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May 2014 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.

A Time to Reap, a Time to Hedge

May 29, 2014

Understanding seasonal tendencies can help refine strategies to protect both feed costs and milk revenues.

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By Chip Whalen, CIH

Many producers know that there are certain times of the year which are more profitable than others.

After all, agricultural commodities follow seasonal trends that can either pressure or support prices of the goods they use and produce. For example, crop producers often find that the value of their crops can be depressed at harvest time as an abundance of supply hits the cash market all at once. Likewise, dairy producers may find that milk prices tend to be depressed during the "spring flush" season, which pressures margins in the early part of the year.

Understanding seasonal tendencies can play an important role in how a producer may want to approach managing forward profit margins.

For example, if you are heading into a period where margins tend to be under pressure, it probably is a good idea to have a fair amount of coverage in place to protect those margins – even if the margin itself may not be historically strong. Moreover, if you understand the reason why the margin tends to be depressed, this may help guide you in the strategy selection process.

As a dairy operation exposed to increasing feed costs, you know that the greatest period of uncertainty surrounding crop production is upon us. From how many acres will be planted to what the weather will be like during germination and reproduction to how many bushels will ultimately be harvested, this uncertainty can lead to increased volatility in crop prices over the summer.

Understanding this, you may want to retain flexibility in the strategies you use to protect your feed costs. On the one hand, if there is a drought like we experienced a few years ago, you want to make sure you’re protected against significantly higher prices. On the other, should we harvest a large crop later this year, you want to participate in the lower prices that could minimize your feed expense and improve your dairy’s bottom line.

While seasonality can certainly play a role in the decision-making process, it is important to remember that the market does not always behave according to seasonal tendencies. In any given year, the fundamental backdrop unique to that period may trump any seasonal pattern. Moreover, historical patterns are based on past price movements, so seasonality itself is changing every year as new price activity gets added to the ongoing history.

The profit margin itself should be the main driver of any strategic decision to manage forward profitability. Understanding seasonal tendencies can help refine strategies to protect both feed costs and milk revenues, though seasonality itself should not be the main decision making consideration.

Understanding the seasonality of price movements or of overall profit margins can certainly assist in tactical strategy selection and position management over time. This may include decisions to include more or less flexibility at certain times of the year, taking on more cost in option positions, or even increasing coverage levels. A strong understanding of how seasonality affects prices and profit margins can help you make better decisions and give you more control over your dairy’s profitability.

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


Midwest Milk Production Ramps Up

May 23, 2014

After waning over the long winter, the milk tide is beginning to turn. Could that pressure dairy prices?

By Will Babler and Luke Strub, Atten Babler Commodities LLC

The world is awash in milk production, but this isn’t easy to see if you are a producer in the U.S. Midwest.

USDA recently reported that U.S. milk production increased 1.0% year over year (YOY) in April 2014, to 17.428 million pounds. The April 2014 year-over-year increase was significantly below the 10-year average milk production growth rate of 1.7%.

Recent U.S. milk production growth appears to be even less impressive when compared to international production growth. Record high milk prices have led to significant YOY milk production increases in Europe and New Zealand, with U.S. milk production trailing significantly. Since November 2013, milk production in New Zealand and Europe has increased 8.5% YOY and 4.6% YOY, respectively. Over the same time period, U.S. milk production has increased by only 0.7% YOY.

U.S. milk production has been hampered by lagging production in the Midwest. Poor feed quality and weather conditions have reduced Midwestern production, with Wisconsin, Minnesota, Iowa, and Illinois experiencing an aggregate 2.6% YOY decline in milk production from November 2013-March 2014.

More recently, however, effects of the adverse weather have subsided, with production beginning to shift back toward normal levels. Aggregate milk production in Wisconsin, Minnesota, Iowa, and Illinois was down only 1.0% year over year in April 2014, which was smallest YOY decline in six months. April 2014 month-over-month (MOM) milk production for Wisconsin, Minnesota, Iowa, and Illinois was up 1.1% on a daily average basis vs. a 10-year national average (April to March) increase of 1.2%.

