Hedging, risk management, margin management, whatever you call it, it’s a pain in the butt. But like it or not, volatility in the milk and feed markets pretty much requires us to find some way to protect our bottom line. There are many tools available on the Internet and mobile phones to help you with margin management but first let’s talk a bit about the process.
Simply stated, margin management is about setting a minimum price for your milk and a maximum price for your feed on some future date. In my experience there are four phases in the process; Education, Budgeting, Tracking Trends and Execution.
Education: Futures, options, puts, calls, margin calls, and the like are complicated concepts and you should educate yourself before implementing a hedging strategy. The best approach is to take a class. Many brokerage firms offer classes but if none are available in your area take them online. CMEGroup.com has educational materials, Youtube has lots of videos, and UC Davis has a Futures and Options course available on iTunesU.
Budgeting: Dairy is a complicated business and finding your breakeven point using a cash accounting system can be tedious. This usually requires an accountant, a financial consultant, or specialized cost accounting software. I created a simple spreadsheet using Google Drive that tracks my fixed costs, my homegrown feed costs, my purchased feed needs, and my expected milk production. I can apply these costs to future months and compare them to the price of Class III milk, Class IV milk, corn and soymeal and have a reasonably good idea of what margins I might be able to lock in.
Several companies have taken this to a much higher level and are offering web based margin projection modeling. These programs update prices multiples times a day and take into account the specific details of your business including basis risk and income price formulas. Since they are web based you can access it via your mobile phone and tablet. Two such companies are Atten Babler Risk Management, and CIH.
Tracking Trends: Midwest drought, China running low on corn, butter piling up in storage, all these fundamental market movers need to be considered in order to know your risk. Market information is available from many sources and several have apps. The Ag Web app is a good source of market news and commodity price quotes. For dairy specific information I like the Daily Dairy Report App. For technical market information including chart analysis and options quotes I use the CME mobile website and barchart.com.
Execution: Some brokerage houses offer online trading and have some feature rich mobile apps. I use the “phone app” on my Android to call my broker for trades.
Even if you don’t end up trading in the futures and options markets, going through these four steps might help you understand your business a little bit better. And if nothing else, it should give you something new to talk about at the coffee shop on Monday morning.
It is also a good idea to subscribe to a few newsletters of trusted market analysts. Another way of doing this is with Flipboard. Flipboard is an app that lets you create your own custom newspaper by subscribing to people’s Twitter feeds. All you have to do is track down the Twitter address of your favorite market analysts and journalists and add them to a group in Flipboard. Any time they post a link to a news article on Twitter, Flipboard will pull that article into the app and format it to look like a newspaper.