Know Your Market
LGM-Dairy Now Two Thirds of CME Futures Volume
Nov 24, 2012
A closer look at the risk management insurance program as the Nov. 30 sales period approaches.
By Ron Mortensen, Dairy Gross Margin, LLC and Advantage Ag Strategies, Ltd.
The Livestock Gross Margin (LGM) for Dairy October sales period covered 20.6 million cwt. of milk. This is significant considering that CME Class III milk (December to September 2013) has 30.2 million cwt. of open interest. Once again, the LGM-Dairy concept has encouraged producers to manage risk. Remember, the open interest at the CME includes hedges from dairymen and long hedges from commercial interest and speculators.
Ten million dollars in subsidy money will be available for Nov. 30, 2012, and subsequent months if it is not used in Nov. 30, 2012. In October, $4.8 million was used. The most milk was covered in Wisconsin, Minnesota and California. Wisconsin dairymen covered almost 6.4 million cwt., or 31% of the total. Minnesota was 14.5% and California was 13.3% of the total.
Margins for November will not be set until Nov. 30, 2012, but halfway through the month, it looks like there will be a slight decrease in margins. As of Nov. 15, the low corn and meal margins slipped by $.17 per cwt. The biggest change was in the first few months. The projected margins have flattened out. See the first chart below. The second chart is from October, which shows stronger margins in the first months. Remember, the next time LGM-Dairy can be purchased is Nov. 30, 2012.
Think of 2013 as a long football game. It will take lots of good, sound plays. Each play does not have to be a touchdown. You will have to put together three plays to get a first and ten. Yes, you will need to score, but a consistent game plan can keep you in the game. Coaches, players and stakeholders all need to be on the same game plan. Develop the plays. Review the plays. Execute the plays.
Review your operation’s breakeven, feed inventory and financial situation. What financial ratios are important to your lender? An important number in the short term would be your current ratio (divide current assets by current liabilities).
Mitigate feed price volatility. If your operation still needs to make feed purchases, consider corn call options or meal call options—whatever is required.
Sell some milk with cash contracts or futures if prices are over your breakeven. Remember to include an estimate of basis (the difference between the futures price and your cash price) when evaluating sales.
Include milk put options or LGM-Dairy to cover milk price volatility. You will want to have a high percentage of your risk to be covered with options or LGM-Dairy. Why? If margins do get better down the road, you will benefit from higher profits. You need these higher margins in the form of profits to flow to the operation.
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. Contact him at firstname.lastname@example.org or visit www.dairygrossmaragin.com.