Farm & Risk Management Team Milk Marketing Manager A Spreadsheet for the Ex- Post Evaluation of Milk Marketing Strategies Kevin Bernhardt, UW-Extension and Margo Rudstrom, West Central Research and Outreach Center, Univ. of MN

Farm & Risk Management Team Today’s Presentation Ex Post not Ex Ante Milk Marketing Manager Spreadsheet – What is it, What does it do Demonstration Some Results Teachables Cautions Q & A

Farm & Risk Management Team Today’s Presentation Ex Post not Ex Ante Milk Marketing Manager Spreadsheet – What is it, What does it do Demonstration Some Results Teachables Cautions Q & A

Farm & Risk Management Team Milk Marketing Manager – What is it, What does it do Calculates what the results would have been if passive Class III marketing strategies had been implemented from –Total revenue –Price –Variability Allows the testing of variable strategy options including PUTS, Forward Contracts and combinations Allows the testing of market timing

Farm & Risk Management Team Strategy Options PUTS –variable strike prices and premiums by month –variable marketing window Forward contracts –three different trigger levels per month –variable levels of contracting at each trigger –different forward contract specifications –marketing window Other –desired benchmark price –how often marketing takes place

Farm & Risk Management Team Today’s Presentation Ex Post not Ex Ante Milk Marketing Manager Spreadsheet – What is it, What does it do Demonstration Some Results Teachables Cautions Q & A

Farm & Risk Management Team Today’s Presentation Ex Post not Ex Ante Milk Marketing Manager Spreadsheet – What is it, What does it do Demonstration Some Results Teachables Cautions Q & A

Farm & Risk Management Team FC 100% at $10.00 Trigger

Farm & Risk Management Team $11.00 PUT for $.15

Farm & Risk Management Team $12.00 PUT for $.25

Farm & Risk Management Team $13.00 PUT for $1.75

Farm & Risk Management Team FC 10%, 15% and 25% at 50 th, 70 th and 90 th %-tile

Farm & Risk Management Team FC 10%, 15% and 25% at 50 th, 70 th and 90 th %-tile Plus an $11.00 PUT for $.15

Farm & Risk Management Team FC 10%, 15% and 25% at 50 th, 70 th and 90 th %-tile Plus an $12.00 PUT for $.25

Farm & Risk Management Team Some Results StrategyTR GainPriceSt Dev, TRSD, Price PUT for $.15 24, , PUT for $.25 34, , PUT for $ , , FC 10, 15 & 25% at 50 th, 70 th, & 90 th %-tile 23, , FC and PUT 1, , FC and 12 PUT 10, , No Marketing, Strictly Cash Result NA12.298,

Farm & Risk Management Team FC 10, 15 & 25% at 50th, 70th & 90th %-tile Contract purchases stopped 15 days prior to market month and triggers checked daily. [-$23,521 mrkt gain] Contract purchases stopped 90 days prior to market month and triggers checked every 10 days [-$6,890 mrkt gain]

Farm & Risk Management Team Marketing Gain Daily Check of Markets Weekly Check of Markets Every Two Week Check of Markets ($23,521)($16,015)($13,695) FC cut off 15 days prior FC cut off 60 days prior FC cut off 90 days prior ($23,521)($16,907)($9,989) FC 10, 15 & 25% at 50th, 70th, & 90th %-tile

Farm & Risk Management Team Today’s Presentation Ex Post not Ex Ante Milk Marketing Manager Spreadsheet – What is it, What does it do Demonstration Some Results Teachables Cautions Q & A

Farm & Risk Management Team Teachables How PUTS, Forward Contracts or a combination of both work –Visual of results –Specifications –Historical premiums Historical prices Historical price variability Historical price benchmarks and seasonality

Farm & Risk Management Team Teachables Impact of employing simple passive strategies: –Easy to implement Other than up front time, virtually no management time is required –Accomplishes the goal of reducing price risk/variability The more aggressive your marketing, the more price variability is reduced –Not a way to achieve a higher price –Result in periods of gain and periods of losses And yes, they are losses!!

Farm & Risk Management Team Teachables Impact of how often you check markets Impact of how close to contract month you take marketing actions Impact of changing your PUT marketing window Marketing for a higher price is a wholly different exercise than marketing to reduce price risk!!Marketing for a higher price is a wholly different exercise than marketing to reduce price risk!!

Think of Marketing in Two Levels Reduce Price Risk - Easy to do (passive) - Effective - Have to maintain long-run focus Increase Price - Difficult (active) - Time consuming - New set of skills required - Have to maintain long-run focus

Farm & Risk Management Team Cautions (Even Danger!) This is a Teaching Program not a management decision-making program –Research indicates that trading systems based on historical data are no guarantee of future performance. Park and Irwin. The Profitability of Technical Trading Rules in US Futures Markets: A Data Snooping Free Test (May 2005).

Farm & Risk Management Team Park and Irwin, 2005 “Nonetheless, the evidence provided by this study suggests a great deal of caution should be used in presenting to farmers any form of technical analysis as an effective method of predicting price movements”

Farm & Risk Management Team Program Status Program is large –Three linked spreadsheets, 24.4 megabytes Too much to Works well on CD Need to make it user friendly (this summer’s project) Stand-alone software perhaps in the future If you want it, let me know!

Farm & Risk Management Team Program Status If you want it, let me know! Kevin Bernhardt

Farm & Risk Management Team