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January 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.

Calculating Your Strategy for Higher Milk-Price Opportunity

Jan 25, 2013

Worried you might miss out on some of the market’s upside potential? Here are tips to consider.

Katie Krupa photoBy Katie Krupa, Rice Dairy

One of the biggest fears producers have when creating a risk management strategy is that milk prices will move higher, and they will "miss out" on those higher prices in their milk check. While I would like to say that all producers implementing risk management strategies are happy because they are protecting their profit margins and making money regardless of price fluctuations, we all know that is not the case.

Ideally, risk management strategies should be set up to reduce anxiety and stress, but, often times when prices move higher, just the opposite happens. When prices move higher, many producers find themselves glued to the computer screen, calculating their "missed opportunity" to the penny.

Below are a couple tips and strategies to help break that nasty habit.

1. Remember the true reason for risk management. Risk management in any business is a way to reduce risk and provide a more stable and sustainable business. Whenever you implement a risk management strategy, you will ultimately be removing some of the potential reward in order to obtain less risk. But the benefit gained should outweigh the potential missed opportunity. This is the topic I struggle with most when talking with dairymen since most are natural risk takers. Dairy farming is not for the faint of heart or the risk averse.

2. Implement a strategy that will allow you to capture the upside potential. Not all risk management strategies were created equal – some fix your price, some protect your price from downside risk, and some can create a minimum and maximum price. These milk price strategies also can apply to feed prices so that you can protect your two most variable prices. Unfortunately, there is no one strategy that works for everyone. Typically, I help producers choose an appropriate risk management strategy based on financial needs, current market conditions and the producer’s personality. Again, it is important to remember that, with any strategy, there will be some fees or premiums that will need to be paid, regardless of high or low milk prices settle.

3. Be nimble. While it is important to create a risk management strategy and not a speculative trade, it is also important to be able to adjust your strategy if the market changes. For example, if you cap your milk price for the next six months, you want to make sure that you are either totally satisfied with that strategy, regardless of low or high settlement prices, or you have a way to adjust the strategy if you feel the market is changing. After discussing possible strategy changes and the associated costs, some producers will choose to just implement a different strategy upfront so they can benefit from potential higher prices. Either way, it is always important to discuss all your options, and know that there are various strategies you can implement or adjust if the market should change dramatically.

This topic is currently important because many producers are considering hedging for the remainder of the year but are concerned that they will execute a strategy and ultimately miss out on some of the market’s upside potential. While no one knows what the remainder of the year will bring, it is important to remember why you set up a risk management plan – to protect against the unknown.

The good news is that there are various strategies available, and some of them will allow you to capture the majority of any potential higher prices. Determine the level of risk you want to protect against, and discuss your available risk management strategies with a professional who understands all your options and your unique business.

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. 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.

U.S. Dairy Exports Influence Domestic Marketing Dynamics

Jan 18, 2013

Producers must appreciate and understand the risks in the global dairy market when making risk management decisions at home.

Carl BablerBy Carl Babler, Atten Babler Commodities

The export of U.S. dairy products has become an increasingly important part of the U.S. dairy industry over the past several years. Net exports of U.S. milk production now exceed 10% on a milk solids basis. It is important for dairy producers to understand the dynamics of this part of the market since it has largely been the outlet for soaking up growth in supplies and supporting prices.

U.S. dairy exports are largely made up of nonfat dry milk and, from time to time, a significant amount of butter. Cheese has historically been a net import, but in recent years has shown a steady growth and now makes up a small amount of exports.

Dairy exports represent a bright spot, supporting growth in the U.S. dairy industry, especially in light of a relatively stagnant domestic market. Over the last decade, domestic dairy demand has grown only about 11% while export demand has grown 113%.

The export growth story has not been a smooth ride. Year-over-year changes in exports have swung wildly compared to the generally single digit year-over-year changes in domestic demand. 

Much of the volatility is driven by weather in New Zealand, the world’s largest dairy exporter. Their grazing production model is highly reliant on consistent rainfall. In years of severe and moderate drought in Oceania, the U.S. has stepped in to fill the void in global dairy trade.

As the world dairy export market grows, the linkages between product prices have increased significantly. This increases the sensitivity of U.S. prices to world weather, production, growth and policy changes. As evidenced by the incredible growth in global dairy trade over the last decade, this is a phenomenon that is unlikely to end any time soon. Accordingly, producers must appreciate and understand the risks in the global dairy market when making risk management decisions at home.

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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. The author of this piece currently hedges for his own account and has financial interest in the following derivative products mentioned within: milk. 

Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact himatcbabler@attenbabler.com or 877-259-6087.

 

More Strength Ahead for the Dairy Market

Jan 14, 2013

Underpinnings to dairy prices are still bullish in 2013.

Kurzawski photo 2013By Dave Kurzawski, INTL FC Stone

If you look past weaker international cheese prices for a moment, it wasn’t that hard to make an argument for $2.00 cheese or butter at some point during the 2012 holiday rush. Strong U.S. consumer demand coupled with slowing U.S. milk production was the dry tinder that lit up cash prices this fall. While we now know that is not the case, don’t be surprised if the $2.00 dairy price point re-emerges in 2013.

