Byers Commodities Canc 090527

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Commodities 102--a follow-up presentation regarding hedging corn, SBM and milk

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  • Byers Commodities Canc 090527

    1. 1. Strategies with Corn, Soybean Meal and Milk Futures Prices Dave Byers [email_address] Galax, VA
    2. 2. Background <ul><li>Feed Cost Webinar: “Strategies to Lock in Milk and Feed Prices” </li></ul><ul><li>Archived: www.extension.org/dairy cattle </li></ul><ul><li>Presentation: www.slideshare.net </li></ul><ul><ul><li>Today’s presentation will also be available for viewing and/or downloading </li></ul></ul><ul><ul><li>Commodity report upon request – no charge </li></ul></ul><ul><li> </li></ul>
    3. 3. PRELUDE
    4. 4. Got Lamborghini?
    5. 5. Maria Bartiroma Interviews Jim Rogers for Business Week
    6. 6. Outline <ul><li>Market Analysis </li></ul><ul><li>Market Trends </li></ul><ul><li>Price Risk Management Strategies </li></ul>
    7. 7. MARKET ANALYSIS
    8. 8. What Lies Ahead? <ul><li>The big question in the financial markets is, ”What lies ahead?” </li></ul><ul><li>People want a financial crystal ball </li></ul><ul><li>What will the price of corn, SBM and milk be </li></ul><ul><ul><li>3 months? </li></ul></ul><ul><ul><li>6 months? </li></ul></ul><ul><ul><li>12 months? </li></ul></ul>
    9. 9. What Lies Ahead? <ul><li>“ How would you like to have a copy of the WSJ one year in advance (i.e., May 27, 2010)?” </li></ul>
    10. 11. What Lies Ahead? <ul><li>Nevertheless, there are secular systems that attempt to predict future market action </li></ul><ul><li>Two main schools in the financial markets: </li></ul><ul><ul><li>Fundamental Analysis </li></ul></ul><ul><ul><li>Technical Analysis </li></ul></ul>
    11. 12. Fundamental Analysis <ul><li>Looks at economic factors, known as fundamentals </li></ul><ul><ul><li>Dollar </li></ul></ul><ul><ul><li>Acres coming out of CRP </li></ul></ul><ul><ul><li>Number of ethanol plants coming into production </li></ul></ul><ul><li>In short, it examines the forces of supply and demand </li></ul>
    12. 13. Technical Analysis <ul><li>Looks at the price movement of a commodity and uses this data to predict its future movements </li></ul><ul><li>Technical analysts make extensive use graphs of data in an effort to “make the invisible visible” </li></ul><ul><li>Hence, they are often called chartists </li></ul>
    13. 14. Key to Technical Analysis <ul><li>Identifying a trend </li></ul><ul><li>In fact, technical analysis can be summed up in the saying, “The trend is your friend.” </li></ul><ul><li>TAs strongly adhere to the premise future price movement is MORE LIKELY to be in the same direction as the trend </li></ul>
    14. 15. MARKET TRENDS
    15. 16. Three Trends <ul><li>Primary </li></ul><ul><li>Secondary </li></ul><ul><li>Minor </li></ul>
    16. 17. Three Trends <ul><li>Primary--tide </li></ul>
    17. 18. Three Trends <ul><li>Primary--tide </li></ul><ul><li>Secondary--waves </li></ul>
    18. 19. Three Trends <ul><li>Primary--tide </li></ul><ul><li>Secondary--waves </li></ul><ul><li>Minor--ripples </li></ul>
    19. 20. Three Trends <ul><li>For investors, it is most important to be aware of the direction of the primary trend </li></ul>
