Sep 21, 2014
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Dairy trading experts offer strategies and practical perspectives to optimize market performance.

2015 – Another 2014 or Another 2009?

Sep 18, 2014

Both heavy milk production and strong export demand are steering the dairy market, leaving the direction of milk prices uncertain.

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By Katie Krupa, Rice Dairy

I am not going to be winning any milk-price forecasting awards with this article, but I think this is the reality of the future milk price. The milk price in 2015 could be continued high prices like we have seen in 2014 or another devastating low year similar to that of 2009.

Let’s start with the bad news. Milk prices have been historically high in 2014, and while high milk prices are fun while they last, we’ve seen in the past how historically high milk prices can result in devastatingly low milk prices. And what’s worse is that while milk prices were at a record high, feed prices were not. The milk-feed margin for 2014 was outstanding and dairymen were able to make a lot of money in 2014. And like any good businessmen would do, dairy producers often prefer to use their profits to build their business rather than spend it frivolously. So, with high profits come expansion and more milk production.

Looking to the 2015 futures market, the current milk prices are significantly lower than 2014 (Class III around $17.50-$18.00) but still pretty high compared to the moderate feed prices. The milk-feed margin for 2015 based on current futures prices is still one of the highest prices in recent years, second to 2014.

My point in discussing the milk-feed margin is that the milk price could drop to $16.00 Class III, and producers could still be making money. If producers are still making money at $16.00, how low will the price need to drop for milk production to slow? And how long will that take? My fear is that the Class III price will drop to $16.00 and, rather than production slowing, producers will crank out even more production to get the most out of their capital investment. From $16.00, let’s say the price drops to $14.00. I think at that level we’ll start to see some pullback but maybe not enough and not fast enough. I fear milk prices could drop lower than $14.00 for some time before we see a substantial impact on the milk production.

Now on to some good news. The international market has had a consistent consumption of dairy products in recent year and the U.S. has been exporting more dairy products than ever before. Assuming the world economy remains steady, it seems that this consumption will continue. If prices move from the highs of 2014 down to the significantly lower current futures prices for 2015, that will only make our domestic products even more attractive to international buyers. If there are no major weather issues in the world, we could expect that the U.S. dairy exports will have some price competition on the international market, but the international appetite has been strong enough that I think product will keep moving. If there are major weather events such as a drought in a high-producing dairy region, that will only help the U.S. dairy prices move higher.

The current forecast for 2015 milk prices is still very good given the current feed prices. If the international supply has any issues, the U.S. could continue to maintain high prices as we will be the main supplier to the international demand. But on the flip side, if the international supply comes in strong as does the U.S. supply, we could be significantly outpacing demand, causing prices to decline. If this does happen, I would expect the U.S. milk production would be slow to change direction, keeping prices lower for a longer period of time. From a risk management standpoint – plan for everything. Be prepared for 2015 prices to be another 2014, another 2009, or somewhere in the middle.

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 or 570-468-6739.Visit There is risk of loss trading commodity futures and options. Past results are not indicative of future results.

Is the New Margin Protection Program Enough?

Sep 11, 2014

It’s important to understand what this program protects and what it doesn’t.

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By Chip Whalen, CIH

Many dairy producers we work with have asked us recently about the new Margin Protection Program (MPP) that has been implemented as part of the 2014 Farm Bill.

As most readers are already aware, this insurance plan will replace the previous LGM program (Livestock Gross Margin for Dairy) in providing protection against deteriorating profit margins based upon a formula comparing the U.S. All-milk price against national average feed costs.

There is a $100 administrative fee to sign up, and the program will run for the next five years through 2018. The specific program details were finalized on Aug. 28. Dairy Today editor Jim Dickrell did a nice job of summarizing those details a couple weeks ago.

The one main question everyone appears to be asking is, "Now that the program is available and the sign-up period has begun, do I really need any other form of risk management for my dairy?"

First, it is important to understand what this program protects and what it doesn’t. Because the formula is based on national prices as released by USDA, the margins calculated may not accurately reflect actual profitability on any specific dairy farm. The calculation also does not take into consideration operating costs. As a result, an indemnity payment may not actually trigger, even if the dairy is already experiencing negative margins.

