Transcript Managing Risk for Stability and Growth

Managing Risk for Stability
and Growth
Dr. Marin Bozic
MMPA/UMN-Extension Dairy Management Workshops
February 5-6, 2013
A real problem…
But it hurts to leave money on the table…
$22.00
$21.00
$20.00
$19.00
$18.00
$17.00
$16.00
$15.00
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
Hedge early, hedge often
Hedge early, hedge often
Hedge early, hedge often
Hedge early, hedge often
2006-2012 returns to at-the-money put
options
1 month ahead:
Cost: $0.19/bu
Payout: $0.16/bu
6 months ahead:
Cost: $0.95/bu
Payout: $1.33/bu
3 months ahead:
Cost: $0.68/bu
Payout: $0.79
9 months ahead:
Cost: $1.13/bu
Payout: $1.59/bu
Hedge early, hedge often
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Purchase
No
at End of
Coverage
Month
Jun
Mar
May
Feb
Apr
LGM-Dairy
1
2
3
4
5
6
7
8
9
10
Insurance Contract Period
LGM-Dairy
LGM-Dairy
LGM-Dairy
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/UMNExtension Dairy Management Workshops. No permission is granted or
implied for disseminating these results further without explicit permission
by Dr. Bozic.
Farm bill
Two alternatives:
 Dairy Security Act
 Goodlatte-Scott
Amendment
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”)
Subsidized Margin Insurance
Subsidized Margin Insurance
Subsidized Margin Insurance
Subsidized Margin Insurance
House bill - Farm with 150 cows
Coverage
Level
Fees &
Premiums
Expected
Indemnity
DMSP
Penalty
Net Revenue
$4.00
$4.50
250
532
5,369
7,569
5,828
5,828
-5,057
-4,235
$5.00
$5.50
$6.00
$6.50
954
1,377
2,081
2,786
10,390
13,938
18,327
23,580
5,828
5,828
5,828
5,828
-2,697
75
4,475
11,270
$7.00
$7.50
$8.00
12,479
16,874
26,229
29,770
37,103
45,862
5,828
5,828
5,828
10,729
16,590
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
$4.50
53,432
26,238
-26,360
14,033
-29,360
9,215
$5.00
$5.50
$6.00
$6.50
66,179
98,927
125,325
138,807
57,439
93,776
120,895
152,012
54,065
84,948
124,033
127,198
$7.00
$7.50
$8.00
158,003
-285
-57,106
77,805
69,217
-25,607
14,525
-23,200
-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
thank you
Managing Risk for Stability and Growth
presented at the
Dairy Management Workshops
Tuesday, February 5, 2013
St. Joseph, MN
Wednesday, February 6, 2013
Rochester, MN
Dr. Marin Bozic
[email protected]
Department of Applied Economics
University of Minnesota-Twin
Cities
You may download this
presentation at
http://marinbozic.info/