Rice Dairy reflects on growth, looks to future as it celebrates 10 years of business in 2012
When Brian Rice launched Rice Dairy LLC in the center of Chicago’s Financial District in 2002, he’d already been involved in the dairy market arena for at least six years. However, Rice felt there was a lack of strong, professional price-risk management services available to dairy industry players.
With this in mind, Rice Dairy LLC was created. The firm’s initial focus was to provide guidance, analysis and execution services on futures, options, spot and forward markets, specializing in dairy and markets at dairy’s periphery. Now, 10 years later, that focus has not changed, Rice notes.
Dairy market poised for growth after a volatile 2011
This past year we’ve witnessed plenty of fireworks in the cheese market as the price has made multiple trips to $2.0000 followed by breaks that dropped it 40 cents in a heartbeat. This type of volatility in the futures market breeds increased volume and open interest as hedgers look to protect themselves from price swings. In a market that — compared to grains or energies — is in its infancy, we’ve seen dairy emerge from 2011 with notable growth. The roller coaster ride of 2011 (and years past) offers numerous lessons to review that, if implemented properly, can bring the dairy complex to what I believe is its true potential.
Got Milk Contracts? Indeed!
Long a backwater of the commodities market, milk futures and options activity has soared. The number of outstanding contracts on the Chicago Mercantile Exchange averaged 110,197 in January, up 32% from a year ago, even as the aggregate number of trading positions among other raw materials fell, according to exchange data. Since 2007, it has more than doubled.
A rise in the popularity of put options
As I travel across the country and talk with dairymen, there is a growing interest in risk management, and buying put options are overwhelmingly the favorite strategy. Producers are attracted to this strategy because it is flexible but still offers price protection if the market should decline.
Along with producers, I hear a lot of interest in this hedge strategy from lenders, accountants and other industry professionals. In order to give you some perspective on this hedge strategy, below is some historical information.
Weather forecast = price forecast
There are some aha moments in life that you don’t recognize as being important until it is too late. It is typically a clue that is staring you right in the face telling you what is likely to happen next, and it isn’t until the result actually hits you in the face that you realize what you saw. For me that moment was in January of this year when I was flying home from the annual International Dairy Foods Association meeting in southern California. As we flew over the Rocky Mountains the pilot suggested everyone look out of the left side of the plane. He pointed out several of the top skiing
mountains in the country. Each one of them was snowless. Too absorbed with finally beating the final Angry Birds level, I looked up momentarily and then went back to my game. Several weeks later, I would look back and recognize that as a telling sign of things to come in our dairy markets.
Drought expected to drive up cost of milk, cheese
Wholesale cheese prices are at about $1.72 a pound. “I expect the cheese price to get up to $1.95 in November,” says Jerry Dryer, editor of the Dairy & Food Market Analyst in Delray Beach, Fla.
Drought expected to drive up cost of milk, cheese
On June 1, I published an article here in Cheese Market News in which I stated that the dramatic increase in milk production that we had seen here in the United States during the first quarter of the year was likely due to the unusually warm weather we experienced during that time. That weather effect manifested itself in the production per cow (PPC) numbers, causing March PPC to balloon to 3.2 percent higher year over year and overall production levels to move to 4.2 percent higher year over year (YOY). I believed then and still do now that the high PPC number was the largest contributor to the high production levels and the lower price levels.
Time to look at hedging the milk-feed margin again
I know you’ve heard it before but, given the current volatility in both the milk and feed prices, I thought now would be a good time to review the importance of hedging the milk-feed margin.
Some of you are more familiar with hedging your milk price, while some may be more familiar with hedging feed prices.
Either way it is important to look at how the two relate to each other and, most importantly, how they relate to your profit margin.
4 Initial Steps to Risk Management
As the harvest comes to an end and the winter months approach, now is a great to begin your risk management planning. Unlike the changing seasons, risk management opportunities are much less predictable, so you can’t always implement your strategy at the same time each year. But it is good to have a set time to review strategy each year. I recommend setting aside some time in the upcoming months to review your risk management strategy or discuss your options if risk management is new to your operation. Below are some steps to get started or revamp your risk management strategy.