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Three strategies to reduce your margin account funding requirements-- or even eliminate them all together. By Katie Krupa, Rice Dairy In recent months, milk prices have declined, and producers acrossthe country are starting to feel the pinch. The 2011 average Class III price was $18.36, which compares to theJanuary-April 2012 average price of $16.14. Unfortunately, theshort term outlook doesn"t look any better. The Class IIIfutures for May-August 2012 are currently averaging around $14.75. Because of this downturn, many dairy producers are looking intorisk management strategies and are concerned with the need to funda margin account when working with a broker. Below are somestrategies to consider to reduce your margin account fundingrequirements or even eliminate them all together. 1. Buy put options through a broker. When you buy put options, you are getting a level of priceprotection for a set amount of premium. If you are buying putoptions through a broker, you will need to pay the full premiumamount (for all months you are contracting) upfront, but you willnot be required to add more money to your account if the marketshould change. This allows you to protect your milk price for a setamount of money, and, if the milk price increases, you"ll beable to benefit from the higher price (and you won"t have toadd more money to your brokerage account). For example, a July-December $14.00 put option costing around 30cents would require you to contribute around $3,600 ($.30 x 2000cwt. x 6) to your brokerage account for 200,000 pounds of milk permonth. Another strategy is to purchase what"s commonly called a‘put spread." When you purchase a put spread, you areactually buying a put, and at the same time selling a put at alower level. This strategy offers limited price protection. Itworks well for some producers because they are able to get a higherlevel of price protection for a lower premium, but the protectionis limited. If the price drastically declines, the producer wouldonly be protected for a portion of the decline. For example, a July-December $15.00/$14.00 put spread (buying the$15.00 put, and selling the $14.00 put) costing around 35 centswould require you to contribute around $4,200 ($.35 x 2000 cwt. x6) to your brokerage account for 200,000 pounds of milk per month.This strategy offers price protection between $15.00 and $14.00,but nothing below $14.00. So, if the Class III price should settleat $12.00, you only gain the $1.00 between ($15.00 and $14.00) lessthe 35 cent premium and brokerage commissions and fees. Again, withthis strategy, you will never have to add more money to yourbrokerage account because if the price should decline, your gainsfrom the $15.00 put will offset your losses from the $14.00 put. 2. Hedge through your cooperative or milk plant. Several cooperatives and milk plants offer risk management hedgingopportunities for their dairy producers. While some only allow youto fix your price, others have diverse milk contract offerings andeven feed hedging strategies. When hedging through co-ops or milkplants, typically no money is due upfront; rather, any money owedor due is adjusted in the milk check for the month the milk iscontracted. This allows producers to hedge their milk (or evenfeed) without having to lay out funds upfront. 3. Take advantage of Livestock Gross Margin Insurance (LGM) whenyou can. Since this option is not currently available, I will keep thisshort. LGM offers coverage on the milk-feed margin for one month ora series of months, and a premium payment is due. The nice thing isthat the premium payment is due at the end of the insured months.Unfortunately, however, funding for the program has been fullyutilized, so producers cannot currently use this strategy. Regardless of your cash availability, there may be an option ormultiple options available. I suggest connecting with aprofessional to assess your risk management needs, availablehedging options and funding sources. Katie Krupa is the Director of Producer Services with Chicago-basedRice Dairy, a boutique brokerage firm offering guidance, analysis,and execution services on futures, options, spot and forwardmarkets. If you are interested in learning more, Katie offersmonthly webinars on the basics of risk management. You can reachKatie at klk@ricedairy.com.Visit . There is risk of loss trading commodity futures and options. Past results are not indicative of future results. We are high quality suppliers, our products such as Sealed Glass Jars Manufacturer , Wine Glass Gift Sets for oversee buyer. To know more, please visits Glass Essential Oil Bottles.
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