Monday, February 22, 2010

A Spade is a Spade

(click on image to enlarge)

There is a very old expression about calling a spade a spade, meaning digging tool. Within present day dairy language we have the term "risk management." Somehow or another, by participating in the milk futures market you too could be a winner.

Apparently, milk futures are not enough. If all goes as planned, there will be cheese futures mid-2010 - or so the Chicago Mercantile Exchange (CME) hopes.

Futures are gambling. According to:

What Does Zero-Sum Game Mean?
A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.

Investopedia explains Zero-Sum Game
Options and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.

Cheese futures will require approval by the Commodities Futures Trading Commission (CFTC). We can hope that the CFTC will not approve the new gamble, because, I suspect, the dairy farm community will be left holding the bag.

In the meantime, it is best to call a spade a spade.


  1. DFA is shoving these so called "risk management" and forward contracting programs down our throats. Confidential info only given over the web site makes me wonder if it is such a good thing and honest and above board, why not send out the DFA rep to each and all farmers so that everyone could take advantage and manage their risk. *sarcasm intended*

    There have been complaints that there are only a few "players" on the CME and IF DFA can get the poor farmer to "play along", not only will it add more money to the pool, the more the "players", the harder it will be to regulate. Then, those that have been FINED before, once they are permitted to trade again are hoping to get lost in the crowd.

    What peeves me off to no end is that the USDA and other government watchdogs are either not smart enough to stay ahead of the game and police the blatent illegal, unethical activities or they are being "rewarded" for looking the other way, or either they just don't give a rat's ...

  2. One arguement I always hear is how EVERYONE had the chance to play the risk management game. Yet there are farmers out here who don't make enough each month to be able to.When I asked one of these snake oil salesmen point blank why the coops don't do the hedging on behalf of their members he dismissed me with, that wasn't how it was set up. Isn't that what the coops are supposed to do? Pool together members resources to have more power in the market place? Once again, is this something set up for just the 'chosen few'? How and who are the ones going to be that participate in cheese futures? Since we have class 3 futures why not class 1? Is this just more smoke and mirrors that isn't going to be regulated?DWCovert

  3. Unregulated derivatives are the reason the country is in the mess it is in now. And more than likely, are the reason our milk prices to the farmer are so low.

    A select few at the processor are taking the milk money from the farmer and using it to gamble. So the farmer is basically working to pay gambling debts that the processor has incurred.

  4. Does anyone know if the processors are "allowed" to tap into the equity that the farmer has provided to the processor for purposes of "risk management" *cough* gambling?

    Or do they just use a (large)portion of the profit that should rightfully be returned to the farmer?

  5. Where is the document referenced in this blog from?

  6. Did any of you ever hear of the word 'hedge'. If you don't know how to do it to lock in prices then don't knock those who do successfully.

  7. If a farmer wants to hedge, that is his business. If an employee of a processor want to hedge with his personal money, that is his business.

    But if a select few employees of processors use funds from the processor to hedge, then I have a problem. When they "win" they grant themselves huge bonuses, when they lose they lower the price they pay to the farmer to cover their bets.