BASICS OF FUTURES. Jon Spainhour. Dairy Market Futures and Options Trading Brokerage. Dairy Market Futures and Op2ons Trading Brokerage

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1 Dairy Market Futures and Op2ons Trading Brokerage BASICS OF FUTURES Jon Spainhour

2 What We Do What We Do 1

3 Our Dairy Team The Rice Dairy team of 20 is fully focused on dairy prices. Our mission is to arm our clients with the right tools, service, and information for participation in a very competitive marketplace. 1

4 What are Futures Futures are price contracts between two parties for specific amount of product at a specific time in the future The party that agrees to buy, is contracting against the price going up. They are considered to be getting Long. The party that agrees to sell, is contracting against the price moving lower. They are considered to be getting Short.

5 What are Futures Futures can be traded in the Dairy Complex on several different contracts CME: Butter, Cheese, NFDM, Whey, Class III, Class IV EEX: Butter, SMP, Whey Euronext: Butter, SMP, Whey NZX: AMF, SMP WMP

6 What are Futures Each contract has a standard size: EEX: CME Butter = 5 mt SMP = 5 mt Whey = 5 mt *5 metric tonnes = 11,023.1 pounds Butter = 20,000 pounds Cheese = 20,000 pounds NFDM = 44,000 pounds Euronext: Butter = 6 mt SMP = 6 mt WMP = 6 mt Whey = 44,000 pounds Class III = 200,000 pounds of milk Class IV = 200,000 pounds of milk * 6 metric tonnes = 13,227.6 pounds

7 Who uses futures Anyone whose bottom line is affected by movements in the price of dairy can use dairy futures Dairy producers worry about the price going down. They can sell futures and get short to establish a minimum price. End users worry about the price going up. They can buy futures and get long to establish a maximum price. People who have inventory and are worried about the price going down can sell futures to protect the price of their inventory. Jon Spainhour 7

8 How to use Futures At the end of the contract period, if spots moves higher than the contracted value for the long, they will have a profit in their account. The short will have a loss in their account. If the spot value moves lower than the contracted value, the long will have a loss in their account and the short will have a profit in their account. Jon Spainhour 8

9 How to use Futures If you have sold short to protect against the price of milk moving lower and the spot price ultimately does go lower, you will receive a lower price for your milk from your milk processor. However the contracts that you sold will perform and you will have gains in your futures account. Those gains can be used to offset the lower milk price.

10 How to use Futures If you have sold short to protect against the price of milk moving lower and the spot price ultimately goes higher, you will receive a higher price for your milk from your milk processor. However the contracts that you sold will perform negatively and you will have losses in your futures account. Those losses will be used to offset the higher milk price.

11 Example Today the price of milk in Germany is around Euro/100 kg. Pretend that the December contract for milk is euro/100kg. This means that you could forward contract your expected December milk collections at

12 Example If the price of milk in December is euro/100 kg, then you will receive that price from your processor. However, you forward contracted your milk with futures at euro/ 100 kg. That means that your futures contracts had euro/100 kg profit. If you add that profit to the euro/100 kg milk price, you will have a net price of euro/100 kg.

13 Example If the price of milk in December is euro/100 kg, then you will receive that price from your processor. However, you forward contracted your milk with futures at euro/ 100 kg. That means that your futures contracts had 8.00 euro/100 kg loss. If you add that loss to the euro/100 kg milk price, you will have a net price of euro/100 kg.

14 Why use futures As you can see from the examples above, the objective is not to pick the highest price possible. That is very hard to do. However, you were able to know today what the price of your milk in December was going to be 32 euro/ 100kg, regardless of what happened in the spot market That allows you to plan for the future.

15 About RDI Rice Dairy International is the only solely dairy focused risk management advisor in the EU We seek to arm our clients with the tools required to bring certainty to an uncertain world We are open and candid, and will collaborate with you to develop strategies and practices to manage risk allowing you to focus your efforts on what you do best, running a dairy

16 Contact us Jon Spainhour Robbie Turner FUTURES AND COMMODITIES TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION CONTAINED HEREIN IS STRICTLY THE OPINION OF ITS AUTHOR AND IS INTENDED FOR INFORMATIONAL PURPOSES AND IS NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION TO BUY OR TRADE IN ANY COMMODITY OR SECURITY MENTIONED HEREIN. INFORMATION IS OBTAINED FROM SOURCES BELIEVED RELIABLE, BUT IS IN NO WAY GUARANTEED. OPINIONS, MARKET DATA AND RECOMMENDATIONS ARE SUBJECT TO CHANGE AT ANY TIME. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.