First off, although prices have risen to make many producers across the country profitable relative to high-priced feed in 2012 (break-evens are generally $17.50-$18.50 in most areas now), it’s a very large stretch to say there has been much healing at the farm level over the past three years. Yes, milk production increased to 1.0% in November due to improving weather in many milk sheds throughout the U.S., but something much more valuable for 2013 still appears to be at an all-time low: confidence in the industry.

Existing dairies are doing their best to balance their resources with an ever-volatile price for their milk. With month-to-month profitability evading many of those who do not use some sort of risk management, the long-term picture is cloudy at best. The lack of confidence doesn’t necessarily impact milk-per-cow figures but, rather, impacts dairy expansion and interest in the business as a whole. And the one-two punch brought on by a lack of capital investment and a lack of young people on the dairy farm, is a much more severe problem for those who buy milk going forward.

To look a little closer at the current production situation: Cold winter weather in many areas recently mixed with the impact of poorer forage quality will likely limit near-term production to 1%, maybe 1.5%. To keep up with demand, the USDA needs to be reporting somewhere closer to 2% growth in U.S. production. The lack of confidence in the business only serves as a black cloud over what is really only lackluster milk production growth. The key here is that lackluster production growth will only serve to enhance ebbs and flows in dairy product demand.

Fluctuations in the demand for cheese tend to drive price. The past few months have been a swift reminder that the vast majority of our business is still very much domestic in nature. Strong domestic sales in September and October of 2012 gave way to a very quiet domestic sales scene over the past two months. But can we really expect more of the same ho-hum demand and rising dairy product inventories over the next two months? Not if you feel the U.S. economy is on the mend, as I do.

U.S home sales rose by 14.5% in November, the Dow Jones Industrial Average is back above 13,000, and sales at U.S. retailers increased by 0.1% in December or 6.5% higher than 2011, to name a few current economic underpinnings. And that was during the heated election cycle and arduous "fiscal cliff" panic. The shaky ground of government infighting has been calmed somewhat, giving way to what is expected to be a rise of consumer confidence this month. And that means we ought to expect better retail sales, better restaurant sales and better dairy product demand through Q1.

The issues of strong U.S. demand, questionable milk production growth and a pervasive lack of capital investment in the dairy industry are real issues facing the dairy industry in 2013. Just because they may have gone dormant as we hit a pocket of product availability over the past month or so doesn’t mean that the underlying fundamentals have changed significantly enough to avoid another significant price increase at some point in the first half of 2013. Remember, when we merge a dwindling milk supply with a growing hunger for dairy products, the risk for dairy prices is not down — but up. So we’re taking a respite from higher prices now. But the deck has not been reshuffled, and the market, as I see it, is still poised for more strength in 2013.

Dave Kurzawski is a Senior Broker with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach Dave Kurzawski at 312-456-3611 or dave.kurzawski@intlfcstone.com.

Who Is in Control Here?

Jan 04, 2013

Advice for dairies looking to actively manage input and milk prices.

Stewart Peterson   Mark LudtkeBy Mark Ludtke, Stewart-Peterson

As 2012 drew to a close, our advisory team was getting very few questions about what dairy prices would be like in 2013. No, most of the questions coming into our office had to do with whether or not the farm bill would be extended or reforms would be enacted.

It seemed like the whole world has been waiting to see what the New Year would bring public policy-wise. Taxes, estate planning, insurance. “Just tell us what to expect so we move on with running our businesses” seemed to be on everyone’s mind.

Well, just as the crystal ball in our office does not have a clear picture of future prices, it does not have a clear picture of what politicians will do when driving toward a cliff or a debt ceiling. And so, while we all await a clearer picture of what might happen with respect to dairy policy, we continue to give our farm clients this advice: Take control yourself.

This message of taking control is not foreign to American dairy producers. In the last decade in particular, we have seen dairy producers take control of their own destiny and do what they need to do to remain leading suppliers in the world. They have become masterful at both production and business management. Some of that mastery was born out of adversity, such as prolonged low milk prices or drought. To be sure, we’ve seen consolidation; however, many of those changes were made so that producers could bring in another generation, or accomplish the lifestyle and career choices they choose.

Even as we await more meaningful results out of the farm bill and dairy policy reform debate, price risk is present. Those businesses that cannot absorb risk in some other way, or those looking to actively manage input and milk prices in search of additional advantages, can be looking at a few key things right now:

- Feed: Look for seasonal buying opportunities on any further price weakness to start getting 2013 protection in place. If any physical product is bought, we recommend setting upside targets to get put option coverage in place on these purchases. Using a combination of tools like this allows you to bring down your weighted average price for a purchased commodity over time.

- Milk: Downside sell stops should be put in place so that if seasonal strength does not materialize, there is a Plan B ready and waiting and your milk can be protected. This kind of “scenario planning” is what we are recommending for all of our clients to help build confidence in an uncertain environment.

