Have to Buy Feed?
Nov 10, 2012
With fundamentals providing dairies with compelling reasons to be active feed buyers, here are strategy recommendations.
By Carl Babler, Principal, Atten Babler Commodities LLC
Corn and protein feed end-users continue to face supply and price challenges. Feed procurement decisions must be motivated by current market fundamentals:
• Both global and domestic stocks-to-use/carryout of corn and beans are historically tight.
• Globally tight supplies provide no supply cushion for 2013 new-crop production problems.
• U.S. corn and soybean meal prices are in the upper part of their historical price ranges.
• Regional U.S. corn supplies are very tight due to production shortfalls.
• Aggressive U.S. end-users of corn and beans continue to offer strong basis bids to acquire needed supplies.
• As harvest concludes, a seasonal buying opportunity may be offered.
• U.S. prices have dropped $1.00 + per bu. in corn and $60+ per ton in soybean meal off summer highs.
Until dynamics affecting supply/demand balances change, the above fundamentals provide compelling reasons to be active as a feed buyer. With this in mind, we offer the following strategy recommendations.
1. Purchase 100% of cash corn feed requirements needed for April through September 2013 now in the spot market and take to your storage or secure commercial storage.
2. In addition to strategy above, contract cash corn for October through March deliveries to be fed and paid for upon delivery.
3. If end-product margins are satisfactory, then milk, hogs or cattle can be contracted or hedged with options to secure a margin and remove corn inventory risk.
4. For all feed corn inventory not involved in a margin lock, hedge with corn put options to manage the downside price risk of feed corn in ownership:
Example - Purchase corn puts to protect the purchased corn (based on Oct. 30, 2012 prices):
1. March, May and July $7.00 put is 28 cents or $10.00 per ton
2. March, May and July $6.80 put is 21 cents or $7.50 per on
3. March, May and July $6.50 put is 13 cents or $4.65 per ton
5. If storage and margin is not available and the decision is to buy corn “hand to mouth” rather than contracting forward, we recommend owning corn calls and buying option protection on the end-product.
Example - Purchase corn calls and stay open in the cash market (based on Oct. 30, 2012 prices):
• March, May and July $8.00 calls are 33 cents or $11.80 per ton
• March, May and July $7.50/9.00 vertical calls are 36 cents or $12.85 per ton
Example - Purchase milk puts and stay open in cash market:
• January through June - buy the Class III $17.00 put for 36 cents
Example - Purchase milk min/max options:
• January through June - buy the $18.00 put and sell January through June $21.50 call for 43 cents
Soybean Meal Origination
1. Contract meal needs through March 2013 in the cash market now (seasonal buy after $60/ton drop).
2. If meal and corn hedges are matched with contracted milk at a satisfactory margin, then meal ownership risk is removed.
3. If meal is contracted forward and margin is not secured, we recommend buying meal put options to manage the risk of meal ownership.
Example - Buy December 2012 meal $475 put options and March 2013 Meal $420 put options for $7.00/ ton premium plus transaction cost to hedge cash contracted meal quantity
With the key motivators being fundamental supply tightness and seasonal opportunity, dairies are encouraged to address their corn and protein needs. The procurement strategy should fit your capabilities relative to cash flow, contracts available in the cash market and understanding of various strategies.
Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at firstname.lastname@example.org or 877-259-6087.
Risk in purchasing options is the option premium paid plus transaction. Selling futures and/or options leaves you vulnerable to unlimited risk. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. The author of this piece currently hedges for his own account and has financial interest in the following derivative products mentioned within: corn and soybeans.