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Know Your Market

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

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

Do You Have a Market Plan in Place?

Aug 22, 2011

High-cost feed purchases and uncertain milk prices add to the risk of 2012. A few moments of planning now will help with the cash flow and overall profitability of your operation.

 
Marv Portrait 4By Marv Carlson, Dairy Gross Margin LLC
 
In dairy country, the silage choppers will be chopping and the silos will be filled. The hay, if you are in the Midwest, is close to the last cutting. If you are not in the Midwest, many of you may have additional costs because you are buying forage. These additional purchases add to the risk for 2012. Most all of this feed is purchased or has been grown and stored, waiting for the price to go up.
 
Now the risk is all on the price of milk. Will it move higher? Will it move lower?
 
It might be time to think about your business plan. A few moments of planning now, without having a panic attack, will help with the cash flow and overall profitability of your operation. It just makes sense to ensure you generate positive returns for the feed you have purchased or have in storage. The plan should include a break-even calculation.  
 
The next step is to estimate the feed stocks you will have on hand. Estimate the dollars you have invested in the hay and/or pile of silage, knowing it needs to be converted to cash. Look at what milk prices are in the future. How much milk do you have to cover with Livestock Gross Margin-Dairy, cash sales, futures or options?
 
We have always suggested using LGM-Dairy as part of the marketing and business plan. By using LGM-Dairy on 33% of your projected milk, you will have coverage for a portion of your fixed expenses and your feed.
 
In October, when we can buy LGM-Dairy, look at the lowest amount of feed possible. You can find a link to the LGM for Dairy Analyzer, designed by Dr. Brian Gould, at our website. It will give you the potential margins you can lock in for 6 to 10 months. LGM-Dairy would establish a floor on your revenue.
 
Here is an example from the LGM Analyzer: 

  • Insurance contract month of August 2011 looking forward to the months of December 2011 through July 2012.
  • Deductible level of $1/cwt. at the lowest amount of feed input allowed.

 
Carlson chart 8 22 11 a

The second choice is to use an options strategy by buying milk puts and soybean meal calls. We do not need to suggest buying corn calls if you have silage and/or wet corn. These option purchases will establish a floor on your revenue.
 
The third choice is to use forward contracts or futures if milk prices are above your break-even. This would establish an absolute price. If you use futures, you are subject to margin calls. If for some reason the market moves higher, you will have accomplished your goal, but you may have missed an opportunity by selling at a lower price. 

Fall is a good time to start the planning for 2012. If you have any questions, please feel free to call me at (712) 240-8395 or contact me by e-mail at marv@dairygrossmargin.com.

 Carlson chart   8 22 11
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.
 

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