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March 2013 Archive for Know Your Market

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

Key Question for Dairy: Will the Dollar Continue Its Bullish Trend?

Mar 29, 2013

The implications of what the U.S dollar does are very big for dairy producers who buy inputs and sell milk.

Patrick PattonBy Patrick Patton, Stewart-Peterson Inc.

Our dairy advisory team has been watching the U.S. Dollar (USD) closely of late. The trend for the USD is up, and it is at risk of rallying even higher. People sometimes forget that even currencies have bull and bear cycles, and many indications are that the USD is starting a bull run and has a risk of moving still higher, to the 84.50 level.

A rallying dollar is bad news for dairy prices, and bad news for commodity prices overall. It makes U.S. commodities more expensive abroad and slows down demand. In contrast, a falling dollar is good news for dairy and commodity prices, as it fuels stronger exports.

If we think about what has transpired politically in the U.S. and how the USD has continued an upward trend, it paints a confusing picture. And yet, the implications of what the USD does are very big for dairy producers who buy inputs and sell milk. That’s why we’re paying attention to it, and preparing strategies that help us navigate the uncertainty.

Here’s a summary of the situation: Since 2008, the Federal Reserve (FED) has undertaken four rounds of what is termed "Quantitative Easing (QE)." QE is essentially increasing the money supply for the purpose of keeping interest rates low to stimulate economic growth. The FED’s QE programs have totaled over $2.5 trillion and counting, as QE4 is still ongoing.

The consequences of increasing the money supply are typically that it drives down the value of the currency, and this tends to fuel inflation. So far, of the four rounds of QE that the FED has undertaken since 2008, only QE1 had a substantial impact on driving down the value of the dollar.

When looking at the value of the dollar now, relative to QE2, QE3, and QE4, its value is actually higher than when each of those easing programs was announced and implemented. Close to a couple trillion dollars of easing has occurred since QE2 and yet the value of the dollar has been going up, not down. This is a bit of a red flag, because one would think that QE of the size and scope that we’ve seen over the last four years would easily have the USD down at the 2008/2011 lows or lower.

And so, the USD could continue to trend up, following its bullish trend, or it could succumb to the impacts of quantitative easing, and go down. Amidst such uncertainty, how should dairy producers be thinking about milk prices and feed costs?

• An up USD would be good from the standpoint of falling input costs, but it would be bad from the standpoint of a falling revenue stream from milk. In that case, milk prices at their current levels could be providing us with a great opportunity to lock in prices for the second half of 2013.

• A down USD would be bad from the standpoint of rising input costs, but should be good for an increasing revenue stream from milk.

Because of the significant implications that the direction of the USD has on commodity prices, dairy producers need to prepare for both an UP dollar and a DOWN dollar. If you consider your marketing strategies in advance for both potential scenarios, you will be prepared when one of them begins to unfold. You can position your dairy in a way that makes either USD scenario a good scenario overall for your operation.

Patrick Patton is Director of Client Services for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Patrick 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 2013 Stewart-Peterson Inc. All rights reserved.

Fantastic Forward Margin Opportunities Lie Ahead for Dairy

Mar 22, 2013

Right now, projections are very favorable for strong profitability later in the year.

chip whalen thumbBy Chip Whalen, CIH

A lot of producers, particularly in the Midwest, can sympathize with what New Zealand dairies are currently experiencing as the country has been crippled by a significant drought this season.

While the situation is obviously regrettable for those producers whose pastures are no longer able to support the dairy herd, the resulting increase in dairy cow slaughter and lower milk production there is becoming a boon to dairy producers here in the U.S.

Summer Class III and Class IV Milk futures contracts at the CME have rallied more than $1.00 per cwt. recently, and despite an increase in corn prices over this same period, projected forward profit margins have improved significantly.

In fact, current projections for a model dairy operation reflect forward margins above the 90th percentile of the past 10 years in the second half of 2013 (see graph). Even nearby margins in Q2 are projecting a much better scenario than what dairy producers have had to endure through the first quarter of this year.

Whalen chart 1   3 22 13In reading past posts to this space, more than a few have touched on the notion that the market does not always reflect the reality on the farm. While this is certainly true -- and there is a difference between the price of an exchange-traded futures contract and the price a dairy pays or receives for its feed or milk -- there is still a relationship between the two that can be demonstrated by a strong historical correlation.

