Keep in mind that the main benefit of options is not to increase overall gross income, but to reduce variability of income. This publication explains how dairy producers can use put options in their operations. To effectively use put options, dairy producers need to know their cost of production, their basis, the strike price, the premium, and their trading costs. Definitions Cost of production Dairy producers need to thoroughly understand their cost of production. Only then can they know if a put option is locking in a profit for their milk.
Cost of production includes all expenses involved in producing milk.
Fixed costs, such as depreciation and interest on equity and value for unpaid labor, should also be considered. For a description of these costs and how they are calculated, refer to The Kentucky Farm Business Program 1997 Annual Summary , Agricultural Economics Extension Series, No. The basis varies by region of the country and, to a lesser degree, the individual farm. Ind. The months in the table are when the BFP is announced. Keep in mind that cash prices lag behind the BFP by two months.