Moreover, it is also important to realize the intent of this program in the context of the larger farm bill. In the verbatim text of the National Milk Producers Federation (NMPF) narrative introducing the Dairy Producer to the Margin Protection Program, it states, "It will help prevent against the catastrophic losses that many dairy farmers experienced in 2009 and again in 2012." The overview of the Margin Protection Program on NMPF’s website also states, "Its focus is to protect farm equity by guarding against destructively low margins, not to guarantee a profit to individual producers."

Reading between the lines, one might interpret this to mean that the program is meant to address a disaster scenario of extremely negative margins as existed in those particular years. A little further into that same document, NMPF details a chart showing the MPP Margin and Coverage Levels over the past ten years from 2004 through 2014. They note that overall, the margin has averaged around $8.50/cwt. since 2004 (the chart is reproduced below).

The details of the program stipulate that a dairy producer can cover a maximum margin of $8.00/cwt. on up to 90% of historical production, which will be based on the dairy’s highest production in each of the past three years (2011-2013). For an operation producing in excess of 4 million pounds annually, insuring the production beyond that level will cost $1.36/cwt. NMPF also provides a table illustrating what the cost would be in dollar terms for a particular dairy. A typical 1,000-head dairy operation could expect to pay $266,206 in annual premiums to insure an $8.00/cwt. margin on 90% of their historical production.

Looking at the chart, the current MPP Margin is indicated at about $12.00/cwt., well above the historical average for the past 10 years.

Getting back to the original question of whether or not a dairy needs any other form of risk management besides this current program, an obvious question is, "What about the margin between the current $12.00/cwt. indicated by this chart and the maximum $8.00/cwt. margin that can be covered under this program?" If I am that typical 1,000-head dairy operation, I might also want to ask how else I might spend over a quarter million dollars to protect profitability in the open market. In other words, if I were to purchase options on the board to protect a minimum price of milk and a maximum feed price, might that possibly be a better deal?

It is important for individual producers to understand what their specific profit margins are projected to be through next year, and what alternatives are available to protect those margins. One interesting feature of the program is that the premiums are fixed over the next five years, and there is an annual signup provision. This means that a dairy producer can elect whether or not to participate in the program at all, or if they do, at what level of coverage they want to enroll for on an annual basis.

The signup period runs through Nov. 28 for the current year and all of 2015, and runs from July 1 to Sept. 30 next year for 2016 with a similar schedule for all subsequent years.

While the MPP may look quite compelling in the future depending on how profitability develops for dairy producers, it would at best appear to be an incomplete solution to managing the profitability and opportunities that exist today.

As Vice President of Education & Research at CIH, Chip Whalen is responsible for developing and conducting all of CIH’s Margin Management seminars. He is also the editor of CIH’s popular Margin Watch newsletters. Whalen can be reached at (312) 596-7755 or


What if fall comes early?

Sep 04, 2014

Early frost could send corn prices sky-rocketing

Bryan Doherty

By Bryan Doherty, Senior Market Analyst, Stewart-Peterson, Inc.

While feed buyers are happy about relatively low corn prices and the anticipated "bumper crop," there is one event that could change the direction of the corn market in a big way – an early freeze.

If you read the headlines, 2014 holds big promise of a record corn crop, and this has been reflected in lower prices. The crops are not in the bin yet, and looking at the December corn chart, you can see that the market understands the risk between now and harvest. Prices have stabilized and not gone lower as they often do just prior to harvest.

Corn prices have little downside risk right now. For many in the northern tier states, even a normal freeze could create quality issues as well as reduced yields. An early frost could send prices skyrocketing. The number of bushels at risk of early frost can be debated, and simple math could argue that one to one and one-half billion bushels are at risk. End users would need to scramble to cover needs should a frost occur. At the same time, producers of corn would be reluctant sellers. Carryout could drop significantly from close to two billion to well under one billion.

