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October 2012 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.

4 Initial Steps to Risk Management

Oct 26, 2012

Whether you're beginning -- or revamping -- your strategy, winter is a good time to make sure you’re making the best decisions for your dairy.

Katie Krupa photoBy Katie Krupa, Rice Dairy

As the harvest comes to an end and the winter months approach, now is a great to begin your risk management planning. Unlike the changing seasons, risk management opportunities are much less predictable, so you can’t always implement your strategy at the same time each year. But it is good to have a set time to review strategy each year. I recommend setting aside some time in the upcoming months to review your risk management strategy or discuss your options if risk management is new to your operation. Below are some steps to get started or revamp your risk management strategy.

1. Find the right professional to work with.

I put this step at the beginning because finding a professional to work with can make the proceeding steps much easier. When looking for a professional, I would suggest asking the following questions:
• Does he or she understand your dairy and the dairy industry? It is important to understand the variables that impact your business’s success or failure, including farm financials, dairy policy and the commodity markets.
• Does he or she understand all of the hedging strategies that are available? Regardless of whether you are working with a broker, cooperative employee, extension agent or independent consultant, your professional should be able to analyze all hedging strategies that are available to your business.
• Does he or she fit well with your personality? That may sound trivial, but you are building a relationship that should last for many years, and good communication and understanding between both parties is very important to a successful relationship.

2. Determine your break-even milk price.

For many of you, I know that hearing this is similar to nails on a chalk board, but unfortunately it is a very critical step. When you start looking at your hedging opportunities, you need to know how those prices relate to your farm’s financials. The good news is that I don’t think it’s essential to get these numbers down to the penny, but you do need to get a rough idea of what is a “good” price for your unique business. More good news is that there are many people and resources available to help you with this calculation. If you need help, look for counsel from a professional.

3. Determine what feed commodities you need to hedge.

Again this is something a professional can help with. Don’t be overwhelmed! As we have seen in recent years, feed price volatility can be just as detrimental to a business as milk price volatility. It is very important to determine your feed price risks. For those of you who grow a portion of your feed, your risks are less than an operation that purchases all its feed, but both operations still have a risk. It is important to determine your risks, and create a strategy that works for your farm business.

4. Make sure you are considering all of your options.

Your risk management strategy may be as diverse as an investment portfolio, with strategies ranging from insurance programs available through the government, milk plant forward-contracting, and hedging on the exchange. As the markets evolve, so will the hedging opportunities available to your dairy business. Again, it is important to know all of you options and/or work with a professional who can analyze these strategies for you and be sure you are properly using all the tools available to your business.

While the professional you work with may not change, your farm’s financials, feed risks and strategies available will most likely change and evolve. That is why I think it is important to review and make sure you are still making the best risk management decisions for your business. Regardless of whether you are new to risk management or already have an established plan, take some time this winter to review your strategies to make sure you are still making the best risk management decisions for your business.

Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. You can reach Katie at klk@ricedairy.com.Visit www.ricedairy.com. There is risk of loss trading commodity futures and options. Past results are not indicative of future results.


 

Consider These Dairy Marketing Strategies to Manage Risk

Oct 22, 2012

Given higher milk prices and potential volatile feed costs, think about putting some kind of floor under your cash flow.

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC and Advantage Ag Strategies, Ltd.

The marketing challenge continues with continued volatility and high costs of production. All of the marketing strategies used last October or November yielded no net gains over the 10-month period. Yes, option strategies, futures strategies and LGM did not yield a net payment to producers. The whipsaw of the market in the 10-month period produced offsetting gains and losses for all of the strategies.

How do I manage risk now? Build a strategy to put some kind of floor under cash flow. Make sure all of your stakeholders have input. Include spouses, family members, partners and lenders.

Milk income over feed has improved slightly over the last few months. It is not enough, however, to make up losses from past months. Margins are strong because of the higher milk prices. Even with high corn and soybean meal prices, the strong milk prices have overshadowed feed costs.