April 2014 MOM production increases have pushed Midwestern milk production off of previous YOY lows. Midwestern production has converged with Western production, which is off of YOY highs experienced during an abnormally early "spring" flush. Although overall U.S. YOY milk production gains have remained steadily between 0.9% and 1.1% throughout the past four months, an increase in Midwestern production stemming from more favorable weather conditions and high quality new crop forage suggests greater milk production gains are likely going forward.

Future increases in Midwestern milk production could have significant effects for global dairy markets. Combined milk production in Wisconsin, Minnesota, Iowa, and Illinois accounted for between a fifth and a quarter of national milk production in 2013. Other important milk producing states including Michigan, Indiana, and Ohio were also affected by the adverse weather conditions, and experienced below average milk production. A rebound in Midwestern production as spring flush approaches, coupled with strong global milk production and an incentive to maximum output, could put additional downward pressure on milk prices.

Will Babler is a principal with Atten Babler Commodities LLC. The firm serves producers, processors and end users in the dairy industry by providing education, margin management programs and futures and options brokerage services. You can reach Atten Babler Commodities at 800-884-8290, or

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. Information contained herein is obtained from sources believed to be reliable, but cannot be guaranteed as to its accuracy or completeness.

LGM for Dairy: A Bridge between Lender and Producer

May 22, 2014

This milk price protection plan program can manage your risk and offer lenders the financial security they seek.

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By Ken Hartzell, Dairy Gross Margin, LLC

Dairying in 2014 and beyond will be as challenging as it has ever been. It is no secret it will require more capital. Plus, like the past 10 years, there is more price commodity price volatility. More money and more price risk add up to increased risk for both the producer and the lender.

As the need for capital grows and risk increases, how does a producer ask for capital and yet satisfy the lender’s need to reduce risk? The first step is, of course, communication. The second is a risk management plan. Think about it from a lender’s perspective. As some bankers have commented, their goal is to have "security without micromanaging."

One way to help provide this "security" could be a Livestock Gross Margin for Dairy (LGM-Dairy) policy. The idea behind LGM seems complicated, yet it is really very simple. It offers a milk price protection plan with a feed component thrown in.

Here are some key points about an LGM-Dairy policy:

1. The premium (using a two-month coverage minimum) is subsidized at 18%-50%, depending upon the deductible chosen.

2. The premium is due at the END of the insurance period.

3. The producer chooses amount of milk to insure each month (does not have to insure 100% production).

4. The producer chooses amount of energy (corn) and protein (soybean meal) in the equation. It is flexible. At least a small amount of feed is required by the policy.

5. The producer chooses the deductible (usually a balance between coverage, break-even and premium).

6. LGM-Dairy does NOT influence the price you receive for milk. It allows for full advantage if prices go higher than predicted.

How does this work for lenders?

1. They know, for whatever time period and whatever quantity of milk, you have a floor under a portion of your production.

2. They know in a "worst case scenario" where you will be.

3. They can treat your policy as collateral.

4. They know there is reduced vendor risk because LGM is backed by the government.

5. They know it is a true hedge, and unlike put options or futures, can’t be sold or offset in the middle of the timeframe.

6. They know it can be budgeted for since the premium is not due until the end of the insurance period.

7. They know the producer is being proactive and is looking for ways to manage risk.

8. They know LGM is a way for them to have security without managing the operation.

What does this do for producers?

1. It provides peace of mind. When prices are dramatically lower than predicted, they have protection. LGM protects their major source of income for family living, balanced against a premium they choose.

