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Looking Back and Forward to Livestock Gross Margin for Dairy

Dec 20, 2013

As this closer look shows, LGM-Dairy can help smooth out the valleys in your dairy’s finances.

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin LLC

The chart below is a seven-year look back at Livestock Gross Margin-Dairy. It is a reflection of the health of the industry. The light green line is the historical milk (Class III) price, with the light purple line to the right showing Class III milk futures (forward looking). The blue line is milk minus corn and soybean meal – another way of looking at income over feed. The pink line (forward looking) to the right is the minimum margin guarantee offered with an LGM-Dairy policy.

Buying an LGM-Dairy policy is similar to an option. It will guarantee you cash flow. If milk prices go lower, the LGM kicks in. If prices go higher, you will get the higher prices. So, if milk prices fall and feed goes up, an LGM policy will protect you. Note the milk price is the main driver of margins—the green milk line and the blue margin line historically move together.

Perhaps at this time of year, it is beneficial to look at the blue line and remember what happened in 2007 and 2009—the opposite ends of the spectrum on this chart. Your analysis of your finances and your emotions during these two years may say a lot about your operation’s risk management going forward. Tools such as LGM-Dairy can help smooth out the valleys in this chart and in your operation’s finances.

Mortensen graph 12 20 13
 

You can see all months back to 1998 by going to our website.

The analysis below is for the October 2012 sales period. Because milk prices moved significantly lower in the December 2012-April, 2013 period, these policies show good payoffs. Also note that MILC did kick in and had payments for seven months.

If you purchased LGM-Dairy in October 2012, the following table shows the indemnity payouts. If you purchased coverage for more than the first five months, the total payout was significant. Remember the indemnity payments are averaged over all of the months you purchase.

The summary below shows indemnity payments for average feed inclusion. Your specific results may vary a little based on how much corn and meal you put on your policy. The data and calculations were in part derived from the University of Wisconsin LGM-Dairy website. You can evaluate your policy by going here
Mortensen graph b 12 20 13

Conclusion
Look at covering three to four months at a time. Cover 10% to 25% of your production every month. This will start to build a portfolio of coverage over time. If margins get better over time, you will be improving your overall coverage. If margins slip, you will be averaging your coverage as it moves lower.

Below are the final price changes for each month:

December
Expected milk prices 20.34, actual prices 18.66, down $1.68/cwt.
Expected corn prices 7.45, actual prices 7.19, down $.26/bu.
Expected soybean meal prices 482.23, actual prices 458.33, down $23.90/ton

January
Expected milk prices 19.53, actual prices 18.11, down $1.42/cwt.
Expected corn prices 7.46, actual prices 7.26, down $.20/bu.
Expected soybean meal prices 482.23, actual prices 458.33, down $66.47/ton

February
Expected milk prices 19.26, actual prices 17.25, down $2.01/cwt.
Expected corn prices 7.46, actual prices 7.32, down $.14/bu.
Expected soybean meal prices 469.32, actual prices 421.86, down $47.46/ton

March
Expected milk prices 18.98, actual prices 17.00, down $1.98/cwt.
Expected corn prices 7.47, actual prices 7.39, down $.08/bu.
Expected soybean meal prices 462.27, actual prices 433.83, down $28.44/ton

April
Expected milk prices 18.89, actual prices 17.61, down $1.28/cwt.
Expected corn prices 7.45, actual prices 7.20, down $.25/bu.
Expected soybean meal prices 449.37, actual prices 440.63, down $8.74/ton

May
Expected milk prices 18.65, actual prices 18.51, down $.14/cwt.
Expected corn prices 7.43, actual prices 7.00, down $.43/bu.
Expected soybean meal prices 436.47, actual prices 447.43, up $10.96/ton

June
Expected milk prices 18.63, actual prices 18.04, down $.59/cwt.
Expected corn prices 7.40, actual prices 7.05, down $.35/bu.
Expected soybean meal prices 431.49, actual prices 484.88, up $53.39/ton

July
Expected milk prices 18.57, actual prices 17.35, down $1.22/cwt.
Expected corn prices 7.36, actual prices 7.10, down $.26/bu.
Expected soybean meal prices 426.50, actual prices 522.33, up $95.83/ton

August
Expected milk prices 18.52, actual prices 17.89, down $.63/cwt.
Expected corn prices 6.99, actual prices 5.94, down $1.05/bu.
Expected soybean meal prices 413.77, actual prices 424.37, up $10.60/ton

September
Expected milk prices 18.46, actual prices 18.13, down $.33/cwt.
Expected corn prices 6.62, actual prices 4.78, down $10.84/bu.
Expected soybean meal prices 395.80, actual prices 468.10, up $72.30/ton

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. Contact him at ron@dairygrossmargin.com or visit his website at www.dairygrossmargin.com.

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