Cooperative
(Continued from Page A 33)
contact their local extension office
and inquire about the program.)
The gist of the program was that
the use of the contracting tools by
producers is being proposed as a
way to ensure (not insure) that pro
ducers can achieve a constant, pre
determined profit margin.
What is sacrificed is the ability
to gain a huge windfall from an
unexpected upturn in the price paid
for milk delivered to a plant.
What is gained is protection
from a huge loss from an unex
pected downturn in the actual price
paid for milk.
But, the bottom line is that the
producer must already have a rela
tively low cost of production, rela
tively high level of production, and
an astute awareness of his antici
pated operational costs.
The way it works is that m New
York and Chicago there are trade
exchanges that have recently deve
loped futures markets for dairy
commodities milk futures and
basic formula price (BFP) futures,
as well as options.
Trading is done on contracts
based in increments of 100,000
pounds of milk.
The program was presented
with a panel of experts, videotaped
interviews with producers of diffe
rent backgrounds who already use
the markets, and question and
answer periods, whereby particip
ants at the 135 different downlink
locations could telephone ques
tions or send them via fascimile
machine.
The program was scheduled
from 1 to 3 p.m.. Central Daylight
Time. There is a little more than an
hour difference in time between
Lancaster and Madison.
Panelists included Bob Cropp, a
University of Wisconsin professor
and an Extension specialist in
dairy marketing and policy; Janet
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Extension Offers Futures Market Satellite Conference
Troye, vice president of the Cof
fee, Sugar & Cocoa Exchange Inc.,
New York, which offers the dairy
trading and currently has the
largest volume of business; Paul
Christ, vice president of dairy
planning and analysis at Land ’O
Lakes Inc.; and Phil Plourd, a
senior marketing specialist at
Bliming and Associates, in Cot
tage Grove, Wis.
The farmers interviewed
included John Blaska, Pete
Knigge, and Mike Downes. Also
shown in a video interview was
Larry Lemmenes, president of
Alto Dairy, a cooperative that,
similar to Land ’O Lakes, offers
fixed price forward contracting for
its members.
There are currently three diffe
rent “tools” available for use and
one that is being suggested as a
least-risk tool for producers.
The three are “forward contract
ing,” “futures,” and “options.”
With forward contracting, the
seller and buyer agree to a price
before time, and delivery of pro
duct is included.
With futures, the seller and buy
er are basically speculating on the
prices and there is no delivery of
product. However, they do make a
cash settlement It’s more like a bet.
with one or the other making or
losing some money, depending on
how closely they came to betting
on the right price. This type of spe
culation is called “price discov
ery,” A seller can offer to sell at
any price he or she sets, but if there
are no buyers... well, then, there
are no buyers.
With options, a producer, for
example, can buy an option to sell
(put) or buy (take) at a certain
price, then if the price comes in
lowers he can sell at the higher
price. This is considered to be
more of an insurance plan, and car
ries a premium that has to paid
(deducted). Again, this is a paper
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transaction dealing only with spe
culation and the exchange of cash.
It is not neccesssaty to be a dairy
producer to be involved, though it
appears that the potential to make
money by a non-producer is too
slim to attract investment
speculators.
Under the “futures” catagory
there ate “milk futures” and, more
recently “BFP futures.” The BFP
futures appears to be the easiest for
producers to use.
The way it works is that
traders buyers and sellers
are basically playing a guessing
game on paper with what the U.S.
Department of Agriculture will
determine to be the basic formula
price of milk in the future.
Cheese prices, historic trends,
consumption and production
trends, as well as other potential
influences on the BFP can be used
to help guess where the USDA will
set the BFP.
What happens is that two
parties one a seller and one a
buyer arrive at a contract. The
seller offers to “sell” a BFP futures
contract at a certain level. The buy
er agrees to it and puts up some
money.
After the USDA announces the
actual BFP, the two parties settle
up.
So, if a fanner sells 100,000
pounds of milks on the BFP futures
market at $l2 per hundredweight
(though he doesn’t really sell the
milk), he is basically guessing that
the BFP will come in somewhere
close to that.
If the BFP is lower, then the pro
ducer who sold that contract will
have gained the difference
between the lower price he got for
his milk and the $l2 per cwt. that
he “sold” on the 100,000 pounds.
If he sells a BFP contract for $ 12
and it comes in at $l3, then he has
lost out on the potential for an extra
$1 per cwt. But he still gets the $l3
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from the actual sale of milk.
Why play around with this side
bet?
Because the BFP futures and the
cash price for the milk generally go
in opposite directions when
there is a higher BFP the producer
will get more money in his blended
price (which is based on the BFP)
from the actual sale of the milk,
which is to offset the loss from los
ing out on the futures contract;
while if the BFP comes in lower,
the farmer will make a profit on the
side bet, which offsets the lower
price he will get for actually selling
his milk.
Why do all of this? Because the
producer does not have control of,
or knowledge of, what price he
will receive for his milk until after
it has been sold and the USDA
generates the BFP and the milk
plant calculates the milk check.
This side-betting futures
scheme can allow a producer to eli
minate the extremities in cash flow
to the farm due to the wide varia-
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m
tions in milk prices.
Forward Contracting
The Toward contracting is basi
cally a delivery agreement at a pre
set price. The cooperatives offer
ing to members use the BFP
futures to calculate and estimate
the price for milk several months
ahead. Then, to lock in some of
their operating expenses at a
known level, they have started
offering to purchase some milk
ahead of time through forward
contracts.
If the price of milk increases, the
cooperative gets milk at less cost,
and the producer misses out on the
potential to get that extra profit. If
the price of milk decreases, then
the cooperative has paid more than
it may have, and the farmer gets
more than he would have.
Forward contracts also have
applications for the milk proces
sor. The fluid milk futures are tools
designed more for the milk
processor.