Tuesday, June 22, 2010


In the most recent "Commitment of Traders" report, most of the open interest for butter was "short." With butter in such short supply, how that could be is hard to fathom.

However, back in 2002 USDA released a report of a study on forward contracting (read that as "risk Management") http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELDEV3004563

Oddly enough, the results of USDA's own study is that farmers lost money with futures. So,why is USDA not looking at the cause of volatility.

1 comment:

  1. There is a cost to reducing exposure to risk, or price volatility. So even though the price per cwt was lower the exposure to lower lows was reduced (price smoothing). The difference in price is essentially the premium.

    "The standard deviation, which is a measure of spread in prices around the average, is $1.80 per cwt for the non-contract price and $0.51 for the contract milk. The price
    range for non-contract milk over the period is $5.71 per hundredweight, but for milk
    under contract is only $1.63. Thus, the program reduced the volatility in prices from
    $5.71 to $1.63 per hundredweight, but the average price was $0.49 per hundredweight or
    about 3.4 percent lower."