Culturally Responsive Teaching : A Training Simulation and Discussion
Teaching Price Risk Management with Real-time Simulation
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Transcript of Teaching Price Risk Management with Real-time Simulation
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Teaching Price Risk Management with Real-time Simulation
John Van Sickle Food & Resource Economics Dept.
&
Mary Sowerby Animal Sciences Department
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Observation 1
• Many commodities –corn, wheat, soybeans,beef and pork –have a long tradition of producers using futures and options for risk management, especially in the Midwest.
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Observation 2• Some commodities (dairy in particular) and
some regions of the United States,lack tradition and “wisdom” gained from long-time useof the futures market for risk management.
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Observation 3• Result: Fear!
Based on: - lack of personal experience and - observed bad experiences of others.
• Even those with knowledge of theoretical concepts for managing risk with futures and options often:- lack the discipline or - fear implementing risk management strategies (pulling triggers).
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Milk Price VolatilityMonthly Class III Milk Prices Jan 2004 – Dec 2010
1 2 3 4 5 6 7 8 9 10 11 120
5
10
15
20
25
2004200520062007200820092010
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Range of potential outcomes highlight the risk associated with milk price
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0.00
5.00
10.00
15.00
20.00
25.00
Ave+2SD (95%)Ave+.67SD (50%)AverageAve-.67SD(50%)Ave-2SD(95%)
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Program Objectives• Teach dairy producers the concepts of risk management
with futures and options for managing their milk and feed price risk.
• Give producers the experience, ‘feel’ and knowledge of implementing risk management practices by using FACTSim with ‘real-time’ markets to make trades.
• Expose producers to risk management alternatives with Livestock Gross Margin Dairy insurance (LGM Dairy).
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Interested Clientele
• Since February, 2009, 40 people have attended one or more of 24 Dairy Risk Management meetings.– 28 dairy producers– 2 bankers– 3 feed mill managers– 3 dairy industry sales reps– 2 insurance agents– 1 journalist– 1 commodity trader
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Producer Clientele Stats
• Owned farms with between 400 and 4,000 milking cows.
• Between ages 28 and 65.• From 6 Florida counties and one Georgia county.• Some raised most of their own forage, others did
not.• All purchased grain for their cattle.• Advanced booking only previous risk management
strategy.
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Most Interested Clientele
• Core group of 4 dairy producers and one ADM sales rep were most interested. - All were college educated.- Between age 28 and 40.- 2 were partners of their own 500 cow dairy.- 1 partnered with his father (600 cows).- 1 partnered with an established producer (700 cows).
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Base Knowledge and Action
• Initially none of the participants had ever used the futures market or options for risk management of feed or milk.
• Booking feed ahead was used by some as a risk management strategy.
• None had used LGM Dairy insurance. • All accepted whatever price of milk their coop paid.
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Initial Producer Deterrents to Implementing Risk Management Practices
• Feeling that Hedging not needed when market for milk is low.
• Lack of cash flow for margin requirements and working with uninformed bankers.
• Family generational disagreements.
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Initial Producer Deterrents to Implementing Risk Management Practices
• Fear (futures market seemed riskier than accepting mailbox price).
• What if – there’s a margin call and banker pulls support, or there are missed opportunities for larger profits, etc.
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First Objective – Teach Hedging Fundamentals
• Understanding risk and its potential impact on their operation
• Hedging with futures – taking a position in a futures contract opposite to position held in the cash market
• Simple options hedge – buying puts for products you produce to protect against downside price risk. Buying calls for required inputs to protect against rising input costs
• Advanced options hedge – Fencing to lock in a range of potential price outcomes
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First Objective – Teaching Hedging FundamentalsFlorida Monthly Milk Basis
Minimum Basis '95-Present
Average Basis '95-Present
Maximum Basis '95-Present
Basis Standard Deviations '95-
Present
Coefficient of Variation '95-
PresentMonth
$2.63 $4.39 $6.67 0.96 21.82 Jan
$1.81 $4.43 $10.05 1.92 43.43 Feb
$1.79 $4.02 $7.66 1.51 37.51 Mar
($0.92) $3.55 $5.54 1.68 47.22 Apr
$0.91 $3.48 $5.88 1.35 38.90 May
$1.83 $3.69 $6.20 1.12 30.41 Jun
$0.74 $4.01 $7.16 1.81 45.10 Jul
$0.43 $4.24 $7.57 2.05 48.41 Aug
$1.68 $4.16 $8.13 1.89 45.43 Sep
$1.59 $4.85 $7.89 1.79 36.93 Oct
$2.09 $5.62 $8.93 2.17 38.64 Nov
$2.52 $4.56 $7.24 1.52 33.45 Dec
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Objective 2 – Teach market fundamentals and give producers the experience and feel of implementing
risk management strategies • Teach market fundamentals by keeping them
apprised of current outlook and highlighting factors impacting the outlook.
• Use FACTSim to give them experience at implementing risk management strategies with futures and options.
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This Presentation provides an overview of the FACTSim Financial & Agricultural Commodity Trading Simulation. Use the arrow key to move forward and back in
the presentation
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The Trade Homepage provides an overview of the status of your account. It provides a statement on your current cash position and profits, plus a summary of news items posted by the Instructor of the group.
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The Trader Homepage also shows the current status on current open positions and;
a listing of the 5 most recently queued
positions to be opened.
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Objective 3 – Expose producers to Livestock Gross Margin Insurance - Dairy
Livestock Gross Margin Insurance Dairy Cattle (LGM Dairy) provides operators of all sizes a chance to manage price risk associated with milk price and feed cost.
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Producer Changes in Risk Management
• Advanced BookingAll producers felt better prepared to make advanced
booking decisions based on: - fundamentals they learned about the markets as
they used FACTSim for trading and - discussed the markets during training sessions.
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Producer Changes in Risk Management
• Risk management with futures and options– Producers increased their use of futures and
options, but still struggled with financing margin requirements and family fears about futures and options.
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Producer Changes in Risk Management
• Risk management with LGM Dairy Insurance– The forced decision points in insurance facilitated
pulling triggers.– Previous training on risk management made it
easier to understand LGM Dairy Insurance. – All were implementing some level of risk
management with LGM Dairy Insurance.
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Conclusion 1
• Farmers are anxious to learn new risk management strategies, but need training on ‘pulling triggers’, i.e., implementing strategies.
– FACTSim helps bridge this issue.
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Conclusion 2
• FACTSim has given agricultural producers knowledge and experience for implementing new risk management strategies.
– FACTSim provides a platform for communication and training.
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Conclusion 3
• LGM Dairy Insurance is a good alternative for implementing risk management practices. - Risk management training developed the foundation for understanding and implementing LGM Dairy insurance.
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Teaching Price Risk Management with Real-time Simulation
John Van Sickle - [email protected] & Resource Economics Dept.
Mary Sowerby – [email protected] Sciences Department