Given the higher milk prices and potential volatile feed costs, look at some of the following strategies.
1. Buy LGM-Dairy as a baseline of protection or buy put options for milk.
2. If you use the low feed LGM-Dairy or milk put options, review your feed inventory and fill in the gaps by purchasing corn and/or soybean meal options.

History of LGM-Dairy for the October period

When in the past has LGM-Dairy paid? Between 2002 and 2011, policies purchased in October paid an indemnity four times using the zero deductible. The years are 2002, 2005, 2008 and 2009. The $1.00 deductible paid off in 2005 and 2008. 2012 policies (purchased last October) could receive some payments if they had a zero deductible.

The total indemnity paid for the four years using the zero deductible (average feed) was $6.64. Premiums would have been $5.39. With the $1.00 deductible, 2005 and 2008 paid an indemnity of $3.10 with premiums of $1.25. The $1.00 deductible was the winner with a payoff ratio of nearly 3 to 1 due to the 48% government premium subsidy.

Mortensen LGM Indemntiy final10 2012

 

Current LGM-Dairy Numbers

These margins are some of the best available since LGM-Dairy was initiated. Looking at the charts, there are only a few months that have better values. Look at the percentile rankings below from Oct. 2012 to May 2013. In most cases, these are the highest or the second highest rankings for five or 10 years.

Mortensen oct162012percentedairy
 

The red line (below) is the average of the last 10 years. The green line is the top one third of the same range. Note that the pink line to the far right is the anticipated margins for the October sales period as of Oct. 16, 2012.

Mortensen oct162012lowcornedairy

LGM–Dairy can be part of the plan. This product is lower cost than purchasing options. Purchasing a zero deductible LGM (vs. options) could save $.74/cwt. Why is it cheaper? Part of the savings is due to the government subsidy and part is the fact the indemnity payout is based on a weighted average of all months covered. Another big plus – the premium payment is not due until October 1, 2013.

Additional feed comments

The corn and soybean markets are transitioning from supply to demand-driven issues. Many think a short crop has a long tail and believe corn and meal would simply trend lower until August 2013. This scenario is not so simple. Especially for soybeans/soybean meal, U.S. supplies could be record tight by March 1. Then, the world will need to rely on South American supplies. These supplies will be slow to move to the world market because of slow trucking/shipping logistics in Brazil. By the time next spring/summer arrives, it is possible the U.S. may need to import soybeans to finish the late summer and fall crush. This sort of razor-thin timing equates to volatile prices. For corn, the same scenario applies. It already looks like Southeast U.S. hog and chicken producers are importing Brazilian corn to meet their needs.

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 ron@dairygrossmargin.com, or visit www.dairygrossmaragin.com.
 

Know the Opportunity Offered by $3.00-plus Run-up in Your Milk Price Average

Oct 13, 2012

After a good price run for fundamentals, indicators are now showing trend momentum and strength is fading.

Carl BablerBy Carl Babler, Atten Babler Commodities, LLC

Knowing your market is about monitoring price behavior and price change that provide your operation a marketing opportunity. Thus, I submit the following observations regarding the January through June 2013 Class III milk futures average price trend.

Current price drivers are as follows:

Fundamentals
• Cow numbers are declining from cyclical high.
• Cheese demand is in a seasonal strong price period.
• Dairy production margins are improving as the corn price has dropped $1.00 off its weather-market summer high.
• U.S. dairy policy is unknown since Congress is inactive.
• Global economies: China –slowing; EU member-nations facing financial breakdown.
• U.S. government faces year-end “financial cliff”; action required.

Technicals
• Price: upward trends are observed.
• The milk price has moved up $3.79/cwt., from $15.57 in May to $19.36.
• Block cheese price has moved up $.63/lb., from $1.46 to $2.09.
• The current average for period at $18.89 Class III futures is in the 87th percentile of the record high $21.67 Class III announced price.
• The trend line on the daily chart has broken to the down side.
• Relative strength showing negative divergence.
• 40-day moving average has broken to the down side.
• MACD shows divergence.

It has been a good price run for fundamentals as described. Indicators are now showing trend momentum and strength is fading. See charts below (Source: FutureSource).

