FTSE Mondo Visione Exchanges Index:
Merc Lauds USDA On Renewal Of Dairy Options Pilot Program - USDA Announces Second Round Of Innovative Risk Management Tool
Date 04/08/1999
.
The Dairy Options Pilot was launched June 1998 as a cost-share program for 37 counties in seven states that the RMA had selected. Under the program, dairy farmers received the opportunity to learn how futures and options markets work and to buy put option contracts to insure a minimum price for their milk. Put option premiums and broker commissions are subsidized by the RMA, so that the program is almost risk-free for producers.
"The expansion and success of the USDA's program is very exciting for the CME and the dairy industry," said CME Board Member and Dairy Products Committee Co-chairman Robert J. Prosi. "It indicates how important our markets are becoming to producers that must cope with increasing price risk associated with more volatile dairy markets. BFP milk put options are ideal for dairy producers - giving them the ability to set a floor or minimum price if the market should fall, but do not limit the upside price opportunity if the market should rise during the coverage period."
The CME's basic formula price (BFP) milk options are available in three contract sizes-200,000 pounds, 100,000 pounds and 50,000-pound mini-options-tailored to meet the needs of both large and small milk producers. Dairy farmers may choose a combination of any of the CME's options to exercise their risk management under DOPP.
Each of the CME's smaller, 50,000-pound options would provide risk management for one tanker load of milk or the approximate monthly production of 35 cows. The 100,000-pound size would cover 70 cows or two tanker loads, while the 200,000-pound contract size represents four tanker loads or approximately 140 cows' production.
BFP milk contracts at the CME are currently available for every calendar month from July 1999 through May 2000. Open interest in BFP futures and options traded on the CME has grown to more than 8,000 contracts as of July 30. Together, the open interest represents 1.6 billion pounds of milk.
The USDA's program lasts up to one year for each group of participants. During that time, dairy producers who participate must operate a dairy that produces at least 100,000 pounds of milk over six months. The USDA pays 80 percent of the premium cost of each put option purchased by the producer as well as brokerage fees of up to $30 per put option. Producers may forward price up to 600,000 pounds of their annual milk production during the four months following training.
A unique aspect of the program is that dairy producers participate in a one-day training session in their county and then team up with RMA registered dairy brokers to place option trades. "By attending the training session and by establishing a broker relationship, participants are armed with lifetime risk management skills that will serve them well beyond the end of the program," said James Graham, Vice President of CME Commodity Marketing and Education. "This is precisely the type of innovative program that should be cloned for other farm commodities."
The CME's dairy complex is the world's largest marketplace for dairy products and trades more tonnage of milk, butter and cheese on its cash, futures and options markets than any other exchange. The CME began trading cash-settled BFP milk futures and options in May 1997. Also traded in the dairy complex are futures and options on butter, cheddar cheese, nonfat dry milk and dry whey.
According to the USDA, the following counties are taking part in the program: Round I included: California: Kings, Merced, San Joaquin, Stanislaus and Tulare. Minnesota: Goodhue, Morrison, Otter Tail, Stearns, Todd and Winona. New York: Chautauqua, Jefferson, Lewis, Oneida, St. Lawrence, and Steuben. Pennsylvania: Berks, Bradford, Chester, Crawford, Franklin and Lancaster. Texas: Hopkins, Johnson and Wood. Vermont: Addison, Caledonia, Franklin, Orange and Rutland. Wisconsin: Chippewa, Clark, Dane, Grant, Marathon and Vernon
Round II will add these counties: Arizona: Maricopa. California: Marin and Sonoma. Colorado: Weld. Florida: Okeechobee and Gilchrist. Georgia: Putnam and Morgan. Idaho: Jerome, Gooding, and Twin Falls. Illinois: Clinton and Washington.Indiana: Elkhart and Marshall. Iowa: Clayton, Dubuque and Winneshiek. Kansas: Nemaha. Kentucky: Barren and Adair. Maryland: Frederick and Carroll. Massachusetts: Franklin. Michigan: Sanilac, Allegan and Clinton. Minnesota: Wabasha and Fillmore. Missouri: Wright and Webster. Nebraska: Gage. New Mexico: Chaves, Roosevelt and Lea. New York: Wyoming and Madison. North Carolina: Iredell. Ohio: Wayne, Mercer and Ashtabula. Oklahoma: Adair and Mayes. Oregon: Marion and Washington . Pennsylvania: Lebanon and Tioga. South Dakota: Deuel and Grant.Tennessee: McMinn. Texas: Archer. Utah: Cache and Utah. Vermont: Washington. Virginia: Franklin and Rockingham.Washington: Whatcom, Skagit and Snohomish. Wisconsin: Barron and Shawano
For further information on the DOPP II Program, visit the USDA's Web site, www.usda.gov/rma/rme/