LidoIsleAdvisors.com ALL RIGHTS RESERVED | 369 San Miguel Dr., Suite 300, Newport Beach, CA 92660 | Phone: 949-461-1137 PAST PERFORMANCE IS NOT NECESSARILY

LidoIsleAdvisors.com ALL RIGHTS RESERVED | 369 San Miguel Dr., Suite 300, Newport Beach, CA 92660 | Phone: 949-461-1137

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS. TRADING COMMODITY FUTURES AND OPTIONS IS SPECULATIVE, INVOLVES RISK OF LOSS, AND IS NOT SUITABLE FOR ALL INVESTORS.

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FUTURES AND OPTIONS RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS

SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN

COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RETURNS. THE VALUE OF INVESTMENTS MAY GO DOWN AS WELL AS UP.


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Lido Isle Advisors is a boutique alternative investment firm focused on serving the individual investor in selecting what we believe to be premier alternative investments.

Our expertise lies in statistical research, extensive due diligence, elite client service, and a true focus on serving the unique interests and needs of each client we have the privilege to serve.


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Risk Management for Baking Operations

By Edgard Cabanillas Associated Person Lido Isle Advisors, Newport Beach, CA


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Outline – Baking Operations Hedging

I) Introduction to Baking OperationsII) Understanding Wheat Flour MarketsIII) Basics of Futures HedgingIV) Baker’s Pricing Options (HRW)V) Baker’s Pricing Options (HRS)VI) Price ForecastingVII) About Our Company


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Part I – Introduction to Baking Operations


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Baking Operational Costs


Fixed CostsEquipment (Oven, Mixer, Cutter/ Divider)Storage Silos & BinsRent/ Mortgage (Land & Plant)

Variable CostsLabor, PersonnelIngredient (Flour, Sugar, Salt)Energy (Natural Gas, Gasoline)Distribution CostsTransportation (Gasoline)

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Primary Ingredient Costs


Baker’s Patent Flour and / or Spring Standard Patent

Flour (95 % of budget)YeastWaterDough ConditionersSugarVegetable OilSaltPreservatives

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Part II – Understanding Wheat Flour Markets


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Made from Hard Red Winter Wheat◦ HRW grown in Kansas, Oklahoma, Texas, Nebraska

Milled in Midwest and in L.A.Pricing based on Cash Markets & Futures MarketsCash Markets based on Transport Cost from

Growing areas to Mills & on Local Market Supply and Demand

Futures Markets in Kansas City Wheat FuturesMajor Suppliers: ADM, Cargill, ConAgra, Cereal

FoodProtein on Flour basis – 11.0 to 12.0 % (12mb)

Baker’s Patent Flour Market

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Spring Standard Patent Flour


Made from Hard Red Spring WheatHRS is grown in North Dakota, Minnesota, Montana

and the Canadian Prairies (CWRS)Milled in the Northern Plains, Canada and MidwestPricing based on Cash markets & Futures marketsCash Markets based on Transport Cost from Growing

areas to Mills & on Local Market Supply and DemandFutures Markets in Minneapolis Wheat FuturesMajor Suppliers – ADM, Cargill, ConAgra, General

MillsProtein on Flour basis – 12.0 to 14.0 % (12mb)

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Flour Prices vs. KC Futures Price History 1993- 2012

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Flour prices vs. Mpls Futures Price History (1993-2012)

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Flour Prices vs. Mpls Wheat (2007)

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Part III – Basics Of Futures Hedging


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Correlation between L.A. Flour Prices & K.C. Futures is 99 % (sources KCBOT & Sosland Publications)

Wheat Millers base local pricing for flour on L.A. cash HRW market and Kansas City Wheat Futures

Wheat Millers use Kansas City Wheat Futures to hedge their input wheat costs as well

Large Corporations (i.e. Safeway, Kroger, ADM, ConAgra, Cargill) use hedging programs for purchasing of many food commodities

Hedging Flour Price Risk with Kansas City Wheat Futures

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Correlation between Mpls Spring Flour Prices & Mpls Futures is 99 % (sources MGE & Sosland Publications)

Wheat Millers base local pricing for flour on Mpls cash HRS market and Minneapolis Wheat Futures

