation unhedged.
Depending on the producer and his or her ability to hedge feed, I am comfortable hedging milk 12-18 months (longer if there is a market for those months furthest out) into the future as long as their feed risk is protected. If you consistently hedge a profitable milk-feed margin, undoubtedly there will be times when you miss out on some higher prices, but you will be protected when the margin declines, and you will be returning a consistent profit.
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. There is risk of loss trading commodity futures and options. Past results are not indicative of future results.
Log In or Sign Up to comment

COMMENTS

Hot Links & Cool Tools

    •  
    •  
    •  
    •  
    •  
    •  

facebook twitter youtube View More>>
 
 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions