Post on 25-Feb-2016
description
Innovative Dairy Solutions
Some Issues ForNonfat Dry Milk Price Discovery
Craig Alexander2013 Dairy Economist Workshop
Boston
O-AT-KA - Then & Now
...1959
Today…
Value-Added ProductsBottled RTD Coffee
&Tea
Bottled Cream Liquor Cocktails
Canned Coffee & Energy Drinks
Canned Ethnic Beverages
Bottled Flavored Drinks
Canned Nutritional Beverages
Canned Evaporated Milk
Canned Pet Milk Replacers
Milk Protein Concentrate Drinks &
Shakes
Packaging OptionsAlumi-Tek Bottles
Glass BottlesSteel Cans
Aluminum Cans
Nonfat Dry Milk Confusion
What is the Price – this past week: CME: $1.70 Friday close (weekly avg - $1.715)Price Survey Reports (previous week): DMN: Central States – $1.75 avg “Mostly” $1.72 DMN: Western – $1.69 mostly NDPSR - $1.6049 California CWAP – $1.55 NFDM Futures – May close on Friday - $1.6470 International (bi-weekly):
DMN – Oceania $2.13 EU $1.86 gDT Auction - $1.94
The Nonfat Price Loop Nonfat pricing is key to the issue
Past/Present industry practice: DMN – prior to NASS - widespread use but in era
of less volatility Not well documented and backwards looking
Use of NASS/CWOP The “loop” - Last week’s price reported
this week, sets next weeks price which feeds the following weeks price survey which sets the next weeks price that all feeds into the Class IV price at month end……..
Movement is even slower –
Does it Matter? For the U.S. as a whole:
More difficult pricing for exporting – almost half of US powder exported now
Alignment with export markets more difficult Increasing value at risk for buyers and
sellers a little futures activity to hedge Price volatility exacerbated – the more the
lag the slower the correction Resources misallocated Class II lags excerbated and creates
additional issues
Does it Matter? For us at O-AT-KA:
Difficult to plan and hedge for our products like evaporated milk based on Class IV
Difficult for customers of our Class II products – can’t forward price the ingredients – and they have alternatives
Difficult for our farmers – increasing amount of basis risk using Class III
Nonfat Causes Problems with Class IV and Class II:
Class IV is made up of butterfat and nonfat solids values driven by Butter and Nonfat dry milk pricing
Nonfat pricing creates some Class IV Pricing problems: Nonfat dry milk prices are confused (butter is
better) A major Class IV supply area is on a different price
formula using CWAP – California Farmers do not see Class IV valuation directly –
creates additional confusion and lack of interest from producers
Survey lags and lack of timely price discovery leads to less ability to manage risk – futures liquidity
Futures Open Interest for Nonfat is weak but..
2010
2013
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
Butter NFDM
Class IV Open Interest is really bad
2010
2013
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Class III Class IV
Cla
ss I
II
Breaking the Loop Ideas for change:
Industry practice – use CME? What’s old is new again? Butter seems to work “better”
Last week’s average or date of order of CME sets this week’s selling price
Correlation between CME spot butter and NASS is .97
With NASS ndm vs. Central States : .87 and vs. CME: .62
NASS nonfat lags both CME and Central States prices(Jan 2011-April 2013
1 13 25 37 49 61 73 85 97 109121$1.00$1.20$1.40$1.60$1.80$2.00$2.20$2.40
CME butterNassNASS Butter
tracks CME much more closely and quicker
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103109115121$1.00
$1.10
$1.20
$1.30
$1.40
$1.50
$1.60
$1.70
$1.80
$1.90
NASSCntrl StateCME
Breaking the Loop Ideas for changing nonfat:
Industry practice – use CME? What’s old is new again? No regulation will enforce
use Industry needs to find
credibility between buyers and sellers
Need to build liquidity – trades on CME are few (but getting better)
Use electronic – anonymous Get rid of extra grade Others ways to facilitate?
What if ? Other ideas?
U.S. Style gDT? Interesting auction set up – takes time to
administer … every day… every week? Just go back to DMN but improve?
ADPI working on suggestions for improvements to reports
Use futures – Use as is? Use a physical contract – try to peg contracts to
that price?
Dairy Innovation Center Study Mike McCully