A24-Lancaster Farming, Saturday, August 1, 1998
(Continued from Page A 1)
that arc enforced upon non-ag
exports to such countries as India.
Trade will affect markets at
home and offers a more agressive
stance for farmers to become
involved in futures marketing.
While the government is pulling
out of price supports, it is offering
support in transition (an optional
pilot program is available in which
the USDA through a government
subsidy pays 80 percent of costs
for producers to participate in the
futures market).
“Success in farming depends on
the ability and willingness to
adapt,” Redding said of changing
times.
Explaining the fundamentals of
the futures markets were Eric
Maine of the New York Board of
Trade, Coffee, Sugar, and Cocoa
Exchange Division and Dr. James
Dunn, Penn State ag economics
professor.
Maine gave the perspective of
futures (the buying and selling of
contracts) from the flow of the
New York Board of Exchange. He
said that the company foresees the
dairy pit becoming as busy as the
Coffee, Sugar & Cocoa Exchange.
Milk is a commodity that is crucial
and has the potential for investors
to make a profit from rising prices
as supply meets demand head on,
Maine said.
Businesses that need milk don’t
want to bother with flunctuating
dairy prices but want to lock in
prices so that they can more effec
tively calculate a business plan.
Farmers can take advantage of
this if they calculate their costs and
lock in at a price that covers
expenses. Although milk prices
may rise higher by the time the far
mer is ready to sell the milk, at
least, he isn’t suffering a loss. If the
market drops, he makes a higher
profit
Over a long period, a farmer
who uses the market may end up
with the same amount of money as
the farmer who doesn’t The
advantage is that locking into the
futures market guarantees a more
consistent income rather than the
highs and lows that cause cash
flow problems.
Dunn explained in lay language
the many terms associated with the
futures markets.
The most often used terms and
their definitions are some of the
following:
Futures A uniform contract
for future delivery, in which every
thing is specified but the price;
quantity, quality, delivery time,
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Hedging, Options, Futures May Spell Survival
delivery place, penalties, and
premiums.
Options The right, but not
the obligation, to either make or
take future delivery of a commodi
ty. The advantages of options is
protection against lower prices (for
someone buying a put), while
allowing the fanner to receive high
prices if they occur. The disadvan
tage is that higher costs are exacted
for protection than those for
futmes.
Puts The option to sell a
futures contract during a fixed time
period for a fixed price.
Calls The option to buy a
futures contract during a fixed time
period for a fixed price. Useful to
protect a hog farmer against higher
com prices.
Basis The difference
between contract price and your
local price at the time you expect to
close contract According to Dunn,
generally grain prices in Pennsyl
vania are IS cent a bushel higher
than in Chicago, where the prices
are set
Hedging Using the futures
market to protect yourself from
price risk in the cash market
Hedging locks in today’s prices for
tomorrow’s needs.
Speculation Using the
futures market to try to make
money by anticipating price moves
on the commodity. Because of the
margin, you can control several
times as much grain as you could
otherwise, allowing for big gains
or losses.
Dunn took conference particip
ants through a worksheet as an
example, to show how hedging can
protect die future of com.
Hedging can reduce risk if you
grow com and have a crop in the
field, he said. You could sell a
futures contract and lock in a post
harvest price. The profit or loss on
the futures contract should offset
the profit or loss due to local price
changes.
One of the most used terms in
milk futures and options is BFP an
abbreviation for basic formula
price. The BFP is government
calculated and based on the mini
mum price for Class 111 milk,
before premiums.
Understanding the futures
market is an ongoing process and
not one that should be undertaken
lighdy with only a one-day work
shop, Dunn said.
“Despite what anyone tells you,
no one knows where the market is
going,” Dunn said.
Another vyord for speculation,
he said, is “gambling,” because
you’re betting money on what you
think the market will be doing. Of
the millions of contracts made only
two percent are actually delivered,
but all contracts affect trading
prices.
On the posidvie side, Dunn sees
using the futures market as a good
way for farmers to protect their
profits. Not only can they lock in
prices for crops growing in the
field, but according to one parti
cipant, “1 get 5 cents more a bushel
for my com just because the buyer
knows I am aware of prices.”
An excellent way to learn more
about the futures market without
risking finances is to become
involved in a marketing club.
John Berry, Lehigh extension
agent, and Ricky Butz, executive
loan officer for Keystone Farm
Dennis Ginder
Farm Management Agent
Penn State Cooperative
There are various types of per
sonal and business planning For
the individual, this may include
planning for retirement or your
children’s education. As business
managers (yes, farm operations are
businesses), there are additional
types of planning which include
business, contingency and succes
sion.
The question many of us have
is whether planning is beneficial
If we’ve thought about planning,
too many times the “yes, buts”
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Credit, told how a group of farmers
formed the Lehigh Valley Grain
Marketing Club and how they use
scenarios to sharpen skills to pre
pare eventually for using the
market.
“We team how to come up with
the best marketing strategy to get
the best prices,” Berry said.
Marketing clubs offer practical
skills and emotional support in
learning the ins and outs of using
futures marketing to the best
advantage. One time club mem
bers combined resoures to place an
order, which offered the advantage
of spreading the risk and learning
the market
The purpose of the Ag Horizons
conferences is to teach educators,
such as extension agents and
have raised their ugly heads.
Most of you have either heard
them or used them yourself. Yes,
but I don’t have time Yes, but
there is no way I can know what
will happen tomorrow, much less
six months from now Yes, but I
don’t know how to do that plan
ning stuff. Yes, but there are
other items we must buy today
and therefore don’t have the
money to save. The list goes on.
It was George Hewell who said
“Those who fad to plan, plan to
fad”. I’ve also heard it said that if
you don’t know where you want
to go, any road will take you
there. My suggestion is that if
Benefits Include:
• 20 straight years of 13th checks distributed to
members.
• Averaged 72 cents per hundredweight above market
prices returned to producers in cash the past 3 years
• 70 percent of patronage dividends in cash returned to
members the last 3 years.
• Quality and over-order premiums paid monthly to
producers.
Call 1-800-552-1976 for more information
Maryland & Virginia
Milk Producers Cooperative
Association, Inc
teachers, about ag issues.
“Educators who can impact the
classroom and decision making
must learn to deal with markets
during this crucial time,” said
Charles Suloff, who was part of the
planning committee.
The conference was sponsored
by the Southeastern Regional
Council of the Pennsylvania Coun
cil of Cooperatives and Penn
State’s Cooperative Business Edu
cation and Research Program.
For more information about
futures marketing or about becom
ing a part of a future’s marketing
club, contact Dunn at Penn State
Extension (814) 863-8625, or John
Berry at (610) 391-9840, or Ricky
Butz at (610) 395-6831.
you do not plan, most of your
time will be spent dealing with
crisis management or completing
insignificant tasks while ignoring
the important issues. Also, if
planning is not part of your per
sonal and business life, a few
questions quickly come to mind
What goals do you and your fam
ily have 7 If you have goals, how
do you plan to achieve them 7
How do you plan to pay for your
children’s education 7 How will
you fund retirement, if you’ll even
be able to retire 7 How will you
pass the farm on to the next gen
eration 7 How will you develop
your successor’s management
skills 7 How will you determine if
you can afford to expand your op
eration 7
Any type of planning requires a
significant commitment from all
those involved in the process. It
requires communication and hon
esty from all participants. Tough
questions need to be asked and an
swered Finally, planning is an
on-going process and not a once
and done event.
(Turn to Page A 42)
FOR