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Managing Risk for Stability and Growth

Managing Risk for Stability and Growth. Dr. Marin Bozic MMPA/UMN-Extension Dairy Management Workshops February 5-6, 2013. A real problem…. But it hurts to leave money on the table…. Start with the end in mind. Retirement without debt? Prevent catastrophic losses?

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Managing Risk for Stability and Growth

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  1. Managing Risk for Stability and Growth Dr. Marin Bozic MMPA/UMN-Extension Dairy Management Workshops February 5-6, 2013

  2. A real problem…

  3. But it hurts to leave money on the table…

  4. Start with the end in mind. • Retirement without debt? • Prevent catastrophic losses? • Gives me headaches, but necessary evil? • Chase the highs, beat the market? • Grow faster?

  5. Three and a half strategies • Hedge early, hedge often. • LGM-Dairy • Farm bill 3.50. Hedging for growth

  6. Hedge early, hedge often

  7. Hedge early, hedge often

  8. Hedge early, hedge often

  9. Hedge early, hedge often

  10. 2006-2012 returns to at-the-money put options 1 month ahead: Cost: $0.19/bu Payout: $0.16/bu 3 months ahead: Cost: $0.68/bu Payout: $0.79 6 months ahead: Cost: $0.95/bu Payout: $1.33/bu 9 months ahead: Cost: $1.13/bu Payout: $1.59/bu

  11. Hedge early, hedge often

  12. LGM-Dairy

  13. LGM-Dairy

  14. LGM-Dairy

  15. LGM-Dairy

  16. Farm bill Warning: Results presented here are preliminary. Further research is needed before analysis of farm level impacts is tested enough to be presented publicly for policy analysis and debate purposes. Results presented here are given exclusively for participants of MMPA/UMN-Extension Dairy Management Workshops. No permission is granted or implied for disseminating these results further without explicit permission by Dr. Bozic.

  17. Farm bill • Two alternatives: • Dairy Security Act • Goodlatte-Scott Amendment

  18. Subsidized Margin Insurance • Official name: Dairy Producer Margin Protection Program (PDMPP) • Two layers: • Basic Margin Protection – No-cost protection at $4.00 margin • Supplemental Margin Protection – Can buy up from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)

  19. Subsidized Margin Insurance

  20. Subsidized Margin Insurance

  21. Subsidized Margin Insurance

  22. Subsidized Margin Insurance

  23. House bill - Farm with 150 cows

  24. Comparing 6-Year Net Revenue for 450 cows farm:DSA vs. Goodlatte-Scott 2007-2012

  25. Hedging for Growth • Profits from hedging? • Good broker that can beat the market? • Mispriced Class III milk options? • Subsidized LGM-Dairy insurance? • Farm Bill participation? • But there is another strategy too… • Using risk management to grow your operation faster • With solid milk marketing plan that delivers stability, your banker will be more willing to accept higher leverage

  26. thank you

  27. Managing Risk for Stability and Growth presented at the Dairy Management Workshops Tuesday, February 5, 2013 St. Joseph, MN Wednesday, February 6, 2013 Rochester, MN Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities You may download this presentation at http://marinbozic.info/

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