Winning The Game-The Dairy Edition
A Simulation Game for Dairy Risk Management
Dr. Margot RudstromRegional Extension Educator
University of Minnesota Extension Service
Program Development
Center for Farm Financial ManagementUniversity of Minnesota
University of Minnesota Extension Service
Program Delivery
University of Minnesota Extension Service
University of Wisconsin Extension Service
Program Financial Support
North Central Risk Management Education Center
The College of Agricultural, Food and Environmental Sciences
Your Local Sponsor
University of Minnesota Extension Service
Center for Farm Financial Management, University of Minnesota
Motivation for “The Game”
• Price variability is a relatively new phenomenon in dairy compared to other commodities.
• Futures contracts for Class III milk been trading on CME in their present form in 1998.
Motivation for “The Game”
• Teach price risk management tools Forward contracts Hedging Options Combinations
Taking a Step Back
• Starting point for milk marketing• Don’t overwhelm participants• Wet the appetite for milk marketing
Don’t try and make expert marketers in one session
• Pricing tool that is not size-dependent
Winning the Game – The Dairy Edition Agenda
• Introduction• Game• Seasonality in Prices• Price Variability and Risk• Target Prices • Pricing Tools • Results of the Game • Writing Your Marketing Plan
Workshop Theme
“Selectively using processor contracts can help smooth out the bumps in your milk check!”
Marketing is Important!
• Good marketing is not about finding the highest price
• A good marketing plan helps you more consistently get a good average price
What is a Marketing Plan?
• A marketing plan is a proactive strategy to price your milk that considers your financial goals, cash flow needs, price objectives, anticipated production, and appetite for risk
Proactive, not reactive, not overactive, not inactive
Why do I need a Marketing Plan?
• Fear and greed are powerful emotions - they will affect your decisions. A solid plan is the only effective weapon against these emotions
“Plan your trades, trade your plan”
Emotions Play a Major Role in Marketing…
The Game Set-up
• Farm information• Forward contract specifications• Other rules of the game
Your Farm for the Game
• 100 cow dairy operation
• Rolling herd average of 22,000 pounds
• Fat 3.4%
• Protein 3.2%
• SCC 361,000
Playing the Game
• There is one type of forward-pricing tool available processor contracts on Class III milk
• You have already signed a participation agreement with your processor
• Contract price is 5 cents under the Class III futures price
Playing the Game
• Processor contracts start at 20,000 lbs, then go up in 5,000 lb increments 20, 25, 30, 35, etc.
• Cannot contract more than 120,000 lbs per delivery month
• There is a penalty ($$$$$$) if you cannot deliver
Playing the Game
• The game starts in November, ends the following June
• Each month there is one opportunity to look at Class III futures prices and contract for delivery in future months
• Any milk not contracted in a month will be sold at the announced Class III price
Playing the Game
• Find your decision input sheet (perforated sheet)
• Use the pricing log (big fold-out sheet) to record your ID number and pricing decisions
• Sales need to be made in thousands of pounds (25,000=25). The processor only types with 2 fingers.
Playing the Game
Please print your name at the top!
Name ID # 99
November Decision #1
Feb ___________,000 lbs. June ___________,000 lbs. Oct ___________,000 lbs.
December Decision #2 ID # 99
Mar ___________,000 lbs. July ___________,000 lbs. Nov ___________,000 lbs.
Playing the GameID #
October
Announced Class III -->
Mailbox Price -->
Delivery Month
Average Production
Contracted Amount
Class III Futures Price
Contracted Amount
Class III Futures Price
Contracted Amount
Class III Futures Price
Contracted Amount
Class III Futures Price
February 177,500
March 195,000
April 186,000
May 189,500
June 186,000
July 191,000
August 191,000
September 184,500
October 184,000
November 178,000
December 191,000
Decision #1 Decision #2November December
Decision #3January
Decision #4February
Playing the Game
• You must turn in an input each time even if you are not selling anything
• You will have a limited amount of time to make your decisions. The milk processor doesn’t take calls at home
• We will provide a brief market update before each marketing decision
Ready to start the game???
Summary to this point
• Marketing is important• Rules of the game• No background information in terms
of cost of production or historical price data
• Play!
