Monitoring Your Vital Signs

Transcription

1 Monitoring Your Vital Signs Gary Sipiorski What is Happening? Volatility Uncertainty Opportunity 1

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3 US Economy 3

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7 Proposed Programs Dairy Price Stabilization Act (Gov) Dairy Industry Advisory Committee (17) Collin Peterson / Mike Simpson Bill NMPF, Margin Protection Eliminate Price Supports, MILC Holstein Association Plan International Dairy Foods Association 7

8 What is Happening? Volatility Uncertainty Opportunity 8

9 Dairy Price Risk Management Dairy Summit Wisconsin Dells, WI December 8 th,

10 December 1995 Corn Contract December 2005 Corn Contract 2

11 December 2010 Corn Contract Class III Milk 3

12 Class III Futures, 12/5/2011 Risk Management Volatility is the new normal How does that affect me? 4

13 Risk Management 500 milking cows 85 lb milk 44.0 lb CS =corn 44.4 lb Hlg =soybeans 12.7 lb HM Corn =corn 10.0 lb permeate=corn 8.6 lb protein =soybean meal 8.0 lb WDG =soybean meal Dairy Hedging 5 yr range on commodities 3,018 bu Corn = $3.18 $7.61/bu 31 tons SBM = $198 $457/ton 767 bu Soybeans = $5.79 $13.8/bu Risk = range in $/month 5

14 500 Cows; 100% Purchased Feed; Monthly $ 74% Due to Milk Price Dairy Hedging 500 milking cows Subject to Market? 85 lb milk 44.0 lb CS 44.4 lb Hlg =corn =soybeans =N =N 12.7 lb HM Corn =corn 10.0 lb permeate=corn =N =N 8.6 lb protein 8.0 lb WDG =soybean meal=y =soybean meal=y 6

15 500 Cows; Only SBM Purchased; Monthly $ 91% Due to Milk Price Dairy Hedging So, what should I do?? Give up and get out Ignore it and hope for the best Learn something new; Look for opportunity Where to start? Maybe milk? 7

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17 Marketing Plan Develop a Marketing Plan A set of rules that tell you what to do under varying market circumstances Removes emotion, subjectivity Limits speculation Customized Ask questions to determine rules 9

18 Marketing Plan Risk Tolerance How much milk do you want/need to protect? What is your equity position? How diversified is your business? What price level do you want to protect? What can your cash flow/reserves withstand? How diversified is your business? Should be defined relative to your COP Calculate a monthly loss of 25 /cwt Marketing Plan Which tool(s) do you want to use? Are you comfortable with futures? No upfront cost, but carries margin risk Can lock in margin, but caps top side price Can go out further on the calendar (24 mo) Do you prefer put options? Significant up front cost (limit?), but no margin calls Leaves top side price open Limited calendar (8 10 mo?) 10

19 Marketing Plan Who will execute your trades? Is your lender willing to set up a hedging LOC? Do you have enough volume to write contracts to accurately address their risk tolerance? Will need a broker or a processor that supplies the means. Milk Hedging Plan I Buy best available put option(s) for 50 6 months out every month on the 15 th Theoretical Plan 11

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21 Class III Average: $13.73 Max: $21.67 Min: $ Average: $11.36 Hedged Average: $14.01 Max: $21.19 Min: $ Average: $13.89 Milk Hedging Plan II Our Plan: Cover 75% of milk produced (5 contracts) Take positions once/month Thursday before 2 nd DRM webinar Target months: 2, 4, 6, 8, 10 months out 1 st Option Sell futures in any target month that has offer of $3/cwt over breakeven ($17.50 or higher) 2 nd Option Buy best available put option for $0.50/cwt 13

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23 Milk Hedging Plan III Want to cover about 2/3 of our milk production (balance sheet) Equal to 8 contracts/month Projected COP = $15.25 (budget) Milk Hedging Plan III Rules: 3 Plans Plan A (high market) Each month, purchase 1 put option in months 3, 4, 5, 6, 7, 8, 9, and 10 months out. In any given target month when the futures price less COP is $3, buy a minimum of a 50 put (currently $18.25). If not available, Plan B. 15

24 Milk Hedging Plan III Plan B Target strike price is least expensive net $15.25 option. 3 choices: $15.50 for 25 ; $15.75 for 50 ; $16.00 for 75 When net strike target is not available in a given month, Plan C. Plan C (low market) When net strike target is not available in a given month, buy a 50 put. 16

25 Dairy Risk Management Must Know Your Financials Balance Sheet, Cash Flow, Budget Evaluate Your Risk Develop A Plan 17

26 Production Better Business Better Financials More profits Better Production more cwts; more animals; lower costs 18

27 Records Better Business Better Financials Accurate Flows/Budgets Better Prod. Info Preg Rate; Animal Inventory; Milk lb; Culling 19

28 12/9/2011 Questions? 20