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Katie Krupa
Director of Producer Services
570-468-6739
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• Boutique brokerage firm specializing in dairy – GUIDANCE
– ANALYSIS
– EXECUTION SERVICES
• Five exchange members executing trades on behalf of the firm's clients
• Along with Chief Market Analyst Jerry Dryer, Rice Dairy publishes daily and weekly reports, periodic price forecasts, and pre-USDA report estimates
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• We help develop and then execute risk management strategies
–Milk
–Milk – Feed Margin
Create a plan that protects your business
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Futures/Options trading is not for Everyone
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• Futures/Options trading
• Hedging through your coop
• USDA’s LGM insurance
• Excellent equity position to ‘self-insure’
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$7.54
$16.56
$3.55
$6.31
$13.29
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
Milk-Feed Margin
Margin - Historical Margin -Futures
2008 = $11.11 2009 = $10.69 2010 = $ 8.72 2011 = $10.62 2012 = $8.01
*Based on Futures prices as of
??
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Basis = Farm Price – Class III Price
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• $2.73 Average for Appalachian Area 2008-2012
Example: Farm Price $20.75
- Class III $18.00
= Basis $2.75
• Futures and Options Markets
– Each month has a unique price
– Can book up-to 24 months
• As little as one month
– 200,000 lbs of milk per month
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$13
$14
$15
$16
$17
$18
$19
$20
$21
Jul Aug Sep Oct Nov Dec
Milk Futures- Fixed Price
Class III Settle Fixed Price
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X X X X
Futures
• Initial Margin =
– Around $2,000 per contract (200,000 lbs) • 6 months, 200,000 per month = $12,000
• Maintenance Margin =
– Prices move higher – you owe
– Prices move lower – credit your account
– Plan for $2.00/cwt • 6 months, 200,000 per month = $24,000
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$13
$14
$15
$16
$17
$18
$19
$20
Jul Aug Sep Oct Nov Dec
Put Options - Price Protection
Put Strike Price Net Price Protection Class III Settle
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$17.00 Put Option Avg. monthly premium
= $0.40 /cwt
Buying Put Options
• Initial Margin =
– Premium Amount • 6 months, 200,000 per month @ $0.45 = $5,400
• Maintenance Margin = NONE
– Prices move higher – you owe nothing
– Prices move lower – credit your account
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$14
$16
$18
$20
$22
Jul Aug Sep Oct Nov Dec
Put & Call Options - Price Protection & Price Ceiling
Call Srike Price Class III Settle Put Strike Price
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$17.00 Put & $20.00 Call Avg. monthly premium
= $0/mo
X X X
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Buy Put & Sell Call
• Initial Margin =
– Around $1,500 per contract (200,000 lbs) • 6 months, 200,000 per month = $9,000
• Maintenance Margin =
– Prices move higher – you owe
– Prices move lower – credit your account
– Plan for $2.00/cwt • 6 months, 200,000 per month = $24,000
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• Default established from several ‘typical’ rations
• Computed energy and protein in entire ration into corn and soybean meal equivalents
– Backed out hay
– Hedge protein and energy
• Can easily create specific margin for your farm
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$7.54
$16.56
$3.55
$6.31
$13.29
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
Milk-Feed Margin
Margin - Historical Margin -Futures
Top 50% Percentile (2008-2012) Top 75% Percentile (2008-2012)
2008 = $11.11 2009 = $10.69 2010 = $ 8.72 2011 = $10.62 2012 = $8.01
*Based on Futures prices as of 2/12/12
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$10.63
$3.65
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
4/1/07 6/1/07 8/1/07 10/1/07 12/1/07 2/1/08 4/1/08 6/1/08 8/1/08 10/1/08 12/1/08 2/1/09
Feb '09 Margin Trade Data
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$10.37
$7.61
$5
$6
$7
$8
$9
$10
$11
7/1/09 9/1/09 11/1/09 1/1/10 3/1/10 5/1/10 7/1/10 9/1/10 11/1/10 1/1/11 3/1/11
May '11 Margin Trade Data
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$10.06
$9.93
$7
$8
$8
$9
$9
$10
$10
$11
7/1/09 9/1/09 11/1/09 1/1/10 3/1/10 5/1/10 7/1/10 9/1/10 11/1/10 1/1/11
Oct '11 Margin Trade Data
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$14.15
$7
$8
$9
$10
$11
$12
$13
$14
$15
1/1/06 3/1/06 5/1/06 7/1/06 9/1/06 11/1/06 1/1/07 3/1/07 5/1/07 7/1/07 9/1/07 11/1/07
Dec '07 Margin Trade Data
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You can’t beat the market.
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Fear will make you hedge when you shouldn’t
Greed will make you not hedge when you should
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They are not guarantees
They will not protect your business
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• 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.
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Questions/Discussion
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Pros
• Work with a broker – Get advice
• Flexibility to get in and out of the market
• Can contract 100+ percent
• Broker fees
Cons
• Contract size set by CME
• Must fund margin account
• Broker fees
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Pros
• No money upfront – No margin account
• Contract size is flexible – Great for smaller dairies
• Simple
Cons
• Fees
• Can not get in and out of contracts
• Contract amount is limited
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Pros
• Protects the milk:feed margin
• Flexible contract size – Great for smaller dairies
• Payment due at end
• Subsidized
Cons
• Not available
• When available, only able to book once a month
• Not flexible
• Payment based on average
• Payment paid at end
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$8
$10
$12
$14
$16
$18
$20
$22
$24
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
Class III Futures
-$0.15
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$8
$10
$12
$14
$16
$18
$20
$22
$24
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Class III Min
-$0.05
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$8
$10
$12
$14
$16
$18
$20
$22
$24
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Class III Min/Max
+$0.03
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4/2/07 10/1/07 4/1/08 10/1/08 4/1/09 10/1/09 4/1/10 10/1/10 4/1/11
10/1/07 4/1/08 10/1/08 4/1/09 10/1/09 4/1/10 10/1/10 4/1/11 10/1/11 Avg. Cost
$13.00 0.05 0.06 0.01 0.19 0.27 0.30 0.19 0.33 0.07 0.16
$14.00 0.19 0.21 0.05 0.42 0.54 0.66 0.46 0.77 0.18 0.39
$15.00 0.48 1.13 0.14 0.78 0.96 1.21 0.90 1.45 0.37 0.82
$18.70 $16.76 $17.06 $10.78 $12.82 $12.92 $16.94 $16.87 $18.03 Avg. Gain
$13.00 0.00 0.00 0.00 2.22 0.18 0.08 0.00 0.00 0.00 0.28
$14.00 0.00 0.00 0.00 3.22 1.18 1.08 0.00 0.00 0.00 0.61
$15.00 0.00 0.00 0.00 4.22 2.18 2.08 0.00 0.00 0.00 0.94
Premium ($/cwt)
Class III Put
Price
Trade Date
Contract Month
Put Option
Gain (premium
not included)
Class III Settlement
