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Pricing Milk with Contracts and Puts: Evaluating Price Risk Reduction Using Historical Class III Milk Futures and Options Data

Margaretha Rudstrom

Summary

The presenters have collaborated on the construction of a spreadsheet system, titled “Milk Marketing Manager,” that allows ex-ante evaluation of generic milk marketing strategies for the years 2000-2006. Once a strategy is set, the Milk Marketing Manager employs the strategy over the seven year period using daily Chicago Mercantile Exchange settle prices and put option premium data. Program flexibility allows users to:
- employ both forward contracting and PUT option strategies,
- set target strike prices, maximum premium, and the range of months for PUT option purchases,
- set forward contracting trigger prices at three different levels for each month, the percentage of production to be contracted at each level, and
- set the timing for marketing decisions – daily, weekly, or bi monthly.

Results visually compare with and without marketing outcomes including overall revenue, average per hundred-weight price, and measure of dispersion over the seven year period.

Milk Marketing Manager is a hands-on tool to facilitate learning of price risk management and marketing. The automatic implementation of a generic strategy is very successful in reducing price variability, especially downside variability. However, there is often no change in the overall average price over a long-run period of time. The effects of changes in trigger prices, use of puts, milk volume priced on revenue and price can be easily assessed. If increased price is the desired goal, then much more daily involvement is needed to adjust for current outlook, moving in and out of marketing positions, etc.

Details

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