Milk – That’s One Illiquid Liquid

We just so happened to stumble upon the table below courtesy of the Food and Agriculture Organization of the United Nations showing a nice breakdown of the dollar value of the top 20  agriculture “crops” produced around the world in 2012 (the last year of data). Who knew milk is the most valuable “crop” produced in the world, or that the Agriculture bellwethers in the futures space – Wheat and Soybeans – are each less than half the value of the meats (cattle, pig, and chicken).  Or that tomatoes outsell potatoes.

RankCommodityBillionsProduction (MT)
1Milk, whole fresh cow $187.28 625,753,801
2Rice, paddy $185.58 719,738,273
3Meat indigenous, cattle $169.48 62,737,255
4Meat indigenous, pig $166.80 108,506,790
5Meat indigenous, chicken $132.09 92,730,419
6Wheat $79.29 670,875,110
7Soybeans $60.69 241,841,416
8Tomatoes $59.11 161,793,834
9Sugar cane $57.86 1,832,541,194
10Eggs, hen, in shell $54.99 66,372,549
11Maize $53.60 872,066,770
12Potatoes $48.77 364,808,768
13Vegetables, fresh nes $46.14 269,852,343
14Grapes $38.34 67,067,129
15Milk, whole fresh buffalo $38.30 97,417,135
16Cotton lint $37.10 25,955,096
17Apples $31.88 76,378,738
18Bananas $28.21 101,992,743
19Cassava $25.69 262,585,741
20Mangoes, mangosteens, guavas $25.25 42,139,837

But we kept coming back to Milk being worth the most “moo-la”, that was utterly interesting (ok, we’re done with the cow puns), and we went searching for some more data, finding an update on Milk production from the USDA:

Milk production in the 23 major States during March totaled 16.7 billion pounds, up 1.1 percent from March 2013. Production per cow in the 23 major States averaged 1,959 pounds for March. The number of milk cows on farms in the 23 major States for March was 8.51 million head, 1,000 head more than February 2014. The average number of milk cows in the United States during the quarter was 9.22 million head.

Milk Production Q1 2014Chart Courtesy: USDA

A single cow produces almost 2,000 pounds of milk by itself… Good to know, but hard to believe until we found out robots were involved via the New York Times.

“Something strange is happening at farms in upstate New York. The cows are milking themselves.

Desperate for reliable labor and buoyed by soaring prices, dairy operations across the state are charging into a brave new world of udder care: robotic milkers, which feed and milk cow after cow without the help of a single farmhand.

Robots allow the cows to set their own hours, lining up for automated milking five or six times a day — turning the predawn and late-afternoon sessions around which dairy farmers long built their lives into a thing of the past.

With transponders around their necks, the cows get individualized service. Lasers scan and map their underbellies, and a computer charts each animal’s “milking speed,” a critical factor in a 24-hour-a-day operation.

The robots also monitor the amount and quality of milk produced, the frequency of visits to the machine, how much each cow has eaten, and even the number of steps each cow has taken per day, which can indicate when she is in heat.”

 

The future is here!

So the milk futures market given milk-bots and $180 Billion in global production each year must be huge, right?  Not even close… as it turns out; the Class III Milk Futures had a Volume of about 2900 across futures and options yesterday, and an Open Interest of about 107,000 contracts. Compare that with Corn at 500,000 contracts yesterday and 2.7 million in open interest, and you can see we’re talking about an illiquid liquid.

So why isn’t there more Milk hedging and the speculators to take the other side?

Well, there is at least one professional speculator in the Milk space, Dairy focused CTA Schindler Capital Management, which just so happens to be up 28% on the year {past performance is not necessarily indicative of future results}. The problem is the CTA isn’t open for new customers because of capacity constraints, based on the fact that the market is just too illiquid.

And why isn’t there more hedging of that $180 Billion in exposure? Well – for one, a big component of the milk price is the price of the feed they give the cows, so a farmer could hedge the feed price instead of the milk price, using Corn or Soybean futures. Further, it doesn’t lend itself to a perfect commodities futures contract. A good futures commodity contract is perfectly transferrable – (a bushel of Corn is a bushel of Corn), cheaply transportable (a train car full of Corn), not easily perishable (Corn can sit in a silo for quite some time), and with a delivery hub close to production.  Milk isn’t cheaply transported and is highly perishable, requiring refrigerated trucks and so forth.  It’s also in nearly every corner of the world – making the delivery of a futures contract a dicey thing. What if it spoils en route?  But the bigger issue is it is produced in almost every corner of the world and that production is highly fragmented (got a cow, you’re in the milk business), leading to less big corporate entities who need to hedge millions or tens of millions of dollars of productions.  There’s also this little PR problem to overcome: “Dairy Farmers of America agrees $46m CME price fixing settlement

So don’t hold your breath waiting for the Milk futures market to explode – we’ll probably see Chicken futures before then.

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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