Feed buyers should now be looking aggressively to cover longer-term needs. If you have not been regularly managing the price of your feed, let’s look at two ways you could act now:

  • The first strategy is to start aggressively booking corn, assuming that corn prices have little downside risk from here. Despite good rain throughout August and generally favorable weather, prices have remained in a range-bound pattern. While prices are low, and your comfort zone as a feed buyer is likely high, now is not the time to sit on your hands. The odds of prices staying low are not in your favor.
  • The second strategy, which will allow for prices to depreciate further and yet provide upside protection, is to purchase call options. A call option gives the buyer the right to go long futures and not the obligation to do this. You could view this as an insurance policy against higher prices. November calls expire on October 24 and provide ample time for the crop to mature. Should a frost occur early, this option has plenty of time to work in your favor. As of this writing, $4.00 November call options are near four cents. This is inexpensive protection against the potential for a major move higher in prices. Yet, should a large crop mature and prices decline further, you may be able to benefit by purchasing corn at lower price levels.

In the end, what we're most concerned about is that those who buy corn could be caught off guard in a rather abrupt and serious way. The best planning is pre-planning so that you are prepared. With corn prices as low as they are, we would much rather encourage corn buyers to be proactive rather than reactive.

Planning for "what ifs" is crucial if your margins depend on feed prices in a certain range. Headlines may lull us into thinking prices will remain in a certain range, however, mother nature does not read the news. She will do as she pleases, and we need to be prepared for whatever comes next.

Speaking of preparing for whatever is next, visit Stewart-Peterson at World Dairy Expo, September 30-October 4. We will have "What’s Next" presentations in our tent outside the Exhibition Hall, and you will be able to ask questions about what the markets might do, and how you can prepare. Click HERE for the schedule. See you there!

Bryan Doherty is a senior market analyst for Stewart-Peterson Inc., a commodity price management firm based in West Bend, Wis. You may reach Bryan at 800-334-9779, or email him 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 2014 Stewart-Peterson Inc. All rights reserved.

Making the Decision: Margin Protection vs. LGM-Dairy

Aug 18, 2014

While awaiting details on USDA’s Margin Protection Program, consider these examples and comparisons with the LGM-Dairy program.

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By Ron Mortensen, Dairy Gross Margin, LLC

As of this writing, we all are waiting for the Milk Protection Program (MPP) details and regulations from the USDA.

The biggest unknown surrounds the possible proration of premiums for producers of more than 4 million pounds of milk.

Another question that needs to be answered is when the MPP premium will be payable. Will it be at the beginning of each year or maybe quarterly or monthly?

The next question is if producers can use the Livestock Gross Margin for Dairy (LGM-Dairy) program one year and MPP the next. We already know if a producer has an LGM policy in place, the USDA will honor it. If a dairyman has signed up for the MPP, after the LGM coverage expires, the MPP starts automatically.

The USDA is required to get the MPP program in place in September. We will have to see if they are able to pull this off. As we wait, please understand LGM-Dairy is still available. There is subsidy money available and policies are being written.

MPP vs. LGM Research

We have spent a lot of time comparing MPP to LGM. We used a dairy producing 2 million pounds per month. For the MPP, we assumed the premium would be pro-rated (we do not know if this is correct). We did adjust the premium to reflect 100% coverage, even though the MPP will only cover 90% of a dairy’s historical production. For the LGM program, we also covered 100% of production.

We assumed we would buy the LGM policy in November and to cover January through October. In January, we would purchase coverage for November and December. Only once in 10 years did the LGM policy have an indemnity payment for November and December.


If you picked the $4.00 MPP for the last 10 years, your premium would have been $1,000, or $100 per year. The estimated payout for the 10 years was $166,142. The payout was $100,597 in 2009 and $65,545 in 2012. For the 10-year period, the net payout was $165,142 ($.068/cwt). The highest payout net was in 2009 for $100,497 ($.42/cwt).

If you picked $6.50 MPP for the last 10 years, your premium would have been $685,000, or $68,500 per year ($.285/cwt). The estimated payout for the 10 years was $943,945. Payouts occurred in 2009, 2012 and 2013. For the 10-year period, the net payout was $258,945 (.108/cwt). The highest payout net was in 2009 for $525,190 ($1.93/cwt).