The Game
November
• Cow numbers are down 3,000 head from a year ago and down 2,000 from last month
• Cheese demand remains strong but butter demand is weakening
• Steep price declines are expected to begin after the holidays
November 18Class III Futures Quotes
Feb 13.65June12.10Oct 12.80
Last Month
Announced Class III 16.04
Mailbox Price 18.44
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
ID #
October
Announced Class III -->
Mailbox Price -->
Average Production
Contracted Amount
Class III Price
Contracted Amount
Class III Price
February 177,500
March 195,000
April 186,000
May 189,500
June 186,000
July 191,000
August 191,000
September 184,500
October 184,000
November 178,000
December 191,000
Decision #1 Decision #2November December
Example
20 12.10
99
20 12.80
13.65-
16.04
18.44
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Name ID # 99
November Decision #1
Feb ___________,000 lbs. June ___________,000 lbs. Oct ___________,000 lbs.
December Decision #2 ID # 99
Mar ___________,000 lbs. July ___________,000 lbs. Nov ___________,000 lbs.
Example
Grandma
20 20
3:002:502:402:302:202:102:001:501:401:301:201:101:000:500:400:300:200:100:00
November 18Class III Futures Quotes
Feb 13.65June12.10Oct 12.80
Last Month
Announced Class III 16.04
Mailbox Price 18.44
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Margot’s Observations
Lack of background information simulates the feeling of “Am I doing the right thing?”
Getting participants attention with the game creates a receptive audience for more information about milk marketing
The rest of the agenda
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Seasonality
Typical milk price patterns• Milk supply and demand
Focus on Class III milkBasisClass III futures contracts
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Price Variability and Risk
Define price risk• Visual
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
0%
10%
20%
30%
Distribution of Announced Class III Prices, 1998-2005
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Price Variability and Risk
Define price riskIntuitive approach to price risk
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Price Variability for One Month
0
20
40
60
80
100
Percent
Which price curve would
you rather sell on?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Price Variability and Risk
Define price riskIntuitive approach to price riskAnnounced versus futures Class III
price variability
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
November Class III1998-2005
0%
10%
20%
30%
40%
50%
60%
$8.00 $10.00 $12.00 $14.00 $16.00 $18.00
Announced
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
November Class III1998-2005
0%
10%
20%
30%
40%
50%
60%
$8.00 $10.00 $12.00 $14.00 $16.00 $18.00
Announced Futures
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Price Risk
Reducing risk through increased opportunities• More opportunities to meet the target
priceClass III futures gives you a greater
chance of reaching a particular price
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
How Many Times???
Comparison of futures and announced price in any given month.• In the past 8 years, how many times
was the announced price above ____?• In the past 8 years, how many times
was the futures price above ____?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Quiz TimeMay Milk, 1998-2005
Announced Price• $9.50? 7 / 8 yrs• $10.00 6 / 8 yrs• $11.50 3 / 8 yrs• $12.00 3 / 8 yrs
Futures Price• $9.50? 8 / 8 yrs• $10.00 8 / 8 yrs • $11.50 8 / 8 yrs• $12.00 7 / 8 yrs
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Summary of Price Risk
Class III futures gives you pricing opportunities in any given month
Are you looking for them?
Proactive marketers are!!!
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Target Prices
Target prices make your marketing plan pro-active (plan for action)
What is a good price from the market?
What is a good price for me?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Class III Announced
Prices1988-2005
Average Top third
January $12.02 $12.73
February $11.51 $12.07
March $11.61 $12.22
April $11.99 $12.97
May $12.02 $13.09
June $12.10 $12.99
July $12.42 $13.19
August $12.75 $13.53
September $13.16 $13.93
October $12.83 $13.51
November $12.31 $13.16
December $12.31 $13.22
Source: www.aae.wisc.edu/future
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Target Prices
What is a good price for me?Cost of production
• What do you expect the milk check to pay for?
• What is a good price for your operation?
• Helps you act on your plan
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Target Prices
Target prices are a balance…• What might be available in the
market in any given month (what’s a good price from the market) AND
• Some idea of cost of production (what’s a good price for me) AND
• Your risk preference
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Summary of Target Prices
What’s a good price from the market?
