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Managing Risk for Stability and Growth
Dr. Marin Bozic
MMPA/UMN-Extension Dairy Management WorkshopsFebruary 5-6, 2013
But it hurts to leave money on the table…
1/3/
2012
1/22
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2
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2012
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2012
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9/6/
2012
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10/1
4/20
12$15.00
$17.00
$19.00
$21.00 Class III Milk Futures: Oct 2012
Start with the end in mind.
• Retirement without debt?• Prevent catastrophic losses?• Gives me headaches, but necessary evil?• Chase the highs, beat the market? • Grow faster?
Three and a half strategies
1. Hedge early, hedge often.
2. LGM-Dairy
3. Farm bill
3.50. Hedging for growth
2006-2012 returns to at-the-money put options
1 month ahead:Cost: $0.19/buPayout: $0.16/bu
3 months ahead:Cost: $0.68/buPayout: $0.79
6 months ahead:Cost: $0.95/buPayout: $1.33/bu
9 months ahead:Cost: $1.13/buPayout: $1.59/bu
LGM-Dairy
Feb Mar
Apr
May
Jun
Jul Aug
Sep
Oct
Nov
Dec
Jan
Purchase at End of
Month
No Coverage
1 2 3 4 5 6 7 8 9 10
Insurance Contract Period
Farm bill
Warning: Results presented here are preliminary. Further research is needed before analysis of farm level impacts is tested enough to be presented publicly for policy analysis and debate purposes. Results presented here are given exclusively for participants of MMPA/UMN-Extension Dairy Management Workshops. No permission is granted or implied for disseminating these results further without explicit permission by Dr. Bozic.
Subsidized Margin Insurance
• Official name: Dairy Producer Margin Protection Program (PDMPP)
• Two layers: • Basic Margin Protection – No-cost protection
at $4.00 margin• Supplemental Margin Protection – Can buy up
from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)
House bill - Farm with 150 cows
Coverage Level
Fees & Premiums
Expected Indemnity
DMSP Penalty
Net Revenue
$4.00 250 5,369 5,828 -5,057$4.50 532 7,569 5,828 -4,235$5.00 954 10,390 5,828 -2,697$5.50 1,377 13,938 5,828 75$6.00 2,081 18,327 5,828 4,475$6.50 2,786 23,580 5,828 11,270$7.00 12,479 29,770 5,828 10,729$7.50 16,874 37,103 5,828 16,590$8.00 26,229 45,862 5,828 18,412
Comparing 6-Year Net Revenue for 450 cows farm:DSA vs. Goodlatte-Scott 2007-2012
Coverage Level
Goodlatte-Scott H.R. 6083 S. 3240
$4.00 53,432 -26,360 -29,360$4.50 26,238 14,033 9,215$5.00 66,179 57,439 54,065$5.50 98,927 93,776 84,948$6.00 125,325 120,895 124,033$6.50 138,807 152,012 127,198$7.00 158,003 77,805 14,525$7.50 -285 69,217 -23,200$8.00 -57,106 -25,607 -84,829
Hedging for Growth
Profits from hedging?• Good broker that can beat the market?• Mispriced Class III milk options?• Subsidized LGM-Dairy insurance?• Farm Bill participation?
But there is another strategy too…• Using risk management to grow your operation faster• With solid milk marketing plan that delivers stability, your
banker will be more willing to accept higher leverage
Managing Risk for Stability and Growth
presented at the Dairy Management Workshops
Tuesday, February 5, 2013St. Joseph, MNWednesday, February 6, 2013Rochester, MN
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities
You may download this presentation at http://marinbozic.info/