They developed such a bond that some of their customers asked Schindler to manage money as well as hedge. “A couple of farmers that had been with us for quite a while said, ‘Hey, you guys have figured this market out pretty well. As a hedger I can only sell milk, but I want to buy when it is undervalued and I want you to do it [for me],’” Schindler says. “Farmers are risk-takers, they can be conservative in many other ways, but they are risk-takers.”
Schindler began trading for them in 2005. “These accounts are still held at KDM, but from 2005-2009 it was just me having individual power of attorney, and I never charged a dime,” he says.
And he did well, earning 76.1% in the first full year in 2006 after an initial 25% drawdown. “I just started trading it and things went very well,” he says.
“A couple of my guys felt so guilty they [said], ‘You made me so much money, can’t I give you anything?’ I thought I’d better just set up a CTA. That way I could charge a monthly fee and an incentive fee if I make [the client]money.”
Schindler only trades Class III milk futures, usually from the long side. It is a discretionary fundamental-based strategy that leans on Schindler’s vast knowledge of the cash dairy business. Eight out of 10 trades are long, so his hedge customers are not concerned he is getting ahead of their orders. “I always get my hedge customers in before I place a trade. My hedges are always on the sell side, selling futures or buying puts,” he says.
The program is based on fundamentals, but he calls it trend-following in nature and will look at technical factors to time his trades. His mostly long positions can last up to six months and he will put on only a handful of positions in a year. “It is supply/demand heavy, having to do with the cost of production,” he says.
Schindler is under no delusions that a program that trades only milk futures can manage larger assets, but he points out that milk futures volume grew 39% year-over-year in 2011 with only a small percentage of the $45 billion cash dairy industry actually hedging. “Even now, less than 10% of the nation’s milk supply is hedged using futures, so it is kind of an exciting business for us from that standpoint. We see a lot of growth potential as more participants enter the market,” Schindler says.
That means KDM’s business can grow and the capacity of the CTA — which Schindler plans to pause at $5 million under management — will increase as well. It will need to as the program that Schindler now oversees from his Fergus Fall, Minn. home already is managing more than $4 million. “It wasn’t until March 2011 that I published results. Then the phone started ringing and I am up to 30 accounts,” he says.
Schindler also is looking to add programs and markets that affect the production cost for farmers. With a compound annual return of 67.21% over six years, there should be some interest.