Farm & Risk Management Team Milk Marketing Manager A Spreadsheet for the Ex- Post Evaluation of Milk...

Farm & Risk Management Team

Milk Marketing Milk Marketing ManagerManager

A Spreadsheet for the Ex-A Spreadsheet for the Ex-Post Evaluation of Milk Post Evaluation of Milk

Marketing StrategiesMarketing Strategies

Kevin Bernhardt, UW-Extension and Margo Rudstrom, West Central Research and Outreach Center, Univ. of MN


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


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 2000-2006– Total revenue– Price– Variability

• Allows the testing of variable strategy options including PUTS, Forward Contracts and combinations

• Allows the testing of market timing


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

10

12

14

16

18

20

22

1 2 3 4 5 6 7 8 9 10 11 12

Average

70th %tile

80th %tile

90th %tile

Maximum

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Monthly Announced Price Overall Average


$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Cash With Mrkt

(40,000)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

J-00

J-01

J-02

J-03

J-04

J-05

J-06

Months

Marketing Gain/Loss

TR Low to High Range per Month With and

W/O Marketing

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

($200,000)

($150,000)

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

J-00

J-01

J-02

J-03

J-04

J-05

J-06

Months

Cumulative Marketing Gain/Loss

FC 100% at $10.00 Trigger


$11.00 PUT for $.15

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Cash With Mrkt Desired Revenue

(2,000)

0

2,000

4,000

6,000

8,000

10,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

$0$5,000

$10,000$15,000

$20,000$25,000

$30,000$35,000

$40,000$45,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


TR Low to High Range per Month With and W/O Marketing

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


$12.00 PUT for $.25

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


(2,000)

0

2,000

4,000

6,000

8,000

10,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months



$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000



$13.00 PUT for $1.75

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


(10,000)

(5,000)

0

5,000

10,000

15,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

$0$20,000

$40,000$60,000

$80,000$100,000

$120,000$140,000

$160,000$180,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months



$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000



FC 10%, 15% and 25% at 50th, 70th and 90th %-tile

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


(12,000)

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

($30,000)

($20,000)

($10,000)

$0

$10,000

$20,000

$30,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months



$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000



FC 10%, 15% and 25% at 50th, 70th and 90th %-tilePlus an $11.00 PUT for $.15

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months



$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000



FC 10%, 15% and 25% at 50th, 70th and 90th %-tilePlus an $12.00 PUT for $.25

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

($10,000)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months



$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000



Some ResultsStrategy TR Gain Price St Dev, TR SD, Price

11.00 PUT for $.15 24,737 12.37 7,974 2.2812.00 PUT for $.25 34,422 12.40 8,085 2.3113.00 PUT for $1.75 46,205 12.44 4,666 1.33FC 10, 15 & 25% at 50th, 70th, & 90th %-tile

23,521 12.21 6,991 2.00

FC and 11.00 PUT 1,217 12.29 6,426 1.84FC and 12 PUT 10,902 12.32 6,530 1.87No Marketing, Strictly Cash Result

NA 12.29 8,531 2.44


FC 10, 15 & 25% at 50th, 70th & 90th %-tile

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

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](10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss


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



($23,521) ($16,907) ($9,989)

FC 10, 15 & 25% at 50th, 70th, & 90th %-tile


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


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!!


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 Marketing for a higher price is a wholly different exercise than wholly different exercise than marketing to reduce price risk!!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


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).


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”


Program Status

• Program is large– Three linked spreadsheets, 24.4 megabytes

• Too much to email• 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!


Program Status

• If you want it, let me know!

Kevin Bernhardt

608 342-1365

[email protected]

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