2/20/2012. Goal: Use price management tools to secure a profit for the farm.

Transcription

1 Katie Behnke Agriculture Agent Shawano County Futures, options, contracts, and the cash market are all tools we can use to manage our business. Important to remember - we are not speculators Goal: Use price management tools to secure a profit for the farm Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 01/04/02 01/04/03 01/04/04 01/04/05 01/04/06 01/04/07 01/04/08 01/04/09 01/04/10 01/04/11 01/04/12 Cool! I m getting a great return on my investment And could have had $21.25 Drats! I lost $2.07!!! Have the Right Mindset It s the Margin that Counts Have a Plan and then Adapt Both have COP of $15.00 & Forward Contracted for $18.00 Announced Price Was $

2 An agreement between a buyer and a seller for a delivery of a specific amount at a predetermined price at some future date. January July futures price is $14.20, plant offers forward price of $14.00 Contract 2,000 cwt of July milk July Class III price is announced at $13.50 July Milk Check: Federal order payment Plus Plant-specific premiums Less Hauling and other deductions Plus 2,000 Cwt. X ($14.00-$13.50) = $1,000 January July futures price is $14.20, plant offers forward price of $14.00 Contract 2,000 cwt of July milk July Class III price is announced at $15.50 July Milk Check: Federal order payment Plus Plant-specific premiums Less Hauling and other deductions Less 2,000 Cwt. X ($15.50-$14.00) = $1,000 Advantages Customizable to your farm No margin calls Relatively easy! Disadvantages Cannot take advantage of positive price movements Delivery is mandatory Built in costs maybe able to find a better deal on your own Buy a futures contract Long commitment to take delivery Sell a futures contract Short commitment to make delivery Most grain contracts require physical delivery Most dairy contracts are cash settled Use the futures market to hedge Involves substituting a position in the futures market today for a position you expect to take in the cash market at some later date. First steps: Find a broker, post a margin If you are a seller sell a contract now, buy a contract later If you are a buyer buy a contract now, sell a contract later BUY LOW, SELL HIGH! Typo! 2

3 PCP future It s May 15 and you want to sell corn in November May 15 - Sell one Dec futures corn contract at $6.30/bu - Expected harvest basis of 0.35/bu - Expected net selling price in Nov $5.94/bu (-0.35) -.01 = $5.94 November 15 - Buy one Dec futures corn contract at $5.30/bu - Sell cash corn at $4.95 (basis as expected) - Net Price: $4.95 (cash price) + $1.00 (futures profit~ sold at 6.30, bought at 5.30) - $.01 (commission) = $5.94 Advantages Eliminates price risk Does not require delivery Allows for pricing any time during the marketing year Disadvantages Contracts are lumpy Still have basis risk Margin calls can results in negative cash flow You purchase the opportunity (but not the obligation) to buy or sell a commodity at a certain price during a specified period of time. Basically, it is an insurance policy Pay a small premium to be protected from the possibility of a large uncertain loss Calls insuring a buying price Ex. Dairy farmers by calls on feed Puts insuring a selling price Ex. Dairy farmers by puts on milk, grain producers by puts on grain It is March and your basis is typically $1.17 You need a $14.00 milk price to keep your banker happy The October Class III is trading at $ If that price holds: $ $1.17 Basis = $15.00 = Happy banker Mixed reports about what milk price will do in the fall But suppose the October Class III price is announced at $12.50: $ $1.17 Basis = $13.67 = Unhappy banker You re fairly confident that the Class III price will be at or above $13.83 when it s announced, but you don t want to take the chance of it falling below $12.83 (= $14.00 $1.17 Basis) 3

4 Solution: Buy an October Class III $13.75 Put at $.83. Minimum Price: $13.75 Put strike price Basis -.83 Premium Commission = Net minimum price Announced Option Option Net Oct. Class III Basis Gain Premium Price $ $ $ Advantages Provide price floor/ceiling in volatile markets Gives flexibility in the amount of price protection selected Can benefit from favorable price movements No margin requirements Disadvantages High premiums in unstable markets Less price protection than futures in an unfavorable market Insurance program for dairy producers buy from crop insurance agent on the last Saturday of the month Securing a margin Milk revenue floor Guarantees farmers a margin between milk price and feed costs (uses prices of corn and soybean meal) Relatively new 112 policies in 2009, 153 policies in 2010, more than 1100 policies in first two months of 2011 $/cwt Minimum IOFC Feed cost ceiling Similar to buying a put on milk and calls on corn and soybean meal. Customizable to your farm Pick the amount of milk Pick the amount of corn and soybean meal (or equivalents) fed Pick the timeline 1 to 10 months of coverage Pick the deductible - $0 to $2 Premium subsidy Between 18% to 50% Significantly less expensive than a similar bundled options strategy Purchased in December 2009 for the period of February November 2010 Protecting 1000 cwt of milk for 10 months Deductible Premium Subsidized Premium Guaranteed Margin Indemnity Net Net per cwt $ $7,725 $6,335 $129,738 $11,647 $5,312 $0.53 $0.50 $5,317 $3,829 $124,738 $6,647 $2,818 $0.28 $1.00 $3,453 $1,796 $119,738 $1,647 -$149 -$0.01 $1.50 $2,100 $1,050 $114,738 $0 -$1,050 -$0.10 4

5 No one knows! Market Bulletin and Dairy Situation/Outlook report from UW-Extension Reports from NASS Production/yield estimates and report Animal numbers Use report World Supply and Demand Weather Basis = + $1.20; Commission (futures or options) = $0.05) Date/Action Hedge Buy Puts Do Nothing Feb 23 Today the September Class III futures price is $12.39 Sep. 1: Class III = Net Sep. 1: Class III = Net Sep. 1: Class III = Net Sell Sep Class Expected September farm milk price - $ Buy Sep Expected MINIMUM September milk price is $ Take a nap. Cost of production Can be very detailed or as simple as using your schedule F Income over feed cost Ask yourself: What is the futures price in relation to your price targets? What are options premiums at strike prices in the vicinity of your basic price target? What is your price outlook and how confident are you with it? What do the experts say? What s your banker have to say? Getting ready 1. Take an Inventory: marketing resources, risk tolerance, and non-price marketing objectives 2. Know the Playing Field: situation, outlook, & historical prices. 3. Know Your Toolbox: Marketing Tools and Strategies Take Aim 1. Costs of production and Financial objectives 2. Personal Price Targets 3. Basis and Triggers for Action 4. Marketing Protocols (what do you do when your trigger s tripped!) Fire 1. Evaluation, control, and record-keeping Good Will be wrong Are patient Are long run thinkers Focus of small gains Are disciplined to a plan Make marketing decisions to meet management goals Take pride in Return on Assets over the last five years. Bad Decide to get in and out based on gut instinct Go for the homerun Think milk prices are too low Brag about the price they locked in this month 5