Margin Management Tools. Commodity & Ingredient Hedging, LLC

Transcription

1 Margin Management Tools Commodity & Ingredient Hedging, LLC

2 Margin Management Tools There are many opportunities to protect a future profit margin on forward production periods How is future profitability determined? A margin management tool is one that organizes and quantifies these production periods and helps to calculate whether there is a profit margin opportunity Copyright 2009 Commodity & Ingredient Hedging, LLC 2

3 What is a Margin Management Tool? Picks a set of future production periods 4 th Qtr 2009 $3/bu $3/bu 1 $3/bu st Qtr 2010 $3/bu $3/bu 1 $3/bu st Qtr 2011 Future production periods organized by quarter Copyright 2009 Commodity & Ingredient Hedging, LLC 3

4 What is a Margin Management Tool? Picks a set of future production periods Organizes your projected output in each of these future periods 1.1 M Pounds $3/bu $3/bu 1.2 M $3/bu Pounds $3/bu $3/bu 1.4 M $3/bu Pounds 15 Million Pounds of Milk Copyright 2009 Commodity & Ingredient Hedging, LLC 4

5 What is a Margin Management Tool? Picks a set of future production periods Organizes your projected output in each of these future periods Captures the projected feed inputs for each of these future periods 20k Tons $3/bu $3/bu20k $3/bu Tons $3/bu $3/bu21k $3/bu Tons 125k tons of Soybean Meal Copyright 2009 Commodity & Ingredient Hedging, LLC 5

6 What is a Margin Management Tool? Picks a set of future production periods Organizes your projected output in each of these future periods Captures the projected feed inputs for each of these future periods Identifies a forward profit margin or loss Profit Margin Opportunities Copyright 2009 Commodity & Ingredient Hedging, LLC 6

7 Margin Management Effectiveness Copyright 2009 Commodity & Ingredient Hedging, LLC 7

8 Margin Management Effectiveness A margin management tool and the information that it models is one part of the margin management process. To effectively manage future profit margin opportunities, businesses have to address many important questions. Copyright 2009 Commodity & Ingredient Hedging, LLC 8

9 Margin Management Effectiveness For the specific future production period, is the profit margin good, average or bad? One way is to compare the current margin projection against a long-term historical range Copyright 2009 Commodity & Ingredient Hedging, LLC 9

10 Margin Management Effectiveness Compared to the past 10 years, $3.59 is a pretty good margin... 4 th Quarter Margin $3.59/cwt 75 th Percentile Margins were higher only 25% of the time. MARGIN $5.76/cwt $4.25/cwt $3.50/cwt $2.12/cwt $1.10/cwt $0.87/cwt 10 YR PERCENTILE 90 th 80 th 70 th 60 th 50 th 40 th Copyright 2009 Commodity & Ingredient Hedging, LLC 10

11 Margin Management Effectiveness What contracting possibilities exist and are there different strategies to use for different market conditions? Forward Futures Options contracts contracts contracts Window contracts Basis contracts Copyright 2009 Commodity & Ingredient Hedging, LLC 11

12 Margin Management Effectiveness What is the cost to lock in the future profit margin? Lock in one value or a range of values? Is the period in question near or far? How predictable are the markets? Allow flexibility for margin improvement? What percent of production are you covering? Copyright 2009 Commodity & Ingredient Hedging, LLC 12

13 Margin Management Effectiveness Is it possible to protect a minimum profit margin, but leave open the opportunity for better margins? $6 4 th Quarter Mar rgin $5 $4 $3 $2 $1 $0 Lo Product Selling Price High Copyright 2009 Commodity & Ingredient Hedging, LLC 13

14 Margin Management Effectiveness What resources are available to help me and my business continue to effectively manage margins? Lenders Accountants Consultants Further education Copyright 2009 Commodity & Ingredient Hedging, LLC 14

15 Conclusion Managing margins for future production periods is an important process that can ensure sustained profitability and protect against adverse market conditions. Effective margin management entails detailed production projections and a careful evaluation of the costs, benefits and opportunities of various contracting alternatives. Copyright 2009 Commodity & Ingredient Hedging, LLC 15

16 END Commodity & Ingredient Hedging, LLC