What’s a good price for me? Don’t be upset for making good
marketing decisions• You are not trying to hit the highest
price• You are looking for a good average price
more consistently
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Pricing Tools
Fixed Prices• Cash forward contracts• Using futures contracts (hedging)
Minimum Price Tools• Put options• Minimum price contracts with
processors
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Example of a Put
Strike price $11.00Premium $0.35Brokerage fee $0.03
My minimum price is $10.62• $11.00 - 0.35 - 0.03 = 10.62
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
September ‘06 Class III Put
Date Futures / Options
3/20/06 Sept 2006 futures @ $12.03$12.00 put costs 63 cents
Worst case scenario (minimum price)?$12.00 strike price - 0.63 option cost – 0.03 fee = $11.34Best case scenario? Poised for profits should September futures go higher than $12.66 ($12.00 + 0.63+ 0.03)
No limit to your upside potential!
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Participation Agreements
Agreement you sign with a processor in order to contract with that processor
Not all participation agreements are created equal
R-E-A-DAsk questions!
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The Game Recap
Let’s meet the celebrity players…
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl has no time to watch the markets. His mailbox price is the announced Class III, plus his basis (PPD, etc.)
Carl Cashseller
Meet Our Players…
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Grandma
Meet Our Players…
Goal: Minimize price swingsTarget Prices?
• NoneContracted Amount?
• 120,000 lbs total for a month, in 20,000 lb increments beginning 11 months prior
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Grandma
Meet Our Players…
Contracts for December 06
Amount
January 06 20,000
February 06 20,000
March 06 20,000
April 06 20,000
May 06 20,000
June 06 20,000
Total 120,000
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Al Averageprice
Meet Our Players…
Goal: Get at least the average price on half of my production
Target Prices?• Monthly average announced Class III price,
from 1988-2005
Contracted Amount?• 85,000 lbs total for a month
Only watching from 11 to 4 months prior
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Terry Topthird
Meet Our Players…
Goal: Lock in the price when it moves into the historical top third range
Target Prices?• Monthly top third announced Class III price,
from 1988-2005
Contracted Amount?• 120,000 lbs total for a month
Only watching from 11 to 4 months prior
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Harriet Halfandhalf
Meet Our Players…
Goal: Reduce price swings, but keep some upside potential for the fall
Follow Grandma’s plan for contract months January – June
Follow Al’s plan for contract months July – December
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Ollie Options
Meet Our Players…
Goal: Price protection without giving up any of the upside
Buys one put six months priorStrike price January to June
$11.00Strike price July to December
$12.00
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Your Game Results
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Game ResultsMonthly Milk Sales
Jan-99 Lbs Rate Farm TotalGrade A pounds 170,350 Announced Class III price 170,350 16.27 $/cwt 27,715.95$ PPD & other quality premiums 170,350 0.70 $/cwt 1,192.45$ Gross amount 16.97 28,908.40$ Additions / Deductions:
Contract in Mar-98 12.50 20,000 (3.77) $/cwt (754.00)$ Contract in Apr-98 12.10 20,000 (4.17) $/cwt (834.00)$ Contract in May-98 12.78 20,000 (3.49) $/cwt (698.00)$ Contract in Jun-98 12.55 20,000 (3.72) $/cwt (744.00)$ Contract in Jul-98 12.25 20,000 (4.02) $/cwt (804.00)$ Contract in Aug-98 12.20 20,000 (4.07) $/cwt (814.00)$ Put option 200,000 - $/cwt -$
Net amount 14.24 24,260.40$
Feb-99 Lbs Rate Farm TotalGrade A pounds 172,677 Announced Class III price 172,677 10.27 $/cwt 17,733.93 PPD & other quality premiums 172,677 3.20 $/cwt 5,525.66 Gross amount 13.47 23,259.59 Additions / Deductions:
