A COMPARISON OF CASH MARKET MILK INCOME WITH INCOME FROM SELECTED FORWARD PRICING STRATEGIES
Applied Research
John Campbell
EXTENSION AREA SPECIALIST
Lewisburg
Abstract
Milk pricing strategies using futures and options offer dairy producers opportunities to stabilize and/or increase income. Futures and options prices were collected at mid-month for each of the twenty-four contract months for each contract from January 2006 through December 2009. Four pricing strategies were applied to actual production and mail box prices on a Tennessee dairy farm. These strategies were (1) selling futures, (2) purchasing put options nearest to, but under the futures price, (3) selling futures and purchasing call options near $1.25 over the futures price, and (4) purchasing put options $1.00 under the futures price and selling call options $1.00 over the futures price. Accumulative income was compared when the futures price for a contract first reached $12.00 per hundredweight and at $1.00 intervals through $20.00. Selling futures at first opportunity above $12.00, $13.00, $14.00, and $15.00 resulted in accumulated income less than staying totally in the cash market. Selling futures at first opportunity above $16.00, $17.00, $18.00, $19.00, and $20.00 resulted in accumulated income 2%, 6%, 10%, 13%, and 14% respectively above the cash market. For individual contract months, opportunities were available 37 of 48 months to top the cash market when selling futures, 33 months when buying put options, 33 months when selling futures and buying call options, and 39 months when buying put options and selling call options. However, there was no consistency as to which month of each contract afforded these opportunities.
Poster has NOT been presented at any previous NACAA AM/PIC
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Authors: J. C. Campbell
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Campbell, J. Area Farm Management Specialist, University of Tennessee Extension, Tennessee, 38402