Assuming one accepts the fact that their costs and revenues correlate with exchange-traded futures prices and that their dairy operation can be modeled to reflect their unique local market characteristics, the futures market’s function as a price discovery mechanism becomes a profit margin discovery mechanism by extension. The role of the market therefore is to signal whether it is profitable or unprofitable to produce, store or process a commodity in a deferred time period based on one’s particular circumstances.

I have also read here previously that it is not wise to try guessing whether the market is right or wrong about its current price projections, or for that matter to try timing the market in anticipation that prices should rise or fall from current levels. This is sage advice given that the futures market discounts all known information by all participants who collectively participate in the price discovery process.

Whalen chart 2   3 22 13As such, it is probably a waste of time to try second-guessing whether or not the market is correct about the assumption that Class III Milk, for example, is going to increase from around $17.00 per cwt., currently based upon March futures, to over $19.00 per cwt. by early summer, based on June and July futures. In other words, the market has already discounted this expectation that, based upon the current drought in New Zealand and associated loss of milk production there, prices should rise over the next quarter as a result.

Similarly, is the market correct that corn prices based upon the current forward futures curve will decline over $1.50 per bu. from current levels to the lower value projected for new-crop? This is based upon the assumption that we will plant a large crop this spring and weather will cooperate over the summer to allow stocks to rebuild in the upcoming year.

That assumption may or may not play out over time, but the point is that this is the best guess of collective wisdom today based upon all market participants. For both milk and corn, these are also probably fair expectations based on what we know right now. We cannot know what the future holds, and it is not a productive exercise to try guessing either. It is important to understand that the reason why it is called a "futures" market in the first place is because the market’s job is to anticipate what will happen based on where things stand today.

The other role of the market, besides being a price discovery mechanism, is to allow an efficient transfer of risk between parties. As a dairy, you have risks of both rising feed costs and lower milk prices based on the business you are in. It is possible to protect these risks using a variety of different contracting alternatives, both on the board as well as in your local cash marketplace. We cannot know what the future holds for the market on either the cost or revenue side of the equation; however, we can project what forward margins are forecast to be based upon current futures prices and then execute contracts based upon these prices.

As of right now, those projections are very favorable for strong profitability later in the year. Our clients are taking advantage of these opportunities. I hope you are as well. Another writer in this space correctly pointed out that these opportunities don’t often last and can disappear quickly. As the saying goes, you have to "make hay when the sun shines."

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

Evaluate Your Dairy’s Marketing Plan

Mar 17, 2013

Before spring planting begins, make sure your dairy’s marketing goals are SMART: specific, measurable, attainable, realistic and timely.

By Kristen Schulte, Iowa State University Extension Farm and Agribusiness Management Specialist

 Kristen SchulteWithin the next month, many producers will be trading in office time for tractor time as field work begins. In the last few days before spring arrives, take the opportunity to review and evaluate your marketing plan for the past year. It is important to evaluate all parts of your marketing plan from goals to pricing strategies and scenarios.

When evaluating marketing strategies and planning, it is important to know the financial position of your dairy, feed inventory and purchase needs, and cost of production. These will help to identify what commodities and how many contracts to include in the marketing plan and the best pricing alternatives. A plan should assess both milk revenue and feed input costs.

A good place to start is reviewing your marketing goals. When you start with the end in sight, you are better able to prepare a plan. Are the marketing goals for your operation SMART: specific, measurable, attainable, realistic, and timely? These guidelines can also apply to the pricing scenarios and related triggers you outline in a marketing plan.

When assessing the pricing methods used, evaluate the success of the methods and which worked for your farm during the given market situation. Follow that question with what you would change in the future based on the current or changing needs and what will work for your operation.

emember not all pricing strategies are the same as some fix price, others protect from downside risk, some set a minimum and maximum price, while others offer insurance protection on the margin between milk and feed. What strategies work for your dairy? Does your financial position or knowledge of the product influence the success of a particular strategy?

Does your plan address different scenarios based on price movements in the market? Do you have triggers in place to accommodate these price changes? Do the triggers identify the price points and percent of commodity priced for each scenario? Discussing all potential scenarios and options helps to build confidence in a marketing plan especially in uncertain times or volatile markets.

When evaluating your plan and follow-through over the past year, also evaluate how the market changed in the past year. Did the market change as you expected? How did you react in regards to marketing? Do you need to add additional scenarios and triggers into your marketing plan based on experience?