    20. 21. Three Trends <ul><li>For investors, it is most important to be aware of the direction of the primary trend </li></ul><ul><li>Corrections within the primary trend (the secondary trends) can be disconcerting and often expensive interruptions to one's position </li></ul>
    21. 22. Three Trends <ul><li>For investors, it is most important to be aware of the direction of the primary trend </li></ul><ul><li>Corrections within the primary trend (the secondary trends) can be disconcerting and often expensive interruptions to one's position </li></ul><ul><li>The minor trend is the one the public gives most attention to, yet the minor trend is least important to the serious investor. </li></ul>
    22. 24. Secondary Trend ??? $63.00
    23. 25. The Primary Trend: DJIA (2007 - 2009)
    24. 26. Primary Trend and MAs <ul><li>Moving averages often used to determine the </li></ul><ul><li>primary trend: </li></ul><ul><li>Grains </li></ul><ul><ul><li>Long term MA = 65 week </li></ul></ul><ul><ul><ul><li>- Above 65 week MA = Bullish Primary Trend </li></ul></ul></ul><ul><ul><ul><li>- Below 65 week MA = Bearish Primary Trend </li></ul></ul></ul>
    25. 27. Primary Trend and MAs <ul><li>Grains </li></ul><ul><li>Long term MA = 65 week </li></ul><ul><ul><li>Above 65 week MA = Bullish Primary Trend </li></ul></ul><ul><ul><li>Below 65 week MA = Bearish Primary Trend </li></ul></ul><ul><li>Milk </li></ul><ul><li>Long term MA = 65 month </li></ul><ul><li>Short term MA = 15 month </li></ul><ul><ul><li>Above 15 month MA = Bullish Primary Trend </li></ul></ul><ul><ul><li>Below 15 month MA = Bearish Primary Trend </li></ul></ul>
    26. 31. &quot;THERE WILL BE BLOOD!&quot;
    27. 32. $9.31
    28. 33. Basic Tenets of Primary Trend <ul><li>The extent and duration of the primary trend cannot be predicted beforehand </li></ul><ul><li>The primary trend will overshoot (farther than almost anyone imagines) $9.31/CWT </li></ul><ul><li>The primary trend cannot be manipulated </li></ul>
    29. 35. OPEC
    30. 36. The Primary Trend: DJIA (2007 - 2009)
    31. 37. The Primary Trend: DJIA (2007 - 2009) THE ADMINISTRATION
    32. 38. Comparison of 2009 March Corn and Milk Prices
    33. 39. Comparison of 2009 March Corn and Milk Prices CWT
    34. 40. PRICE RISK MANAGEMENT
    35. 41. Dairy Profitability <ul><li>COP ($/cwt) </li></ul><ul><li>Production (cwt) </li></ul><ul><li>Farmgate price ($/cwt) </li></ul>Farmgate price ($/cwt) COP ($/cwt) Difference ($/cwt) x cwt multiplier = profitability
    36. 42. Multiplier Effect <ul><li>Good--make lots of money </li></ul><ul><li>Bad--lose lots of money </li></ul>Farmgate price ($/cwt) COP ($/cwt) Difference ($/cwt) x cwt multiplier = profitability
    37. 43. C1 C3 C2 Jan 01 (9.99) Jul 03 (11.78) Nov 06 (12.84) DAIRY CYCLES
    38. 44. <ul><li>DAIRY CYCLES: </li></ul><ul><li>Bad Year $11.89 (‘06) </li></ul><ul><li>Good Year $18.04 (‘07) </li></ul><ul><li>Good Year $17.44 (‘08) </li></ul>
    39. 45. Spilt Milk (the ugly side of the multiplier effect)
    40. 46. Profitability and Price for Product <ul><li>Nothing affects profitability of a </li></ul><ul><li>dairy operation like the price of milk </li></ul>
    41. 47. Profitability and Price for Product <ul><li>Nothing affects profitability of a dairy operation like the price of milk </li></ul>“We can’t do anything about the price of milk.”