For this research, we used LGM with feed coverage similar to the MPP program (please remember, LGM does not include hay). The premium for the last 10 years would have been $535,727, or $53,572 per year ($.22/cwt). The estimated payout for the 10 years was $958,467. Payouts occurred in 2006, 2008, 2009, 2010 and 2013. The net payout was $422,740 ($.176/cwt). The highest payout was in 2009 for $593,703 ($2.47/cwt).

The best value was to just buy LGM in November and just cover January to October. Only one small indemnity payment in November and December 2012 would have been missed. For this research, we used LGM with the lowest allowed feed coverage. The premium for the last 10 years would have been $280,168, or $28,016 per year ($.14/cwt). The estimated payout for the 10 years was $690,627. Payouts occurred in 2006, 2008, 2009, 2010 and 2013. The net payout was $410,459 ($.205/cwt). The highest net payout was in 2009 for $583,018 ($2.92/cwt).

Decision-Making Thoughts

What are the potential issues with this research? The LGM has a better risk/reward ratio than the MPP. In other words, you get more bang for your buck (premium paid). Because the MPP has a lot of corn, soybean meal and hay, the calculation may not reflect what you are doing on your farm. If you buy a lot of feed and hay, the MPP may be more appropriate.

Also, size does matter in the decision-making process. If you have less than 150 cows, the MPP may be your best choice because the premiums are highly subsidized. If you have more than 3,500 cows, you may be better off with the MPP because LGM has a limit of 240,000 cwt. If you are a larger producer, you may want to buy the LGM in November 2014. Then, if the subsidies run out, you can always move to the MPP program. It’s a process--step one and step two.

Note the premiums for LGM were cheaper prior to 2006 because volatility was lower. I would expect premium costs to come down a little as the volatile markets subside (for example, corn prices are now under $4.00, versus $5.00-$7.00). Remember the MPP premiums are fixed. The LGM premiums more accurately reflect market risks.


The LGM program performed surprisingly well in this historical analysis and was equal to or even better than the MPP. The $4.00 MPP payments in 2009 would not have saved the family dairy with payouts of about $100 per cow. The $6.50 MPP program was more expensive than the LGM. LGM will be a good alternative to the MPP if your dairy has between 150 and 3,500 cows.

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

Feed and Cull Cow Prices Spell Opportunity Now

Aug 11, 2014

While negative scenarios color the early 2015 milk market, there are other places to look for revenue excitement.

By Warren Wagner, Stewart-Peterson

Dairy producers may be looking out to the early 2015 Class III Milk prices, which are down in the low $18 range and enjoying the current prices hovering around $21.00 per cwt. There isn’t a lot to get excited about right now in the milk market. In fact, early 2015 prices have many negative scenarios built into them, and so that is why they are trading significantly lower than today’s prices.

There are other places to look for excitement, however: the cull cattle market and the corn market.

The cull cattle market has been insanely high, and for many dairy producers, this spells great opportunity for an additional revenue stream. At the time of this writing, live cattle futures are at record highs, with August through December contracts trading as high as $160 per cwt. As of Aug. 5, live cattle contracts through April 2015 were trading at $156 per cwt. or higher. So, the pricing opportunity for cull cattle extends into the spring of 2015, whereas milk pricing opportunities do not.

On the feed side, note that corn prices are at relatively low levels. On Aug. 1, 2014, the corn price had declined 32% over a period of three months. That 32% selloff from the May 2014 high of $5.22-3/4 to the July 2014 low of $3.56-1/2 is right in line with other historical percentage moves that led to a long-term, bear-market bottom. So, from a cyclical perspective, there is a lot of evidence to suggest the corn price is very close to a cyclical bear market low.

Feed buyers need to realize that these low prices are not going to last forever. In fact, at past major lows, the corn price has rallied on average 18% within 60 days. Favorable feed prices can come and go fast, as historical statistics tell us. Remember this fact when all the headlines scream "record corn crop" this fall.

Chart 1 shows the forward curve for Class III Milk futures. It shows how the higher-priced opportunities for milk disappear quickly past the November contract. As a result, the opportunities to lock in near record high milk prices are now pretty limited. Producers will need to look to other markets like cull cows and feed to find opportunities to manage prices.

Chart 2 shows Live Cattle prices trading in record high territory out through spring of 2015.

Chart 3 shows the opportunity to secure corn at relatively low prices.