As we head into end of year, take time to make sure you have minimized your risk and kept yourself open for better prices if they may occur. It has been a difficult stretch for milk prices which is evident by clients that have had consistent coverage in place are shaping up to get DRP indemnities for their 6th quarter in a row! Don’t get caught thinking that you know where prices are heading next year. Here are good ways to protect negative outcomes and still be positioned for better prices in milk, feed and cattle.
Milk- This part is simple, DRP has worked as advertised over the last few years. There have been both good and bad prices. DRP has paid out nicely in the low price times and still allowed for availability to participate in some of the highest milk checks on record. I strongly recommend having at minimum 25% of milk protected in both Q2 and Q3. Utilizing the 1.5 factor, this will protect 33% and still leave plenty of room to add coverage if prices improve. Looking at the historical comparisons, milk prices are pretty good and with the subsidy provided for DRP purchase, the cost is well worth the investment in price security.
Corn and Meal- Now the attention is south of the equator. Don’t put yourself in a position of guessing weather outcomes and China demand, which we will be hearing a lot about in the next few months. There are plenty of technical and fundamental cases being made for higher or lower prices for corn and meal. It is unnecessary to take this risk. Buy May calls in meal; buy calls or risk reversals in corn. Calls in May meal will give protection against a disastrous crop in Argentina and Brazil. For corn, whichever timeframe you are concerned about March through December, add an option strategy that best fits your needs.
Cattle- Cattle prices, not to mention DRP, have been a savior to many dairies. Now that the straight climb up has seemingly ended, we now will be experiencing some volatility and up and down markets. With the emergence of beef/dairy, I’m an advocate of LRP for all dairies. Beef prices affect dairy revenue, why not have subsidized coverage to protect that revenue stream? Look to add LRP on upticks in feeders or live cattle and be open to trading futures and options vs. LRP policies.
Looking back to the beginning of this year and the newsletters that charge subscription fees and “predict” market direction, not very many, if any, predicted this market. Don’t get caught thinking you know what is ahead. Your business won’t have a bad year because your invested in downside protection, but it could have a bad year if you don’t.
I look forward to hearing from you and discussing individualized risk management plans that best fit your business. Have a wonderful Thanksgiving weekend.
Mike Merucci
312.893.5546