When evaluating historical prices, remember they help to paint a picture of what has and could happen while the futures market gives us an estimate of price based on current information and expectations of future events and how they all interact together in the market place. Both can be good indicators of what can happen, but remember no one can predict the future; these prices allow us to become educated and formulate scenarios.

From your market plan evaluation, outline what you can work to better understand or new price strategies you will try in the coming year. Also make note of what changes you will make relating to scenarios, strategies, and triggers.

Remember there is not one strategy for everyone--each operation is different. Each will have its own goals, margin to protect, or cost of production to cover. Depending on the operation’s financial position or cost of production, operations may see opportunities in the markets at different times. Each farm’s plan should be individualized and unique to their situation.

As with any other task in work or life, it takes diligence and continued dedication to become comfortable and excel. Do not give up if something doesn’t go as you expect. Keep trying. With the right individual (or individuals) on your team, continued research and education on options and the markets, and re-evaluation of your marketing plan, you can utilize a variety of marketing strategies to achieve your goals and help your business become more sustainable.

Kristen Schulte is an Iowa State University Extension farm and agribusiness management specialist. She can be reached at 563-547-3001 or

ron mortensen photo 11 05   CopyComments by Ron Mortensen

The reality of trying to write or implement a marketing plan brings up the subject of emotions. Why?

No matter what is written down or how pricing scenarios are evaluated, marketing becomes an emotional job. There is joy or greed with profits, fear when prices move lower, disappointment when things don’t go according to plan and anger when outside influences (think the Great Recession) present insurmountable financial burdens.

The concept of being able to sleep at night helps in these turbulent times. This often means using a mix of marketing strategies to lock in prices for both your feed inputs and your milk output. If you cannot sleep worrying about margin calls, then do not subject yourself to them. Never used a futures or options strategy, which could generate a margin call? Don’t go all in—try out a small futures position first before making a larger commitment.

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. Reach him at or

If You're Hedging the Margin, Don’t Try To Guess the Market

Mar 11, 2013

No one knows what the market will do, so it’s important to hedge at a price that is good for your business.

Katie Krupa photoBy Katie Krupa, Rice Dairy

Continuing market volatility in both milk and feed has many producers looking to hedge their feed along with their milk. While most of you in the Midwest think hedging feed is a natural part of managing your business, producers throughout the rest of the country are mostly unfamiliar with the concept. While many folks will do local contracts or even hedge basis, hedging feed on the exchange is new – and, for many, hedging milk on the exchange is also new.

With continued market volatility, it is extremely important for your risk management strategy to incorporate milk and feed -- and possibility other commodities, but I’ll save that for another article.
When looking at managing a margin between milk and feed, a great first step is to figure out what your risk is and how to hedge for volatility. For milk, you may get a good hedge by simply hedging Class III. This usually works great for producers in the upper Midwest.

But milk utilizations in your area may be more diverse, and using a combination of Class III and Class IV contracts may give you a better level of protection in your marketing area. Or, for producers out West, a hedge using cheese or powder contracts may work better. The market is constantly evolving, so it is good to work with someone who understands your milk market so they can help you prepare for volatile markets in your specific area.

For feed, you may have a good portion of your feed needs in storage until harvest, so the bulk of your shirt-term risk may be your protein needs, but longer term, your risk increases. Or, the opposite end of the spectrum is you are a purchase operation, so beyond what you have already purchased for the next several weeks or months, you are 100% at risk.

Many people will ask, "If I am hedging milk and feed, should I do both on the same day, or try to time the market and get a better price on different days?"

My answer is that you should hedge a margin that is good relative to your business. If the available margin that you are looking at hedging will return a profit for your business, then you have to opportunity to hedge a profit. That opportunity does not always exist. If you only hedge one side of the equation (milk or feed) and the prices change, your profitable margin can quickly erode and you may only have the opportunity to protect a breakeven or worse.

Most likely, the best day to hedge milk may not be the best day to hedge feed, but do you know when those days are? Does anyone? Unfortunately, these markets don’t always give you, the dairymen, a great opportunity. But sometimes you get a good opportunity, and you can protect your profits for the upcoming 6 months, or even 12 months. If that opportunity exists, are you comfortable passing it up, or trying to pick a better day and ultimately becoming a speculator rather than a hedger?

