Tuesday October 16, 2018 135 S. LaSalle St. Suite 3000 Chicago, IL 60603 312-492-4200 www.ricedairy.com Zach Bowers, & Ryan By Trevor Slegers,Trevor Ryan Slegers Yonkman, Zach Yonkman Bowers & Cody Koster zjb@ricedairy.com tws@ricedairy.com rjy@ricedairy.com tws@ricedairy.com rjy@ricedairy.com zjb@ricedairy.com cjk@ricedairy.com DAIRY COMMENTARY Highlights: 4In Class III, what goes down must come up! 4CME butter finds support again, just shy of $2.30 Class III - Cheese/Dry Whey: By Zach Bowers - Fundamentally, not much has changed in the Class III market. Blocks are still in demand while barrels seemingly can t find any. This is due mostly to society s demand change to a more premium natural product (blocks) compared to processed cheese (barrels). So today let s take a different approach and look at seasonality and percentiles. Everything I m referencing you able to see in the Seasonal charts below. The old saying goes what goes up must come down, but today I m going to reverse that theory and say, what is down must come up! For all of 2018, the milk price has settled below the 5-year 25th percentile, and that trend continues into the first half of 2019. This means that over the last 5 years 75% of the time the milk price has been higher. This tells me that there is less downside risk as there is upside potential. Unfortunately, though, I don t think we are off to the races quite yet. It is something we need to be very mindful of in our risk management strategies. I think we can see some extended time at these ranges until a supply or demand function disrupts this. All the while, keep in mind that we are sitting on the 25% percentile which gives us a lot of room to go higher from here. So, for now, Options and Dairy RP should be your best friend-- cheap coverage with upside, because what goes down must come up. Market Tables Page 1
Class IV - Butter/Nonfat: DAIRY COMMENTARY By Trevor Slegers - Class IV on a current cash basis is back over the $15.00 threshold, just a week after hitting monthlylows. Butter is the primary cause of index finding legs again with the spot market finding support this past week. A market that has been a sideways trade with a neutral sentiment is a penny shy of $2.30/ lb, consistently finding support in the low- $2.20s and resistance in the low-$2.30s. In the futures, the fourth quarter average recently found support at $2.27, current a penny above that. Nonfat meanwhile is also trading sideways but in a much tighter range. Spot, current at $0.8725/lb, has only seen a range of roughly 1.50 cents from the median price for the past month. This morning s GDT was stronger than expectations. While today s auction did not break the streak of non-positive auctions set a 10 now after today s 0.3% decrease for the total index, fat posted a higher day in both AMF (+1.0%) and butter (+2.4%). Skim milk powder, on the other hand, finished unchanged while WMP finished down almost a percent lower. MILK-FEED *(Class III Corn*1.0728 Soybean meal*0.00735) Provided by Vault Page 2
DAIRY RECOMMENDATIONS Class III/Cheese Time Period % Hedged (Class III) (Cheese) (Dry Whey) Comments Oct 18 75+% $15.62 $1.577 $0.44 Nov-Dec 18 25-50+% $15.67 $1.574 $0.47 Jan-Jun 19 15-30% $15.90 $1.630 $0.41 Jul-Dec 19 15-30% $16.39 $1.670 $0.39 Oct. is pretty well priced out and trading right near what we are getting for expiration: $15.55-60 Class III and Cheese at $1.575. Want to continue to focus on owning puts here, maintaining our upside. Nov. 15.75 puts are 20 cents and Dec 15.50 puts are 20 cents. Prefer options here and prefer using RP to buy them, taking into account the subsidy (pricing around 40% less then similar CME put). On the CME, the 15.00 puts are running around 20 cents a month or could consider the 15/17 collar for around no cost. I know for some there is some margin out there at this $15.90 area and you re looking to lock it up. At this point in time if your objective is to lock in some margin, I have no problem with this. I personally still prefer options and would like to see what prices will do through October. 2019 is now averaging $16.13 and Jul-Dec is at $16.39. Our 2019 strategies are changing with new Dairy RP program launch and we are looking get our revenue covered with RP and sell CME options around it. For now on the CME: 14-15.50/18.00 would be around no cost or could use RP to obtain a similar floor, sell the same 14 floor and have upside to 19.00 for around no cost. Class IV Time Period % Hedged (Class IV) (Nonfat) (Butter) Comments Oct 18 75+% $15.03 $0.879 $2.28 Hold into expiration Nov-Dec 18 25-50+% $15.03 $0.881 $2.28 Jan-Jun 19 15-30% $15.32 $0.920 $2.25 Jan-Dec 19 15-30% $15.88 $0.935 $2.27 Class III remains the driver and focus. $15.00 puts are around 30 cents per month. Class III remains the driver and focus. If you want coverage here, I would prefer using RP to buy them, taking into account the subsidy (pricing around 40% less then similar CME put). Looking at 14.30 coverage in Q1 for 13 cents and 14.75 coverage in Q2 for 21 cents using RP. Class III remains the driver and focus. Prefer using RP to buy options if need be here. Page 3
Provided by: CURRENT MARKETS Data taken at 9:30 a.m. CST on 10/16/18 and provided by Options City. To learn more about Vault Technologies, visit www.vaultdairy.com Page 4
SEASONAL CHARTS Page 5
SEASONAL CHARTS FUTURES AND OPTIONS ON FUTURES TRADING INVOLVES SIGNIFICANT RISK OF LOSS AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION CONTAINED HEREIN IS STRICTLY THE OPINION OF ITS AUTHOR(S) AND NOT NECESSARILY OF RICE DAIRY 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. RYAN YONKMAN AND CODY KOSTER DO NOT MAINTAIN POSITIONS IN ALL COMMODITY(S) CONTRACTS MENTIONED WITHIN THIS REPORT. TREVOR SLEGERS DOES MAINTAIN POSITIONS IN ALL COMMODITY(S) CONTRACTS MENTIONED WITHIN THIS REPORT. REPRODUCTION OR REDISTRIBUTION PROHIBITED BY LAW.