A32-Lancaster Fanning, Saturday, July 4, 1998
(Continued from Page A 1)
seven states have been selected to
participate during the first six
month period. Other states that
have counties participating in
clude; California, Minnesota,
New York, .Texas, Vermont, and
Wisconsin. Selection was based
on those counties and states that
have a high dairy concentration.
Funding has been approved for a
three-year program so hopefully
other counties in Pennsylvania can
be included after this initial round.
If you receive a letter from Risk
Management/USDA, please take a
few minutes and read it carefully!
It will provide details about this
program along with instructions
on how you sign up to participate.
From the time you receive the let
ter, you will have approximately
two weeks to return die registra
tion form. If you have questions
about the information in the letter,
do not hesitate to contact your lo
cal Penn State Extension office.
If a producer chooses to partici
pate, they will need to attend a
four-hour training program in late
August or early September where
the final details of the program
will be explained. This program
will be limited to 100 producers
per county.
Just what is the DOPP? The
Dairy Options Pilot Program al
lows USDA to help share the cost
of brokerage fees and option pre
miums that you would purchase to
set a floor price for your milk.
This allows producers to gain
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Dairy Options
some education and experience in
using options without spending
much money. During the six
month period, if your county is se
lected to participate, you may pur
chase option contracts on up to
600,000 pounds of production.
USDA will then pay 80 percent of
the premium cost for the option
and $3O of brokerage fees for each
transaction. The minimum amount
that needs to be contracted during
the six months of the program is
only 100,000 pounds. This allows
both large and small producers to
participate in the program.
What is an option, you ask? A
BFP milk option allows the holder
(producer) the right to sell a BFP
contract at a guaranteed minimum
floor price while still providing
for upside potential, should the
market move upward unexpected
ly. This type of option is referred
to as a “Put” and is used to protect
you from falling prices. An easy
way to think of options is that they
are similar to insurance. The better
the policy, the more it costs. An
option for $l3 BFP milk will cost
more per cwt than an option for
$11.75. What if the BFP is above
my option price when the contract
ends? If this happens, then your
contract expires and you are for
tunate to receive the higher cash
market price. Similarly, if you
have car insurance and do not
have an accident, your policy ex
pires without you collecting any
money.
What price options can I pur-
Michael & Barbara
On their new
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chase with this program? Options
are available in 2S-cent incre
ments above and below the cur
rent BFP or strike price for a given
month. You will be allowed to
purchase options that are at least
10 cents below the current BFP
strike price. For example, if the
August BFP is $13.54, then you
may purchase options from
$11.50 to $13.35. This would then
provide a floor price on the
amount of milk in the option con
track
How do I initiate an option con
tract? Once producers have com
pleted their training session in
August or September, they will be
given a list of brokers who are ap
proved to help you work with BFP
options. You can then decide what
portion of production for which
you’d like to purchase an option.
No more than 200,000 pounds
may hedged in any one month.
Each option contract must be held
for a minimum of two months. For
example, if it is September and
you want to take a Put option un
der this program, you will need to
work with December ’9B or early
’99 contracts.
Option contracts come in differ
ent sizes depending on which trad
ing exchange you work with. BFP
contracts are traded daily on the
Coffee, Sugar & Cocoa Exchange
in New York and at the Chicago
Mercantile Exchange in Chicago.
Contracts on the Coffee Exchange
arc in 100.000-pound increments
while contract sizes at the Mer-
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cantile Exchange are 50,000
pounds and 200,000 pounds.
If 1 participate in this program,
does it change the way I get paid
from my milk company or co
operative? Absolutely not Your
milk is still marketed as always
and your milk check from your
milk buyer will not change.
Should the futures BFP price drop
below your option floor price, you
would receive money from your
option account That money com
bined with your cash price would
equal your floor price.
Both trading exchanges have
excellent educational material,
available at no cost, that help to
explain BFP futures and options
trading. Information can be ob
tained from the Chicago Mercan
tile Exchange by calling (312)
Feltman, Richfield, PA
er
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930-1000, or from the Coffee, Su
gar & Cocoa Exchange at (212)
742-6100. The Coffee exchange
also has a free book available enti
tled: From Price Taker to Price
Maker. This easy »o read book dis
cusses BFP hedging and provides
numerous examples for you to fol
low.
If you are one of the six selected
countries, be watching your mail
for DOPP details. Any producers
in PA who have questions on this
program are encouraged to contact
their county Extension office for
additional information. Additional
contact persons would be Glenn
Shirk, Lancaster County Exten
sion Office (717) 394-6851, and
Larry Swartz or Larry Yager,
Adams County Extension Office
(717) 334-6271.
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