Sep 20, 2014
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August 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.

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.

ron mortensen photo 11 05   Copy

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.

The message for business people who are using markets to protect a price advantage is to go where the opportunity is. Right now that opportunity is in cull cattle and in feed.

Warren Wagner is a dairy advisor with Stewart-Peterson Inc., a commodity price management firm based in West Bend, Wis. You may reach Warren 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.

Are You a Speculator?

Aug 04, 2014

If you’re in business and haven’t utilized hedges to protect profit levels, you’re speculating.

Chris Robinson

By Chris Robinson, Top Third Marketing

Over the past 2½ years, dairy producers have watched the value of your out put on a very slow, determined rally. Glancing at a weekly price chart, the trend has definitely been in favor of the producers.

Class II milk on the August price board is bumping up against the $22.00 level. Back in November 2011, the price struggled at the $14.00 level. All of the experts and price gurus have had opinions over the last 2½ years as to when the trend will end.

At the end of the day, you need to ask yourself, as a producer and a business person, if you’re comfortable speculating on the direction of prices over the long term. You have to ask yourself if you would be either psychologically or financially stressed if, for some unforeseen reason, milk prices were to begin sliding back towards those 2011 levels.

If you are not hedging some or all of your price risk, you are speculating. As a producer, you are in effect making the same decision that an "investor" might be making by deciding to buy milk and hold it looking for higher prices. Make no mistake about it: If you are in business and you have not utilized hedges to protect profit levels, you are speculating.

Many hedgers resist adding a marketing budget to their business bottom line simply because there is a cost associated with any hedging program. If you are using futures markets to hedge, you are opening yourself up to margin calls, and you might need to be on a first-name basis with your banker to have them:
1) Understand, and
2) Be willing to finance a hedge for your milk.

The grain and livestock commodities were the original derivatives market. In 1851 the first "forward contracts" ever were created and began trading in Chicago. Farmers were given a way to protect themselves against uncertain price moves. That means for over 160 years, farmers and producers have had a method to hedge their business risk.

As we head into the second half of 2014, the farmer is faced with a lot of business risk. Record hog and beef prices are being enjoyed by producers. Milk is also sitting at contract highs. Domestic and worldwide demand for beef and pork as well as dairy has held up well. One can only hope that this demand continues strong. There is an old saying, however, among hedgers and producers: "Hope is not a marketing plan."

Is there a price associated with hedging? Absolutely. However, with prices near record highs, one could argue that there is an even greater level of risk. The higher the prices, the value of your product increases. As a producer, you have downside price risk up until the day you contract your milk. Prudent risk management would suggest having downside protection of some sort in place until that physical sale is booked. In essence, the hedge, either a futures contract or an options contract on the futures price, is a substitute sale. Your risk is on paper, as opposed to being completely unprotected in the cash market.

So what is a producer to do?

First, educate yourself about hedging. Secondly, find an advisor or group of advisors whom you trust to help you make hedging decisions. Finally, make sure you include a line item in your business budget for marketing. You have line items for your inputs, electricity, etc. You owe it to yourself to budget for your marketing. With prices at or near record levels, you have a lot riding on that marketing plan.

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

This material has been prepared by a sales or trading employee or agent of Top Third Ag Marketing and is, or is in the nature of, a solicitation. This material is not a research report prepared by Top Third Ag Marketing. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.


The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Top Third Ag Marketing believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

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