Contract in Apr-98 11.65 20,000 1.38 $/cwt 276.00$ Contract in May-98 12.44 20,000 2.17 $/cwt 434.00$ Contract in Jun-98 12.28 20,000 2.01 $/cwt 402.00$ Contract in Jul-98 12.20 20,000 1.93 $/cwt 386.00$ Contract in Aug-98 12.20 20,000 1.93 $/cwt 386.00$ Contract in Sep-98 12.60 20,000 2.33 $/cwt 466.00$ Put option 200,000 - $/cwt -$
Net amount 14.83 25,609.59$
Grandma
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Game Results
1999 Marketing SummaryID # 0.07
CarlMilk Sold Contracted % My Mailbox Cashseller's Contracted %
(lbs) (lbs) Contracted Price Mailbox Price (lbs) ContractedJan-99 170,350 120,000 70% 14.21 16.97 - 0%Feb-99 172,677 120,000 69% 14.80 * 13.47 20,000 12%Mar-99 191,674 100,000 52% 14.09 * 13.68 20,000 10%Apr-99 178,442 100,000 56% 13.42 * 13.20 20,000 11%
May-99 176,869 100,000 57% 13.02 * 12.64 20,000 11%Jun-99 177,282 100,000 56% 13.35 * 13.09 40,000 23%Jul-99 171,914 120,000 70% 13.50 14.51 40,000 23%
Aug-99 160,217 120,000 75% 14.53 16.98 40,000 25%Sep-99 153,314 120,000 78% 13.91 16.57 40,000 26%Oct-99 156,161 120,000 77% 14.93 * 13.74 40,000 26%Nov-99 149,310 120,000 80% 14.69 * 12.23 40,000 27%Dec-99 161,618 120,000 74% 14.03 * 11.81 40,000 25%
2,019,828 1,360,000 67% 14.02 14.05 360,000 18%
Grandma
Group Averages
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Game Results
1999 Mailbox Prices
Carl Cashseller
Ollie Options
Al AveragepriceHarriet Halfandhalf
Grandma
Terry Topthird
$14.00
$14.10
$14.20
$14.30
$14.40
$14.50
$14.60
0 0.5 1 1.5 2
Other Participants Celebrity PlayersYou are Here
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
And the winner is…
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Mailbox Price Comparisons0.01 0.07 0.03 0.04 0.06 0.02
Carl Cashseller Grandma
Al Averageprice
Terry Topthird
Harriet Halfandhalf Ollie Options
1998 15.43 14.07 14.56 15.33 14.54 15.301999 14.05 14.02 14.02 14.59 14.04 14.282000 11.97 13.58 12.79 12.41 13.21 13.432001 14.99 13.74 14.68 14.82 14.19 14.412002 12.21 13.26 13.00 12.51 13.04 12.932003 12.88 13.11 12.95 12.88 13.29 12.992004 16.75 14.97 15.75 16.37 15.03 16.382005 15.38 14.67 14.77 14.91 14.62 15.19
Weighted average 14.22 13.94 14.08 14.23 14.00 14.37Median 13.95 13.91 13.95 14.39 13.95 14.10
80% of prices between… 12.10 13.10 12.90 12.50 13.05 12.77and… 15.90 14.68 15.17 15.47 15.03 15.62
Difference 3.80 1.58 2.27 2.97 1.98 2.85 0.00
§ The 'Weighted Average' price is the total revenue from 1998-2005 divided by total production (182,636 cwt) over thesame period.
§ Half of 96 monthly mailbox prices are above the 'Median' price and half are below.
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
Carl
Weighted Average
14.22
HighestPrice *
4
80% of Prices
12.10 … 15.90
Let’s compare to Carl Cashseller!
* Out of 8 years
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl’s Mailbox Prices1998-2005
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Monthly Mailbox Price
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Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
a
Weighted Average
14.22 13.82
HighestPrice *
4 2
80% of Prices
12.10 … 15.90
13.10…14.68
Carl vs. Grandma
* Out of 8 years
• 28 cents less total revenue (all from 2004)
• Smallest price range difference (1.58)
• 90% of prices above $13.10
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl vs. Grandma1998-2005
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Carl
Grandma
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl
Weighted Average
14.22 13.82 14.08
HighestPrice *
4 2 -
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
Carl vs. Al
* Out of 8 years
• $0.14 less revenue than Carl over the 8 years
• Reduced his price range
• Still has upside potential, but never had the highest price
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl vs. Al1998-2005
0
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Al
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl Terry
Weighted Average
14.22 13.82 14.08 14.23
HighestPrice *
4 2 - 1
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
12.50…15.47
Carl vs. Terry
* Out of 8 years
• Fewest contracts
• 2nd widest price range after Carl
• Slightly more revenue
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl vs. Terry1998-2005
0
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15
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11.