2. It allows the flexibility to protect whatever quantity of milk for which policy months they choose.

3. It protects what affects their income the most: milk price and feed inputs.

4. It allows them to routinely protect revenue almost a year into the future.


LGM-Dairy can provide protection for a 10-month period, starting two months from now. For example, a policy purchased at the end of May (the sales date is the last business Friday, so May 30) could cover July 2014 through April 2015. A producer can insure a single month but must insure milk at least two months to receive a government subsidy on the premium (which can be as high as 50%). He can choose to insure any combination of months or he can insure all 10 months. Listed below are just some of the examples for a policy that could be purchased on May 30:

1. Cover July 14 through April 15 (10 months)

2. Cover last quarter of 2014 (3 months)

3. Cover first quarter 2015 (3 months)

4. Cover both last quarter 2014 and first quarter 2015 (6 months)

When thinking about how much milk to protect, the flexibility of this product is also key. A producer can "layer" or "stack" coverage. For example, on May 30, he can purchase coverage of 20% of his production for October-December. Then, on June 27, he can purchase coverage of another 20%.

Ken Hartzell is an agent with Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products. Reach him at or visit

What the Stock Market Has to Do with Milk Prices

May 15, 2014

Milk prices have soared partly because commodities have risen to asset-class status. CME trader Chris Robinson explains this new driver and what it means for dairy producers.

Chris Robinson

By Chris Robinson, Top Third Ag Marketing

What a difference 24 months has made to the bottom line of agricultural producers and end users. Flash back to September 2012 when we had the CN14 (July 2014 corn) flat price on the board trading at a contract high of $6.76 per bushel.

Ironically, those record high prices created complacency in many grain producers, who became convinced that sub-$5.00 per-bushel corn would not been seen again for decades. In reality, those highs set the stage for a 16-month downward swoon, punctuated by the 4-year low posted 16 weeks ago, down at $4.21 ¾. This $2.55-cent break represented a 38% drop in price. For producers who had not hedged against that loss, this was a negative for their bottom line. However for end users, this was a true blessing to have your input prices drop sharply.

As a milk producer, you also saw the reverse move in the value of your output. Class III milk was trading a board flat price at $14.50 in the fall of 2012. Just two weeks ago, milk traded to a record contract high of $23.00, for a gain 8.50 or 59%.

The first driver for demand for milk has been the Chinese decision to allow families to have a second child. In a country of 1.3 billion souls, even if only 3% of the families decide go forward with a second child, that is a demand wave which has supported higher milk demand and therefore higher prices.

In my opinion, the second biggest factor driving higher prices in commodities has been the investment community’s group-think decision to treat commodities as an asset class. Because of that decision, you have seen record inflows of investment capital into both the grain and livestock markets.

The logic behind the decision to monetize commodities as an asset class has grown from a concern regarding record-high levels in the stock indexes. Back in 2009, many investors exited the stock market during the panic lows. The Dow traded down to the 6,500 level while the S&P500 traded at 670. The recent record high in June Dow futures (as of May 12, 2014) was 16,675 and the high in the S&P at the 1892.75. This pencils out to a 150% gain in the Dow and a 180% gain in the S&P 500. The investment community has bought commodities as a hedge against an untimely severe down-draft in the stock indexes. It also has the long commodity positions as a hedge against inflation coming back into the market due to the expansion of the money supply as the Federal Reserve has implemented Quantitative Easing.

Bottom line, the world markets are all interconnected today at the speed of light. Something that happens while you are asleep could have drastic impact on your bottom line as a producer.

So what’s a producer to do? If you would suffer emotionally or financially in the wake of sharp or sustained drop in value in the market price for your milk, then you need to set a hedge. Vice versa, if you would feel financial pain watching the spot price of corn or your feed inputs spike up this summer, then you need to set a hedge to protect against that.

Good risk management is about protecting your business bottom line and not letting your emotions rule your marketing plan. A proper hedge plan should be priced into your operating budget the same way you budget for everything else that affects your business bottom line. As with all decisions regarding your bottom line, you owe it to yourself to learn as much as you can before you start hedging. Working with a well-respected broker or advisor can make hedging decisions less intimidating.

