Dairy Risk Management in 60 Minutes. Marin Bozic University of Minnesota – Twin Cities Guest Lecture at Ridgewater College, Feb 26, 2014. Why is There A Lot of Risk in Dairy?. Price. S. D ′. D. Quantity. Why is There A Lot of Risk in Dairy?. What Can be Done About Volatility?.
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University of Minnesota – Twin Cities
Guest Lecture at Ridgewater College, Feb 26, 2014
Class III Futures
Class IV Futures
Nonfat Dry Milk Futures
Dry Whey Futures
What Happened? 1. Futures Market
What Happened? 1. Milk Check
Economic downturn accelerated in autumn of 2008. February 2009 Class III milk price was 9.31, and average February 2009, mailbox price for Minnesota was 11.82, or 5.89 below what was expected in early October 2008.
Example: On October 5, 2011, December 2011 Class III futures price was $16.53. The right to buy (call) this contract for $17.50 could be obtained for 35 cents. A put option, the right to sell this futures contract for $16.00, could be obtained for 47 cents.
Feb ’09 Futures: $15.31
Buy $14.00 put for $0.31
Sell $17.00 call for $0.28
When Should I Hedge?
When Should I Hedge?
Q: When does the MPP pay indemnities?
Expected Margins Much Below Historical Average
Expected Margins Near Historical Average
Expected Margins Much Above Historical Average
Margin Insurance Premiums are Too Expensive!
Margin Insurance Premiums are Very Highly Subsidized.
Conventional wisdom: Use MPP for passive catastrophic risk protection (e.g. always buy $6.50), and private risk markets for “shallow loss” protection if you need it.
A smarter way: If USDA sets the annual enrollment date near the end of the calendar year, you will be able to glean at expected margins in the year ahead before deciding what to do:
If expected margins are sufficiently high, try to lock in profit using futures & options, and if you manage to do that, then drop MPP to low coverage level
If expected margins are low – use MPP with high coverage levels
(somewhat harder to do for large producers).