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