Method and system for contracting producer milk on a class III basis

• US 8,438,093 B1
• Filed: 10/05/2010
• Issued: 05/07/2013
• Est. Priority Date: 10/22/2009
• Status: Expired due to Fees

• Current Assignee: Wells Enterprises, Inc.
• Original Assignee: Wells Enterprises, Inc.
• Inventors: Palmer, Brian R.
• Primary Examiner(s): NGUYEN, TIEN C
• Application Number:
  US12/897,865
• Time in Patent Office: 945 Days
• Field of Search: 703/11, 705/26.1, 705/36, 705/35, 705/37, 705/38, 705/500, 705/4, 705/80
• US Class Current: 705/36
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/08 Insurance
• CPC Class Codes: G06Q 50/04 Manufacturing
• CPC Class Codes: Y02P 90/30 Computing systems specially adapted for manufacturing

Abstract

A system and method to: Protect the process used to hedge Class II handler milk price exposure and to allow the Class II handler to control the use of the process for its customers, producers, or others who are deemed suitable to the Class II handler and are willing to compensate the Class II handler to utilize the process for their hedging requirements. In one aspect of the invention, the Class II handler will be able to offer to its customers a way to transparently hedge (or set) its milk price as a component of its finished goods cost in a fashion that is correlated in accordance to all FASB and Sarbanes-Oxley financial reporting requirements, and provide a competitive advantage over others. The system and method can be applied in analogous ways to buyers and suppliers of different components used for different finished goods.

Claims

1. A method for a buyer to manage economic risk regarding purchase from suppliers of one or more components to produce a finished product for commercial sale comprising:

a. providing a computer configured to determine a contract price for the one or more components of the finished product based on a calculated compensating factor for reducing volatility of a market providing adequate volume to offset price risk for the one or more components of the finished product;

b. executing a forward contract indexed on a regulated pricing schema for the one or more components outside the regulated class of the buyer between the buyer and one or more suppliers for supply of at least one of the components to the buyer according to mutually agreeable terms which include contract pricing having;

i. at least one factor tied to the market of the component, wherein market pricing of the component;

1. has some volatility;

but

2. has a reasonably liquid derivatives market related to it;

ii. a compensation factor to adjust the contract pricing to reduce volatility in the market price;

c. hedging by the buyer against the contract pricing by purchasing derivatives in the derivatives market after confirming a high correlation between the contract pricing and the derivatives pricing according to the compensation factor calculated by the computer.

2. The method of claim 1 wherein the component is a milk component, the buyer is a Class II milk handler, and the suppliers are milk producers.

3. The method of claim 2 wherein the market pricing is indexed to Class III milk prices and the compensation factor is a Fixed Producer Price Differential relative to Class III milk prices.

4. The method of claim 3 wherein the Fixed Producer Price Differential is determined by an average of regulated producer price differentials for substantially longer than a one month period of time.

5. The method of claim 1 wherein the hedging is in Class III milk features.

6. A system for a buyer to manage economic risk regarding purchase from suppliers of one or more components to produce a finished product for commercial sale comprising:

a. a computer with memory medium, programming, and user interface;

b. a forward contract indexed on a regulated pricing schema for the one or more perishable components outside the regulated class of the buyer between the buyer and a plurality of suppliers of a perishable component needed by the buyer to manufacture a finished good;

c. a derivative instrument between the buyer and a derivative exchange;

d. a payment issuing component taking instructions from the computer according to data related to terms of the forward contract;

e. the programming on the computer configured to;

i. determine a contract price for the perishable component based on;

1. a market with enough liquidity to provide adequate volume to effectively offset price risk for a volume of required demand for the component;

2. a calculated compensating factor to reduce volatility of the market;

f. the derivative instrument taking a hedge position of the buyers choosing related to the same market as used to determine the contract price;

g. the payment issuing component generating a payment to each supplier based on the contract; and

h. wherein financial risk to the buyer is managed by (a) reducing risk of volatility of price paid to suppliers, (b) tying the contract price to the market that provides a hedge with a high correlation between the contract price and the hedge.