Wheat Millers use Minneapolis Wheat Futures to hedge their input wheat costs as well

Large Corporations (i.e. Safeway, Kroger, ADM, ConAgra, Cargill) use hedging programs for purchasing of many food commodities

Hedging Flour Price Risk with Minneapolis Wheat Futures

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Calculate Total Flour Usage per year, month, week

Convert Flour Usage per pound to Wheat Usage per bushel ◦ Flour (lbs) / 0.76 = Gross Wheat Volume (lbs)

Then calculateGross Wheat Volume (lbs) / 60 = Wheat Volume (bushels)

Finally calculate Wheat Volume (bushels) / 5000 = # KC Wheat Contracts

Consider Current Flour Supply Proposals & Prices vs. Historical Flour Pricing and Wheat Futures Prices

Assessing Risk & Reward

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Part IV – Baker’s Pricing Options (Patent Flour – HRW)


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Option 1 – Buy Wheat Flour @ Spot MarketOption 2 – Buy Wheat Flour for Extended CoverageOption 3 – Buy Wheat Futures as Substitute Purchase/Hedging Strategy for Wheat FlourOption 4 – Buy Wheat Futures Options as Substitute Purchase/ Hedging Strategy for Wheat FlourOption 5 - Combination of Wheat Futures & Options as Flour Hedging Strategy

Patent Wheat Flour Purchasing

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Option 1: Spot Market (2007)Bakery in L.A. buys Wheat Flour from Miller Supplier

at spot prices every week based on current market price (based on 250,000 cwts per year)

Example of this option in 2007 would have been the most expensive

Published prices (as in slide # 11) shows an increasing flour price through the duration of 2007

Total Costs of Flour Purchases (2007)- $4,787,740.38

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Bakery forward contracts flour prices with Miller Supplier for extended period of time (i.e. 12 months)

For example, Bakery & Flour Supplier agree to $ 14.90/ cwt for daily deliveries for ALL of 2007, as early January prices started at $ 14.90/ cwt

In this example, total Flour Purchase Costs for 2007 are $3,725,000.00

Savings in Flour Purchase Budget : $ 1,062,740.38

Typically, Suppliers will NOT contract out 6-12 months ahead on sales with their bakery customers

Option 2 : Forward Purchases

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Bakery can decide to use KC Wheat Futures as hedging strategy for flour purchases, while flour purchases continue weekly as per Option 1

For example, Bakery decides to buy Futures coverage in January for all of 2007 because of bullish opinion

Purchases of total 110 ctrs of KC Futures on 1/5/2007◦ KWH7 $ 4.8125/bu KWK7 $ 4.9150/ bu

◦ KWN7 $ 4.8625/bu KWU7 $ 4.9200/bu◦ KWZ7 $ 4.9950/ bu

Option 3 : Hedging with Futures (a)

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As Bakery makes Flour purchases in spot market, they lift the KC Wheat Futures hedge, thus offsetting higher costs in flour with gain in Futures markets

Total costs for Flour Purchases 2007:

$ 4,787,740.38Futures Hedge Offset : $ 910,641.24Net Costs for Flour Purchases

$ 4,787,740.38 -$ 910,641.24

$ 3,877,099.14

Option 3 : Hedging with Futures (b)

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Please note that Futures contracts are at a highly leveraged instrument, approximately 9-10 % of contract value. This margin does fluctuate based on price volatility and contract price.

The benefit of hedging with futures is that one is only required to deposit a portion of the contract value.

In today’s prices, 110 contracts KC futures in this example is only $ 343,750 based on $ 3125 margin (deposit) per contract vs. total contract value of $ 3,833,500.00

Option 3: Hedging with Futures (c)

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An Options contract is one between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy or to sell futures

Example, Bakery is bullish wheat futures and believes that KWN futures will rise to $ 7.00/ bu, while currently KWN is $ 5.19 ½ / bu (3/4/10).