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Terry
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl Terry Harriet
Weighted Average
14.22 13.82 14.08 14.23 14.00
HighestPrice *
4 2 - 1 1
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
12.50…15.47
13.05…15.03
Carl vs. Harriet
* Out of 8 years
• 22 cents less revenue over 8 years
• 2nd smallest price range (1.98)
• 90% of prices above $13.05
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl vs. Harriet1998-2005
0
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Harriet
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl Terry Harriet Ollie
Weighted Average
14.22 13.82 14.08 14.23 14.00 14.37
HighestPrice *
4 2 - 1 1 -
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
12.50…15.47
13.05…15.03
12.77…15.62
Carl vs. Ollie
* Out of 8 years
• Most revenue
• Worse than Carl 4 out of 8 years
• Reduced price range, mostly on the lower end
• Options can work
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl Terry Harriet Ollie
Weighted Average
14.22 13.82 14.08 14.23 14.00 14.37
HighestPrice *
4 2 - 1 1 -
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
12.50…15.47
13.05…15.03
12.77…15.62
Carl vs. Ollie
* Out of 8 years
• “Takes money to make money”
• Average monthly cost: $926
• Last month his put made money: June 2003
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Carl vs. Ollie1998-2005
0
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Ollie
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Celebrity Results, 1998-2005
CarlGrandm
aAl Terry Harriet Ollie
Weighted Average
14.22 13.82 14.08 14.23 14.00 14.37
HighestPrice *
4 2 - 1 1 -
80% of Prices
12.10 … 15.90
13.10…14.68
12.50…15.47
12.50…15.47
13.05…15.03
12.77…15.62
* Out of 8 years
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Workshop Theme
“Selectively using processor contracts can help smooth out the bumps in your milk check!”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Smoothing Out the Bumps
Average Mailbox Price, 1998-2005
12.50
13.00
13.50
14.00
14.50
15.00
15.50
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Carl Cashseller Grandma
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Smoothing Out the BumpsMailbox Price, 2000
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Carl Cashseller Grandma
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Smoothing Out the BumpsMailbox Price, 2004
$13.00
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
$21.00
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Carl Cashseller Grandma
Sizing Up the Market
What are the celebrities doing today?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
Market
Contract
Month
FuturesAs of
3/23/06 Target Prices
Amount Contracte
d
July 06 $11.37
Aug 06 $12.02
Sep 06 $12.07
Oct 06 $12.10
Nov 06 $12.10
Dec 06 $12.00
Jan 07 $11.80
Feb 07 $11.77
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketCarl Cashseller
• Still giddy from prices in 2004-05
Contract
Month
FuturesAs of
3/23/06 Target Prices
Amount Contracte
d
July 06 $11.37 ?? 0
Aug 06 $12.02 ?? 0
Sep 06 $12.07 ?? 0
Oct 06 $12.10 ?? 0
Nov 06 $12.10 ?? 0
Dec 06 $12.00 ?? 0
Jan 07 $11.80 ?? 0
Feb 07 $11.77 ?? 0
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketGrandma
• Writing one 20,000 lb contract for July - February
• Next month, August-March
Contract
Month
FuturesAs of
3/23/06 Target Prices
Amount Contracte
d
July 06 $11.37 20,000
Aug 06 $12.02 20,000
Sep 06 $12.07 20,000
Oct 06 $12.10 20,000
Nov 06 $12.10 20,000
Dec 06 $12.00 20,000
Jan 07 $11.80 20,000
Feb 07 $11.77 20,000
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketAl Averageprice
• Above target price for February 2007
• One 85,000 lb contract
Contract
Month
FuturesAs of
3/23/06
Target Prices(Average Announce
d)
Amount Contracte
d
July 06 $11.37 $12.42
Aug 06 $12.02 $12.75
Sep 06 $12.07 $13.16
Oct 06 $12.10 $12.83
Nov 06 $12.10 $12.31
Dec 06 $12.00 $12.31
Jan 07 $11.80 $12.02
Feb 07 $11.77 $11.51 85,000
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketTerry Topthird
• No targets are met
• No contracts
Contract
Month
FuturesAs of
3/23/06
Target Prices(Top third Announce
d)
Amount Contracte
d
July 06 $11.37 $13.19
Aug 06 $12.02 $13.53
Sep 06 $12.07 $13.93
Oct 06 $12.10 $13.51
Nov 06 $12.10 $13.16
Dec 06 $12.00 $13.22
Jan 07 $11.80 $12.73
Feb 07 $11.77 $12.07
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketHarriet
Halfandhalf• 20,000 lbs in
January and February 2007
• No targets are met in July-December 2006
Contract
Month
FuturesAs of
3/23/06 Target Prices
Amount Contracte
d
July 06 $11.37 $12.42
Aug 06 $12.02 $12.75
Sep 06 $12.07 $13.16
Oct 06 $12.10 $12.83
Nov 06 $12.10 $12.31
Dec 06 $12.00 $12.31
Jan 07 $11.80 20,000
Feb 07 $11.77 20,000
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sizing Up the
MarketOllie Options
• Buying a September2006 put @ $12.00 strike price