Babler chart 1   10 13 12 copy

Babler chart 2   10 13 12 copy

Bottom line: Know the opportunity offered by a $3.00-plus run-up in your milk price average. Positions taken in milk must be matched to positions in feed as you look through the first six months of 2013.

Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at cbabler@attenbabler.com or 877-259-6087.

Risk in purchasing options is the option premium paid plus commissions and fees. Selling futures and/or options leaves you vulnerable to unlimited risk. Transaction cost used throughout this report includes both commissions and fees. 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. Unless otherwise stated the information contained herein is meant for educational purposes only and is not a solicitation to buy futures or options. The author of this piece currently hedges for his own account and has financial interest in the following derivative product mentioned within: Class III Milk.

 

Time to Get “Fanatically Disciplined”

Oct 08, 2012

In marketing, there is always a temptation to overreact, follow the herd or give in to emotions. It takes fanatically disciplined leadership to stick to goals and not pull back because you – or someone else -- second-guessed your decision.


Stewart Peterson   Mark LudtkeBy Mark Ludtke, Stewart-Peterson

We were at World Dairy Expo in Madison, Wis., last week, talking with dairy producers. The discussions, as expected, had to do with feed. It’s on every producer’s mind right now – either "How will I secure it?" or "What strategies can I use to manage the value of my inventory?"

And so, we’ve been having those conversations. And during the conversation, I usually pull out this chart:

Chart 1: Second Month Continuous Monthly Milk vs. Continuous Monthly Corn
milk1
This chart shows the peaks and valleys of the corn price dating back to 1995, mirrored by the Class III milk price at the same time. Almost without exception, when the corn price has fallen apart, the milk price has quickly followed.

So, although feed dominates everyone’s thoughts right now, we also have to be thinking about protecting milk. The risks are just too great to NOT think about milk, as the chart below shows. The typical downturn in milk ranges from about $6 to almost $12, with the average price decline being about $8.

Chart 2: Second Month Continuous Monthly Milk
 

milk2

The question then becomes, "When should I act?" The conventional wisdom is that the milk price has to hold because feed prices are high. That is true to a certain extent. In our global marketplace, any number of things could bring the price of feed down again, and in this kind of rollercoaster world, it is possible that 2013 corn could trade in the wide range of $4-$12. That is such a huge range that incrementally pricing some 2013 milk, and then managing those positions as time goes on, is wise. This can only be done, however, if one is committed to a consistent, disciplined approach to price risk management. In this market, there is just too much risk in jumping in and out. You will never know if you are doing so at the right time.

If the constant up-and-down of markets has you weary, you are not alone. That’s the gist I get from dairy producers I spoke with at World Dairy Expo. How will we as an industry respond? Will we allow ourselves to become battle-weary and vulnerable? Or will we confront the challenge head-on?

We can look to the enduring, sustainable businesses outside of the dairy industry for some role models. Jim Collins, who authored the popular business book Good to Great, has researched some of the world’s best-known companies who have survived in chaotic environments, outlining the characteristics of their success in his newest book, Great by Choice. We’ve been giving copies of the book to dairy producers to help them see how uncertainty can be handled, and there are keys to managing and thriving despite chaos.

One of those keys is "fanatic discipline." Collins calls it "fanatic discipline" because there is always temptation to overreact, to follow the herd, or to give in to emotions, and it takes fanatically disciplined leadership to stick to goals and not pull back because you second-guessed (or someone else second-guessed) your decision. In marketing, it doesn’t matter if you pick the top or the bottom right. In fact, those are futile efforts. What matters is that you embark on a program focused on establishing a solid weighted average price, staying consistent and disciplined in implementing the strategy, and staying steadfastly dedicated to long-term goals. Fanatically disciplined.

I’ll cover more of the characteristics of successful "Great by Choice" businesses in my next column. In the meantime, if dairy producers would like a copy of Great by Choice, email or call me, and I will be happy to send you the book and discuss its concepts with you.

Mark Ludtke consults with dairy producers nationwide concerning their choices for risk and opportunity management. He can be reached by calling 855.334.0700 or at mludtke@stewart-peterson.com.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. 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. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

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