Bakery buys $ 7.00 / bu CALL at $ 0.04/bu, optionIf KWN reaches $ 7, Buyer own futures at fraction

of the cost. If KWN does not, then option buyer forfeits the cost of $ 7 call (i.e. $ 0.04/ bu) and buys cheaper futures at the market

Option 4 – Hedging with Options

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Processors & Manufacturers use a combination of Futures & Options strategies to hedge their purchases and sales

For example, Short-term volatility can lead to the utilization of short-term bearish strategy of options with long-term bullish futures hedging strategy or vice versa

A combination of Futures & Options strategy allows for the hedging entity to minimize cost exposure in such volatile commodity markets

Option 5 – Futures & Options Combined Strategy

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Part V – Baker’s Pricing Options (Spring Flour – HRS)


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Option 1 – Buy Wheat Flour @ Spot MarketOption 2 – Buy Wheat Flour for Extended

CoverageOption 3 – Buy Wheat Futures as Substitute Purchase/Hedging Strategy for Wheat FlourOption 4 – Buy Wheat Futures Options as Substitute Purchase/ Hedging Strategy for Wheat FlourOption 5 - Combination of Wheat Futures & Options as Flour Hedging Strategy

Spring Flour Purchasing Program

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Bakery in Minneapolis buys Wheat Flour from Miller Supplier at spot prices every week based on current market price (based on 250,000 cwts per year)

Example of this option in 2007 would have been the most expensive

Published prices (as in slide # 12) shows an increasing flour price through the duration of 2007

Total Costs of Flour Purchases (2007)- $ 4,154,567.31

Option 1 – Spot Market (2007)

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Bakery forward contracts flour prices with Miller Supplier for extended period of time (i.e. 12 months)

For example, Bakery & Flour Supplier agree to $ 12.05/ cwt for daily deliveries for ALL of 2007, as early January prices started at $ 12.05/ cwt

In this example, total Flour Purchase Costs for 2007 are $3,012,500.00

Savings in Flour Purchase Budget : $ 1,142,067.31

Typically, Suppliers will NOT contract out 6-12 months ahead on sales with their bakery customers

Option 2: Forward Purchases

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Bakery can decide to use Mpls Wheat Futures as hedging strategy for flour purchases, while flour purchases continue weekly as per Option 1

For example, Bakery decides to buy Futures coverage in January for all of 2007 because of bullish opinion

Purchases of total 110 ctrs of KC Futures on 1/5/2007◦ MWH7 $ 4.87/bu MWK7 $ 5.03/ bu◦ MWN7 $ 4.95/bu MWU7 $ 5.06 ½/ bu◦ MWZ7 $ 5.00/ bu

Option 3: Hedging with Futures (a)

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As Bakery makes Flour purchases in spot market, they lift the Mpls Wheat Futures hedge, thus offsetting higher costs in flour with gain in Futures markets

Total costs for Flour Purchases 2007: $ 4,154,567.31

Futures Hedge Offset : $ 910,641.24Net Costs for Flour Purchases

$ 4,787,740.38 -$ 982,229.46

$ 3,805,510.92

Option 3: Hedging with Futures (b)

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Please note that Futures contracts are a highly leveraged instrument, approximately 9-10 % of contract value. This margin does fluctuate based on price volatility and contract price.

The benefit of hedging with futures is that one is only required to deposit a portion of the contract value.

In today’s prices, 110 contracts Mpls futures in this example is only $ 314,600 based on $ 2860 margin (deposit) per contract vs. total contract value of $ 4,504,500.00

Option 3: Hedging with Futures (c)

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An Options contract is one between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy or to sell futures

Since Minneapolis Options market is relatively illiquid, we like to use either K.C. Wheat options and/ or Chicago Wheat options.

Example, Bakery is bullish wheat futures and believes that KWN futures will rise to $ 7.00/ bu, while currently KWN is $ 5.19 ½ / bu (3/4/10).