Chris brings over 23 years of experience to his Top Third clients. He began his career as a broker and analyst in 1991 with a Chicago firm which specialized in cash grain trading and hedging. In 1992, Chris became a member of the CBOT. He joined Top Third in January 2010, capping an 18 year career as a floor trader and broker. Today, in addition to his Top Third duties, Chris is a featured grain and livestock analyst for the CME. He is also featured on weekly video summaries with RFDTV. In January of 2013, Chris became the lead broker for the Pit bull division of Top Third. This is a separate branch of the company that is involved with traditional speculative trading and is separate from the hedging arm of Top Third. Chris is a 1988 graduate of Colgate University with a degree in Political Science and Economics. Contact him at



Why Active Management Beats “Set It and Forget It”

May 08, 2014

Regretting that you locked in your prices and missed the record rally? Here’s a smarter approach to price-risk management.

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By Mike Rusch, Stewart-Peterson Inc.

As I visit with dairy producers across the country, there is a distinct group of producers who have locked in what were said to be "good" prices late last year and are now questioning this decision. Back in November and December of 2013, based on a gut feel, suggestion or view of a profit margin between milk and feed, they may have sold 50%-75% of their milk production for all of 2014 through their milk plant or in their hedge account, with the mentality of "lock in a good margin and move on."

Now as this milk rally has picked up steam, each month brings new regret and frustration about the rally they are missing. Justifiably so. This approach simply doesn’t work for price risk management, unless your goal is to achieve a certain price level and not the best possible price level.

I am reminded of one of the infomercial world’s biggest stars on late-night TV, Ron Popeil with his Ronco Rotisserie oven. If you’ve heard of him, perhaps his famous line is ringing in your ears: "Set it and forget it!" While this feature may be attractive for selling his brand of convenience cooking, it should not be the way you approach any market to manage price risk.

The way to achieve the best possible price levels for feed or for milk is to actively manage your price risk. A producer who is actively managing market risk for milk will go ahead and make sales incrementally that will lock in favorable prices. Then, if there is opportunity for the market to rally, those sales can be covered with call options, providing the opportunity to participate in a rally. You continuously -- actively -- monitor price levels and put strategies in place for future price moves.

Dairy producers manage this way in almost every other area of production. You create a nutrient management plan, and then you monitor soils to make sure all is going according to plan. You make adjustments as needed. You plan your ration, and then you monitor feed quality to make sure the cows are getting what you planned, or adjust if something changed. You build a new facility and install new equipment, then monitor to be sure the equipment is working as promised. You go back to the builder or installer if necessary. You fine-tune and debug until you get the results you want.

So it is with price risk management. You wouldn’t accept a "set it and forget it" mentality to manage the day-to-day production operations on your dairy. It should not be the approach to markets, either.

Adding more active management of markets to a dairy producer’s workload may not be a welcome thought; neither is the alternative of weathering a price drop unprotected. With each step the milk market goes up, we are at greater risk of it coming down, and coming down fast.

The chart below shows the final January through December Class III milk futures average price for each year, 1998 through 2013. The 2014 price reflects where the average is at this point in the year. We also highlight the percentage declines that we have seen in the past from the market’s peak to its trough. Note that after every peak there is a pretty sizeable decline.

It’s also worth noting, beyond the peaks and troughs, that milk has been on an overall steady climb upward, with each high climbing a bit higher. Those who take an active approach to price risk management can take steps to secure good prices as they head upward, thus protecting against the catastrophic drops. With this approach, you will not always sell at the top of the market, however, you should be able to follow the general upward trend, achieve better than average prices, and avoid the deep troughs.

Source: Stewart-Peterson Inc. and ProphetX


"Set it and forget it" may be dangerous, and so is "ignore it." These days, lenders and dairy owners recognize the risk of being fully exposed to a price collapse. Somewhere between "set it and forget it" and "ignore it" is a middle ground that dairy producers are very familiar with, and very good at. It’s called "active management."