    42. 48. Farming the Cycles <ul><li>Good year, good year, bad year </li></ul><ul><li>Put money away during the good times </li></ul><ul><li>Ride out the down market </li></ul>
    43. 49. Dairy Cycle (2006-2008) +/- $3.34 Standard deviation 15.79 3-year average 17.44 2008 18.04 2007 11.89 2006 Av Price ($/cwt) Year
    44. 50. Price for Product <ul><li>“ We can’t do anything about the price of milk?” </li></ul><ul><li>We can capture more $$$, but “we need to get our ducks in a row.” </li></ul>
    45. 51. PRECISION HEDGING MILK
    46. 52. Precision Hedging
    47. 53. Market Timing <ul><li>Strategically sell milk at its peak </li></ul>
    48. 54. Market Timing <ul><li>Strategically sell milk at its peak </li></ul><ul><li>Know exact points to sell </li></ul>
    49. 55. Market Timing <ul><li>Strategically sell milk at its peak </li></ul><ul><li>Know exact points to sell </li></ul><ul><li>“ TIME THE TOPS!” </li></ul>
    50. 56. Market Timing <ul><li>Strategically sell milk at its peak </li></ul><ul><li>Know exact points to sell </li></ul><ul><li>“ TIME THE TOPS!” </li></ul><ul><li>The graveyards are full of people who knew where the top was </li></ul>
    51. 57. Market Timing <ul><li>Strategically sell milk at its peak </li></ul><ul><li>Know exact points to sell </li></ul><ul><li>“ TIME THE TOPS!” </li></ul><ul><li>The graveyards are full of people who knew where the top was </li></ul><ul><li>Nobody can do it </li></ul>
    52. 58. Two Critical Objectives <ul><li>We should Never-Ever miss the best prices </li></ul>
    53. 59. Two Critical Objectives <ul><li>We should Never-Ever miss the best prices </li></ul><ul><li>Avoid the worst prices </li></ul>
    54. 60. M-I-L-K P-R-I-C-E F-L-O-O-R 50.00% <$16.28/cwt
    55. 61. M-I-L-K P-R-I-C-E F-L-O-O-R 66.67% <$18.00/cwt
    56. 62. Precision Hedging <ul><li>Never-ever miss the best prices </li></ul><ul><li>Avoid the worst prices </li></ul><ul><li>“ milk insurance” </li></ul><ul><li>Futures/options commodity instruments </li></ul><ul><li>Self-directed, online account </li></ul><ul><li>Technical analysis to enhance profits (Improve timing) </li></ul>
    57. 63. PRECISION HEDGING SBM
    58. 69. Summary <ul><li>Stay aligned with the primary trend </li></ul>
    59. 70. Summary <ul><li>Stay aligned with the primary trend </li></ul><ul><li>Avoid the big loss </li></ul><ul><ul><li>Remember, you can be wrong! </li></ul></ul><ul><ul><li>Know the risk:reward ratio </li></ul></ul><ul><ul><li>Don’t take naked positions </li></ul></ul><ul><ul><li>Reduce risk by using protective futures/options </li></ul></ul>
    60. 71. Summary <ul><li>Stay aligned with the primary trend </li></ul><ul><li>Avoid the big loss </li></ul><ul><ul><li>Remember, you can be wrong! </li></ul></ul><ul><ul><li>Know the risk:reward ratio </li></ul></ul><ul><ul><li>Don’t take naked positions </li></ul></ul><ul><ul><li>Reduce risk by using protective futures/options </li></ul></ul><ul><li>Adopt a commodity strategy that allows you to sleep at night </li></ul>
    61. 72. Strategy Comparison - - + + + + + + + + + + Precision Hedging - - - + + + + + - - - - - Marginal Buying - - - - - + + + + + Fractional Buying Cost Avoid the Worst Prices Never-Ever Miss the Best Prices System
    62. 73. Synopsis <ul><li>SBM -- Bullish </li></ul><ul><li>Corn -- Bearish </li></ul><ul><li>Milk -- Hopeless </li></ul>
    63. 75. Strategies with Corn, Soybean Meal and Milk Futures Prices Dave Byers [email_address] Galax, VA
    64. 77. Primary Trend <ul><li>Corn </li></ul><ul><li>Soybeans </li></ul><ul><li>Milk </li></ul><ul><li>Cattle </li></ul><ul><li>Stocks </li></ul><ul><li>Aluminum </li></ul><ul><li>Copper </li></ul><ul><li>Oil </li></ul><ul><li>Steel </li></ul><ul><li>Cocoa </li></ul><ul><li>Coffee </li></ul><ul><li>Cotton </li></ul><ul><li>Sugar </li></ul><ul><li>Lumber </li></ul><ul><li>Gold </li></ul><ul><li>Guns </li></ul>

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