Take a look at the graph. It shows the Class III milk price for March 2013, the March 2013 corn price and a corresponding milk-feed margin based on futures prices trading on the CME. While it is easy to look back and say you should have hedged feed last spring at the low, and milk last fall at the high, no one knows if the future will provide better or worse opportunities.

Krupa chart snag it
I can imagine that many producers hedging milk in the summer (thinking it can’t move higher) would have waited to hedge feed because the "experts" said corn would decline in the summer (we all know that didn’t happen). Then you would have ended up with a low milk price, and a high corn price because of an unforeseen drought. Your milk-feed margin would have been inverted.

Unfortunately, you can probably think of many other examples where there milk and feed prices did not do as the analysts projected, and the milk-feed margin declined, and profits eroded.

The reason for risk management is that we don’t know what the future will bring. So, while it is easy to see the historical graph and pick out the best times to hedge milk and hedge feed, we can’t see the future as we sit here today.

If you hedge today, the margin could move higher or lower. That is why it is important to hedge the margin at a price that is good for your business. I’ll let you set the definition of "good," could be profit, could be breakeven and, in a bad market, could even be below breakeven. If you hedge only milk or only feed, and wait for a better opportunity, you are exposing yourself to the risk that the price will move the opposite direction, and your opportunity to hedge a profit may completely disappear. No one knows what the market will do. That includes me, economists, cooperative leaders, lenders or other brokers. Be sure your risk management strategy is complete and not exposing you to more risk but setting up an incomplete hedge.

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 There is risk of loss trading commodity futures and options. Past results are not indicative of future results.

Money Flow and the Dairy Futures Market

Mar 01, 2013

Why it’s important to be aware of the presence of outside money in the commodity markets.

Carl BablerBy Carl Babler, Atten Babler Commodities LLC

Dairymen understand the terms cow flow, milk flow and cash flow and their importance to their operation. "Money Flow" is also an important term when it comes to a dairy markets. The dynamic flow of funds in and out of the dairy futures market complex impacts dairy producer price volatility, opportunity and risk.

Money flow, outside money and fund money are interchangeable terms for the net speculative position held by participants in the futures market for investment purpose. Money flow into commodities by managed funds since 2007 has been significant drawing attention of market analysts. These funds, both domestic and international, have placed funds in many futures markets, including energies, grains, livestock and, even to some extent, dairy.

Dairy futures volume and liquidity has been a deterrent to big participation by these players, yet dairy markets have been involved. The figure below provides an example comparing the relatively low participation of outside money in dairy as compared to corn. It is generally a requirement that a market would have strong money flow to push prices to historical price levels, either highs or lows. Therefore, the awareness of money flow should be part of our observation of the dairy futures market.

Babler chart 3 1 13
Where do we get money flow information?

The CME Clearing House routinely reports open interest and volume for each contract traded, which represents the number of long and short contracts held in participant accounts that have yet to be offset and the total number of contracts traded on a daily basis. Open interest provides a measure of increasing or decreasing participation in a giving contract. This data reported in the Commitment of Traders Report is commonly divided into two trader classes.

• Commercials (those accounts that are trading contracts that related to their physical commodity exposure i.e. producers, processors, handlers);
• Non-Commercials (those accounts that are trading contracts but have no physical commodity exposure i.e. small speculators, index funds, managed futures funds).

Within the Open Interest position report, the clearing house provides the net position, either long or short, of a given number of contracts.

The chart below provides a view of money flow in the milk futures since 2006. In the various price rallies that have occurred, it is not clear if money flow pulled the market or pushed the market higher, but it is assumed the presence of outside money was a component of the price strength. There are many competing opinions on the long-term influence of outside money in futures markets, but, in any case, in the short run it is clear that it helps improve liquidity and it may increase volatility. It is important to understand this influence since volatility can result in both risk and opportunity for a dairy producer.
Babler chart 3 1 13b
Currently, milk market money flow is near a net zero position. The milk market is not providing conditions at this point that are encouraging money to flow in to the buy side. Including money flow awareness to your market analysis is warranted for you to know if your market being helped or hindered by money flow.

Risk in purchasing options is the option premium paid plus transaction. Selling futures and/or options leaves you vulnerable to unlimited risk. Atten Babler Commodities LLC uses sources they believe to be reliable, but cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. The author of this piece currently hedges for his own account and has financial interest in the following derivative products mentioned within: Class III milk.

Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at or 877-259-6087.

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