Bakery buys $ 7.00 / bu CALL at $ 0.04/bu, option

If KWN reaches $ 7, Buyer own futures at fraction of the cost. If KWN does not, then option buyer forfeits the cost of $ 7 call (i.e. $ 0.04/ bu) and buys cheaper futures at the market

Option 4: Hedging with Options

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Processors & Manufacturers use a combination of Futures & Options strategies to hedge their purchases and sales

For example, Short-term volatility can lead to the utilization of short-term bearish strategy of options with long-term bullish futures hedging strategy or vice versa

A combination of Futures & Options strategy allows for the hedging entity to minimize cost exposure in such volatile commodity markets

Option 5: Futures & Options Combined Strategy

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Part VI – Price Forecasting


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As we look at both futures markets below (02/13/2012 closes):

◦ KWH $ 6.84 ¼ /bu MWH $ 8.15 ½ /bu

◦ KWK$ 6.89 ¾ /bu MWK $ 8.06 ¾ /bu◦ KWN $ 6.97 ¾ /bu MWN $ 7.96

/bu◦ KWU $ 7.10 ¼ /bu MWU $ 7.70

/bu◦ KWZ$ 7.28 ¾ /bu MWZ $ 7.74 ½ /bu

2012 Strategy : Risk Management

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Apart from price analysis for HIGH GRAIN costs such as grains and related products, our job is also to help with forecasting and hedge analysis for other food input products, such as soybean oil, sugar, cocoa.

Also keep in mind HIGH ENERGY cost constraints. We can help with analysis on non-food products that affect the bottom line, such as energy lines like natural gas, gasoline and heating oil (related to diesel fuel).

We are here to help you to minimize costs and maximize profits using futures & options as hedging tools!

Price Forecasting

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Part VII – About Our Company


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Please feel free to ask any questions or comments at this time.

You can always reach me at the following: Lido Isle Advisors 369 San Miguel Drive # 300 Newport Beach, 92660 Email: [email protected] Telephone: 949-461-1139

Hedging Program Contacts

mailto:[email protected]

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CEO Anthony Lazzara has been featured in...


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The Lido Isle Advisors Advantage

• Proprietary CTA Selection Methodology

• Full Transparency with Daily Position Statements

• No Lock-Ups of Client Capital

• Managed Futures Experts, Customizing the Investment To Each Client

• Extensive Industry Network


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About the Presenter Edgard Cabanillas has been trading futures and commodities

for over 18 years. He is an Associated Person with Lido Isle Advisors. Starting in 1994, he began his trading career with a major grain exporting company until 2001.

Subsequently, he started brokering cash grain and other ag markets in the U.S. and overseas. At the time, he focused on cash grain trading in wheat, corn, and soybean complex and futures spread trading.

Since his start as a Series 3 broker in January 2010, Mr. Cabanillas has incorporated his passion for spread trading in the grain and ag markets into other futures markets such as financials, currencies, softs, energies and metals. With a view to risk and diversification, he offers his clients specific spread trading strategies that help complement their commodity trading portfolios. He also works closely with producers and grain related companies on their commodity hedging needs.


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LeadershipAnthony Lazzara: Began career on floor of the Chicago Board of Trade in 1990, and spent 10 years as a trader and floor broker for high-profile financial institutions like

Merrill Lynch, Deutsche Bank and Salomon Brothers.During this time he executed as much as $100 billion in interest rate futures contracts annually.

- Mr. Lazzara is a member of the Chicago Mercantile Exchange.

- Mr. Lazzara brings more than 20 years of trading experience in fixed income, equities, oil products, energies, and grains markets.

Jason Rotman: Mr. Rotman is a graduate of Princeton University, where he majored in Psychology and played varsity football for 4 years.

- He began his career in 2002 in Chicago, trading futures on the Eurostoxx index for Resource Trading Group. He then traded US government bond futures at Refco Trading

Services, becoming one of the largest volume 10yr Note traders of the firm.

- He has created a proprietary measurement formula to evaluate CTAs which is an additional unique element to working with Lido Isle Advisors.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS. TRADING COMMODITY

FUTURES AND OPTIONS IS SPECULATIVE, INVOLVES RISK OF LOSS, AND IS NOT SUITABLE FOR ALL INVESTORS.

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Types of Accounts We Service• Individual

• Self-Directed IRAs

• Trusts

• Corporate (LLC, LP)


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Contact us to Inquire or Open Your Account

www.lidoisleadvisors.comphone: 949-461-1139

email: [email protected]


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LidoIsleAdvisors.com ALL RIGHTS RESERVED | 369 San Miguel Dr., Suite 300, Newport Beach, CA 92660 | Phone: 949-461-1137 PAST PERFORMANCE IS NOT NECESSARILY