7. The system of claim 6 wherein the perishable component is a milk component, the suppliers are milk producers, the market is Class III milk market for a Class II milk handler, and the buyer is a Class II milk handler purchasing milk from the supplier to manufacture a finished product.

8. The system of claim 7 wherein:

a. the Class II milk handler ties or indexes forward contract milk prices with one or more producers to Class III regulated pricing, but with an Adjusted PPD designed to reduce volatility of the regulated PPD values; and

b. the Class II milk handler hedges the forward contract milk prices in a Class III derivatives market in a manner that has a high correlation between the forward contract milk prices and Class III derivatives prices.

9. The system of claim 6 wherein the calculated compensating factor is a Modified Producer Price Different which produces a correlated hedge within Class III milk pricing.

10. The system of claim 7 wherein the Class II milk handler can manage risk by choosing to pool milk during any given month to offset any spread between Class II (competitors regulated milk price) and Class III (the forward contracted milk price).

11. The system of claim 7 wherein the Class II milk handler uses the correlated forward contract and the hedge to establish relationships with business partners using the high correlation between the forward contract milk prices and the hedge.

12. The system of claim 7 wherein the computer provides computerized record management and calculation of payments and settlements between stakeholders of the forward contract.

13. A method for a Class II milk handler to manage economic risk regarding purchase of a milk component from one or more milk producers to produce a finished product for commercial sale comprising:

a. providing a software system executed on a computer for determining a contract price for one or more milk producers for producing a finished product based on a calculated compensating factor for reducing volatility of a market having sufficient volume to offset price risk for the one or more components of the finished product;

b. executing a forward milk purchasing contract between the Class II milk handler and the one or more milk producers according to mutually agreeable terms which include contract pricing having;

i. the compensating factor tied to a market of the milk component, wherein market pricing of the milk component is indexed to Class III milk prices using the software system executed on the computer;

ii. a Fixed Producer Price Different calculated by the software system executed on the computer using regulated producer price differentials for substantially longer than one month to adjust the contract pricing to reduce volatility in the market pricing;

c. hedging by the Class II milk handler against the contract price by purchasing Class III milk features in a Class III derivatives market after confirming a high correlation between the contract pricing and the Class III derivatives pricing using the software system on the computer.

14. The method of claim 13 wherein the high correlation using statistical linear regression is at least 0.85.

15. The method of claim 13 further comprising a payment issuing component taking instructions from a computer according to the mutually agreeable terms and generating a payment to each milk producer based on the forward milk purchasing contract.

16. A system for a buyer of milk product to manage economic risk associated with the purchase of one or more components of milk from a milk producer to produce a frozen dairy product for commercial sale comprising:

a. a software system executed on a computer;

b. a forward contract setting forth terms of agreement between a Class II milk handler and milk producer, the forward contract being executed between the Class II milk handler and the milk producer to acquire a milk component to manufacture a frozen dairy product;

c. a derivative instrument held between the Class II milk handler and a derivative exchange;

d. a contract price for the milk component based on a Class III milk market for the Class II milk handler having sufficient liquidity and volume to effectively offset any price risk associated with an acquisition of a volume of the component adequate to meet demand;

e. the contract price calculated by the software system or the completer based on a Modified Producer Price Differential having a correlated hedged with a Class III milk price, the Modified Producer Price Differential calculated;

f. a hedge position acquired by the derivative instrument held by the Class II milk handler, the derivative instrument being correlated to the Class III milk market for the Class II milk handler and the forward contract milk prices to determine the contract price;

g. a payment based on the contract price issued to the milk producer by execution of the software on the computer;

h. wherein financial risk to the Class II milk handler is managed by reducing risk of volatility of the contract price paid to the milk producer and tying the contract price to the Class III milk market for the Class II milk handler that provides the hedge with a high correlation between the contract price and the hedge calculated by the software executed on the computer system.