• Premium is 58 cents
• Total premium is $1,160
Contract
Month
FuturesAs of
3/23/06 Target Prices
Amount Contracte
d
July 06 $11.37
Aug 06 $12.02
Sep 06 $12.07
Oct 06 $12.10
Nov 06 $12.10
Dec 06 $12.00
Jan 07 $11.80
Feb 07 $11.77
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Writing Your PlanWhat tools will you use?How much of your production will you
market?What are your target prices?Maybe more than one target priceWhat contract months are your focus?How far ahead will you look?How much time / effort / money do
you want to dedicate to marketing?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
SummarySeasonal pattern in milk pricesBy being proactive and taking
action, you can reduce price variability• Nothing you can do to get a better
price yesterday• Woulda…Coulda…Shoulda
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
SummaryHave target prices in mind
• What is a good price and when?Good marketing is not about
getting the highest price, it’s about getting a good average price more consistently
Forget last month (or yesterday)
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Some Final Thoughts
There is no one “right” answer in dairy marketing, and some degree of risk is unavoidable
K.I.S.S. theory•A complex plan is harder to
maintain
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Why WTG Dairy?
Based on our experience with more intensive milk price risk management programs, we didn’t see the results we expected
Focus the messageAny size farm can use processor
contracts
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Winning the Game – The Trifecta Concept!
Half-day program A simulation game using historical
data with real time results and no risk
The goal of giving participants an attitude that “this is so easy my husband could do it”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Producer Reviews “The game helps producers learn what
they are afraid to try in the market.”“The game is by far the best. It was
great to have a comparison between all marketing options.”
“Good display of information and getting the information across! I do understand the process a little better.”
“Thank you! It was very interesting and opened my eyes a bit. It made me think !”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Sponsor/Other Reviews Radio Broadcaster: “The workshop allowed
for a lot of producer interaction and input. That makes for a very practical presentation producers can relate to.”
Sponsor Lender: “Very good information-great hands on involvement.”
Milk Plant Field Rep: “Nice and informal, knowledgeable speakers, very nicely done, Thank you!”
Farm Business Management Instructor: “Great Job-Thank you! Gets producers involved which is the best way to learn. Thanks to the sponsor, Eastwood Bank, and the U of M presenters.”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Evaluation Results
7 workshops, 149 attendees, 110 evals returned (99 producer 11 other)
Average Herd Size: 145 Median: 100Average RHA: 21263 cwt.
Median: 21900 cwt.Cash forward contracts most
frequently used marketing tool(97% of those fwd pricing use this tool).
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Evaluation Results
As a result of the WTG-TDE workshop:74 participants indicated they plan
on forward pricing milk (64 currently forward pricing).
Only 13 participants indicated they will continue to take the announced price (previously 35 participants indicated they always took the announced price).
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Evaluation ResultsAs a result of the WTG-TDE workshop:Planned 8.2% increase in forward
priced production.86% of producers indicated they plan
to develop and implement a marketing plan.
10% of participants who are not forward pricing, plan to begin forward pricing.
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model
Local sponsor responsibilities…• Host the workshop• Provide the facility and refreshments• Recruit participants• Pay a sponsorship fee of $600
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model
University responsibilities…• Provide promotion materials to
sponsor• Present the workshop• Provide the participant materials
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model -- Advantages
Local presence for promotion, advertising and partnership
Local meeting arrangements handled by sponsor
Cover direct program costs (travel, printing, etc.)
Pressure on presenters to deliver quality program
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model -- Challenges
Private vs. public meetingsLogistics of sponsor care
• Recruiting, promotion, billing• Make sure sponsors understand their
responsibilities• Follow-up
Pressure on presenters to deliver quality program
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Contacts
Bret Oelke• [email protected]
Margot Rudstrom• [email protected]
Wynn Richardson• [email protected]