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June 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.

Why You Should Consider an LGM-Dairy Policy

Jun 19, 2014

This risk management strategy can be a valuable form of price protection in the volatile world of farming.

ron mortensen photo 11 05   Copy

By Ron Mortensen, Dairy Gross Margin, LLC

Last month, we discussed how Livestock Gross Margin for Dairy (LGM-Dairy) can be part of the conversation with a lender, as one of the different marketing strategies that can be used to reduce the risk in today’s world of volatile feed and milk prices.

First, here’s a review of the basics of purchasing an LGM-Dairy policy:

1. Sales are made one day per month, on the last business Friday of the month. Sales begin in the late afternoon/early evening.

2. The application is relatively easy.

3. The payment for the premium due is made at the end of the policy period.

A policy can be designed in many different ways. First, what months do you want to cover? Buying a policy for at least two months means you get a government premium subsidy. You can cover up to 10 months. Next, you can choose the deductible you want. Of course, the higher the deductible, the lower the premium. Finally, you can choose the amount of feed you wish to cover (you need to have some feed in the policy, but you can adjust it depending on your ration/crop condition, etc.). Use a University of Wisconsin website to help you choose the amount of feed coverage. Go to http://future.aae.wisc.edu/lgm_analyzer/

Consider using LGM-Dairy to insure milk out in the future, say the last three months that can be purchased. This is where the greatest level of uncertainty is regarding both milk and feed prices. So, on June 27, protect 15% of your milk production for March/April/May of 2015.

Remember how much flexibility is built into LGM-Dairy. A producer can "layer" or "stack" coverage. So, as the months go by, continue to purchase the last three months of coverage available. At the end of July, buy 15% for April/May/June of 2015. At the end of August, buy 15% for May/June/July of 2015. Eventually you will be covering 45% of your milk, and you will have a bundle of policies protecting your dairy’s financial position.

If LGM-Dairy becomes part of a risk management plan, what are some of the practical questions and considerations?

First may be the whole question of "do you really want to receive a check from the insurance company for a loss?" Receiving a payment on your LGM policy means margins (highly influenced by the price of milk) have collapsed. Yes, you have made money on your LGM policy, but your overall dairy operation is probably suffering.

An LGM policy is a form of insurance, and it is probably best if it does not pay off. No check from the insurance company means that margins are wider than what you insured and, as a result, your dairy is probably more profitable. Having said that, the LGM policy can be a valuable form of protection in the volatile world of farming nowadays.

One of the hardest wrinkles of this program to grasp is how to calculate gains and losses to come up with a net indemnity (a net payment on the policy). A gain or loss is calculated each month, but for policies that last multiple months (as most do), the gains and losses are added together to determine any potential payment. In a 10-month period, there could be five loss months and five gain months. These gains and losses offset, and there might not be a payment on the policy. The University of Wisconsin website (mentioned above - http://future.aae.wisc.edu/lgm_analyzer/) can help with these calculations.

If there is an insurance indemnity, what do you do? Provide your insurance agent with proof of production from your processor or cooperative for the amount of milk insured.

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

 

Protein Prices Up, Milk Prices Mixed

Jun 05, 2014

Protein prices and milk volatility could equal a "summer squeeze" for dairy producers.

Devenport, Bob

By Bob Devenport, Stewart-Peterson Inc.

Since January, the price of the July soybean meal futures contract has climbed from a low of about $390 per ton to $509 per ton as of this writing. That’s about $47 per ton less than the 2012 high, when prices peaked due to drought conditions. (See Chart 1.)

For the second year in a row, inventories are tight for old crop soybeans, and that is keeping protein prices high. Inventories are tight largely due to world demand for U.S. soybean meal. For the 2013-14 marketing year, U.S. soybean meal export commitments are running about 4.8 percent ahead of 2012-13’s pace as of week 31 of the marketing year (the week ending May 1). While 4.8 percent may not sound like a huge increase, it follows a year where soybean meal export commitments were up 27.3 percent from the 2011-12 pace at this same time of year.
As of this writing, total export commitments for soybean meal stand at 9,129,659 metric tons. At this point in the marketing year, total export commitments have never been this high. (See Chart 2.)

The strong demand for soybean meal is giving plenty of support to prices now. In view of soybean planted acres for this year’s crop, the market is anticipating replenishing supplies. The October and November contracts for soybean meal are looking more attractive, priced at about $100 per ton less than these nearby months of July and August. So there should be better buying opportunities in the fall. The key is to manage through these expensive months.

Summer squeeze?

When I say "manage through," what do I mean? Let’s turn to the milk side of the equation. It’s important to stay defensive on milk in these nearby months where your cost of protein is significantly more expensive. Looking out to fourth quarter milk prices, we are still expecting attractive prices: Those contracts are in the $19-$20 range right now. Also, by that time, protein should be at least $100 per ton cheaper. So if prices were to weaken in milk in the fourth quarter, there is not as much of a margin squeeze.

This summer, however, could be a different story. Milk prices are such a mixed picture right now, and that is producing the volatility we’re seeing lately. When volatility picks up and trade gets choppy, the market has the potential to move sharply in either direction, and that increases price risk through the July and August timeframe.

One area of concern is that global dairy prices come down steadily over the last couple of months. For the eighth auction in a row (reported this week), the Global Dairy Trade (GDT) Price Index lost ground, losing another 4.2%. If dairy prices globally continue to fall, U.S. prices could track with them to remain competitive.

It’s important to note that during times of high price volatility it can be difficult to get positions in place. We’ve seen several limit moves for Class III milk recently. If you do not have some milk price protection as this volatility kicks in, you may not be able to get the positions you want, and you will have to weather some ups and downs in the coming months.

This potential summer volatility is the reason why we are such strong advocates for a consistent approach to commodity price management, all year long, so that when we go through these volatile periods, your position is safe and you’re not left scrambling. Sometimes we forget how fast milk prices can fall, and a $1.50 per cwt. drop, especially with high protein prices, can be a significant margin change.

So, if you are hesitant to act – and many producers are during times of relatively high milk prices – think about the impact that protecting $1.50/cwt. would have for you this summer. Dairy producers often pride themselves (and rightly so) in doing the "little things" well. Proactively managing through a $1.50 price swing over the summer months can be a "little thing" that adds to the 2014 bottom line, along with all the other "little things" you do well this year.

If you’d like a better picture of price volatility and what is behind the recent milk price swings, view the Dairy Today Market Week in Review, posted each weekend. Click here for this week’s video.

 


Chart 1: July 2014 Soybean Meal Futures Daily (in $ per ton)
Chart 1: Since January, the price of the July soybean meal futures contract has climbed to levels approaching the 2012 high. Source: Stewart-Peterson Inc. and ProphetX.


 


Chart 2: Total Export Commitments of U.S. Soybean Meal (in metric tons)
Chart 2: Total export commitments for U.S. soybean meal have never been as high as they are this year. Source: Stewart-Peterson Inc. and USDA FAS.

 

Bob Devenport is a dairy markets advisor with Stewart-Peterson Inc., a price management firm based in West Bend, Wis. You may reach Bob at 800-334-9779, or email him at bdevenport@stewart-peterson.com.

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.

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