There are balanced reasons for caution, optimism and opportunity in the coming months:

- Caution: Politicians kicked the can down the road again, which means more uncertainty and more political battles in the months ahead regarding the debt ceiling and budget cuts. Much of the debate will be just noise and posturing, however, economic strength directly feeds demand and the ability to fund farm programs, so we’ll be watching.

- Optimism and Opportunity: Recent price action in whey futures and cash cheese suggests that a bottom is forming. Higher moving product prices would provide opportunities to get milk covered at higher levels.

New beginnings

Speaking of optimism and opportunity, I have some of my own to share. After eight-plus years with Stewart-Peterson, I have decided to take a position with Nutrition Physiology Company. It’s a position that will likely mean less travel for me, which I believe my family will appreciate. And so, as the calendar turns to a new year, I find myself both optimistic and also reflecting on what I have learned in this dynamic business.

In my years with Stewart-Peterson, I have seen an increase in volatility that most certainly will continue. I have seen so many dairy producers rising to whatever challenge came their way, including price risk. I have also heard the “woulda-coulda-shouldas” from those dairy producers who wish they had done more to manage price risks. Those things only become clear in hindsight. Even though I am moving on to other pastures, I still believe that taking control is the right thing for dairy producers to do when it comes to price uncertainty. These days, whether you are a politician or a business person, everyone is in the business of managing or shifting risk. Dairy producers are no different.

Thank you for listening to my ideas for the past year in this column. Tom Mongoven, who has been bringing you the Dairy Today Market Week in Review, will bring you next month’s column on behalf of the advisors of Stewart-Peterson.

Finally, I and everyone at Stewart-Peterson wish you a great 2013!

Mark Ludtke consults with dairy producers nationwide concerning their choices for risk and opportunity management. He can be reached by calling 855.334.0700 or at mludtke@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 2013 Stewart-Peterson Inc. All rights reserved.

Long and Short New Year’s Resolutions

Jan 01, 2013

In this new year, it's time to create your own personal resolution list called the "Manager's List."

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC and Advantage Ag Strategies, Ltd.  

As we flip the calendar to 2013, we also flip our minds to the New Year and a fresh start. The New Year’s resolution list is still on your desk (or maybe in your head). Although New Year’s Eve is past, how about your own personal resolution list called the "Manager's List"?

As part of the 2013 Manager's List, I suggest you really write two lists--one short term and one long term. Why two? It will allow you to work on the short term issues and check them off. There’s a feeling of accomplishment—got in done, check it off. The second list is for long term issues and the big picture. This one will take longer to get done.    

Short-Term Manager's List

Review your cash flow by looking at accounts receivable and accounts payable for current month. Generate a short term cash flow by projecting receivables and payables for the next three months.

Look at forward milk prices versus your cash costs for the next three months. Can you make your operation’s cash flow more predictable by using forward contracts on a portion of your milk? If you cannot lock in a profit, then look at using options or LGM-Dairy.

Brainstorm with employees, spouse, stakeholders and family members about how to be more productive in 2013. In particular, challenge everyone to list tasks/items that can be eliminated. Many times we do things just because we have always done them. A fresh start for the year means simplification. This benefits everyone!   

Control risk. Controlling risk is probably a three-pronged strategy in a dairy operation—there’s production risk, revenue risk and expense risk. So, think about the balance of maximizing production with an eye towards improving herd health. Since this is a short-term list, don’t make big risky decisions. Make a lot of incremental decisions about milk marketing and inputs. If you are comfortable with the situation for the next three months, for example, look out to the second quarter of the year.    

Long-Term Manager's List

Take care of your health and your family’s health. It is important. Enough said.  

Think strategically. Consider making at least one BIG decision in 2013. Possible topics: Estate planning, life insurance, succession planning. Or maybe allow employees to make more decisions. Or a significant change in herd size. Some of these decisions reduce your "worry" list and some can make your operation more profitable.       

Think equity and working capital—two keys of financial stability. Develop a strategy to improve these financial benchmarks.  

Learn more about option strategies for managing risk. Options are cushions or little pieces of price protection for your operation. They can help reduce your risk and, as such, are often compared to insurance. Options can be frustrating, as a farmer pays option premiums and often does not get anything in return. Then it becomes time to step back and realize that, like your property and liability insurance, you should not expect a price "accident" all the time. Options can, however, significantly lower your price risk, whether it is corn, meal or milk.  

Learn more about LGM- Dairy and how to integrate option strategies with LGM. LGM for Dairy is an insurance product which functions like a set or bundle of options, protecting you from significant changes in milk and feed prices. It can be a "one stop" shopping approach to risk reduction.

(Comment about LGM margins: Front month LGM margins have been slipping because milk prices have been moving lower. Milk prices are still very strong from a historical stand point for February 2013 through June 2013. In addition, the month of November shows historically high margins.)

Have a Great 2013 from all of us at Dairy Gross Margin, LLC.

Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Strategies, Ltd., a commodity trading advisor.

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