Mike Rusch is a business development consultant with Stewart-Peterson Inc., a price management firm based in West Bend, Wis. You may reach Mike 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.

2014: What a Year It Can Be!

May 01, 2014

While this year’s January-to-June stretch will prove fantastic for dairy producers, it’s important to focus time and money on protecting yourselves for July to December. Here’s simple advice for milk and feed price protection.

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By Katie Krupa, Rice Dairy

We have closed out the first third of 2014, and milk prices reached record high levels. As we move further into spring, many producers look to the fields wondering if the summer will bring more good fortune. While we all wish for only good things, the list of possibilities is endless: drought, floods, record high heat, damaging storms, high milk production, low milk production, etc. So what is a producer to do? Here are some of my thoughts on protecting yourself for the remainder of the year.

The Class III milk price for the first third of 2014 was a record high average of $23.04 per cwt., and the average for the first half of 2014, based on current Chicago Mercantile Exchange (CME) futures prices, is $22.66. If the prices for May and June settle at or around current trading prices, that will be a record-high Class III milk price for any six-month period. My point in showing you these numbers is to point out that the first half of 2014 will be fantastic, with little opportunity for a drastic downturn for the January-June average. Therefore, I recommend producers focus their time and money on protecting themselves for July-December.

Protect your milk price

After coming off of these record high prices, I understand many producers are hesitant to hedge July-December because the current futures price of $19.54 is much lower than the first half of the year (January-June average of $22.66). The "Why would I hedge prices so much lower than the current price I am receiving" mentality kicks in, and many producers remain in the cash market. The problem with that mentality is that today’s high prices are in no way a guarantee of higher prices in the future. As we know from experience the dairy market can be fragile and drop quickly.

A simple hedging strategy that I really like in today’s market is simply buying put options to protect your milk price. The nice thing about buying put options is that you are able to protect the downside of the market but not limit the upside potential of the market. Currently the premium cost for an $18.00 Class III put option for July-December is about 50 cents per hundredweight, and the $18.00 Class IV put option is about 30 cents. I am encouraging many producers I work with to simply buy put options for the remainder of the year for up to 100% of their production because the net hedge price meets or exceeds their expected cost of production for July-December.

Let’s walk through a quick example, assuming you purchase the Class III $18.00 puts for a total cost of 50 cents per hundredweight. Given the Class III average for the first half of the year at $22.66 (based on current CME futures) let’s assume that the milk price drops drastically for the second half of the year. Regardless of how low the price goes, your lowest price for July-December will be $17.50 ($18.00 put option - $0.50 cost). That equates to an annual Class III average of just over $20.00. That would be the highest 12-month average in the Class III market – and because you purchased put options, if the price should remain high, you will benefit from the higher prices (less your 50 cent cost).

If you need a higher net price than the $17.50 discussed above, then you will have to review different strategies such as selling futures, or utilizing a risk reversal (min/max) to get a higher net floor price. The potential disadvantage of those strategies is that you are limiting your upside potential. If that is necessary for your financials, I often recommend this type of strategy so that your business can be profitable. But given the current high prices, if you can get a level of protection that satisfies your business’s needs without limiting your upside, I would keep the upside open.

Protect your feed price

Do you know what the weather will be in July? Me neither. In fact, no one does. So hedge your feed price along with your milk price so you do not get stuck paying extremely high feed prices. And if you grow a large portion of your feed needs, you may still need to hedge some to cover what crop insurance would not if there was a loss.

I don’t make blanket statements about hedging because all producers are different and their needs are diverse. With that being said, there has never been another time when I thought producers should hedge to this extent to take advantage of the current market prices. You have the opportunity to protect a record high price for 2014, and still leave the upside open. As always, do what is best for your unique business and don’t overlook your feed risks.

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 312-492-4195.Visit There is risk of loss trading commodity futures and options. Past results are not indicative of future results.

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