Marketing and Management
Avoid Playing
Eeny, Meeny, Miny Mo
With Your Future
Kevin Bernhardt
UW-Extension, Center for Dairy Profitability, and UWPlatteville
March 17, 2010
2
The Take Home Messages
•
•
Management Matters
Marketing is a part of Management not an
activity that sits in a vacuum by itself
–
–
–
–
•
Know Your Market
Have the Right Mindset
It’s the Margin that Counts
Have a Plan and then Adapt
Think long-run – act short-term
© 2008
Farm & Risk Management Team
WHEN IT COMES TO
MANAGEMENT, WE ARE
NOT ALL THE SAME
MANAGEMENT
MATTERS
ROROE (mrkt basis w economic depreciation)
CDP: 100-250 Cow Dairies in WI
(freestall, no pasture, not organic)
25
20
15
Low 25%
10
Middle 25%
5
High 25%
0
-5
-10
2006
2007
2008
5
Production and Price Matter
18,000
21,000
24,000
27,000
10
(143,977)
(123,977)
(103,977)
(83,977)
11
(124,977)
(102,977)
(80,977)
(58,977)
12
(105,977)
(81,977)
(57,977)
(33,977)
13
(86,977)
(60,977)
(34,977)
(8,977)
14
(67,977)
(39,977)
(11,977)
16,023
15
(48,977)
(18,977)
11,023
41,023
16
(29,977)
2,023
34,023
66,023
17
(10,977)
23,023
57,023
91,023
18
8,023
44,023
80,023
116,023
$137 hay, $4.00 corn, $300 SBM
© 2008
Farm & Risk Management Team
6
Input Costs Matter
Decrease in Feed Costs
10
11
12
13
14
15
16
17
18
Increase in Feed Costs
23,000
-15% -10% -5%
Avg
5%
10%
15%
(85,938) (93,206) (101,166) (109,923) (119,117) (128,311)(137,505)
(62,938) (70,206)(78,166) (86,923) (96,117) (105,311) (114,505)
(39,938) (47,206)(55,166) (63,923) (73,117) (82,311) (91,505)
(16,938) (24,206)(32,166) (40,923) (50,117) (59,311) (68,505)
6,062 (1,206) (9,166) (17,923) (27,117) (36,311) (45,505)
29,062 21,794 13,834 5,077 (4,117) (13,311) (22,505)
52,062 44,794 36,834 28,077 18,883 9,689
495
75,062 67,794 59,834 51,077 41,883 32,689 23,495
98,062 90,794 82,834 74,077 64,883 55,689 46,495
© 2008
Farm & Risk Management Team
7
Class III/BFP Prices
Volatility is a Growing Challenge
Class III Prices - 1962-Dec 2009
20
15
10
5
0
Jan62
1962-79
Jan67
Jan72
1980-87
Jan77
Jan82
1988-95
Jan87
Jan92
1996-99
Jan97
Jan02
2000-2003
Jan07
2004-2009
© 2008
Farm & Risk Management Team
8
Is There More Milk Price Risk Today?
C-III Price Distributions (8 year time periods)
15
10
5
21
20
19
18
17
16
15
14
13
12
11
10
9
0
8
Percent Occurence
20
25 Cent Range, Midpoints Are Shown
1980-Dec 87
1988-Dec 95
1996-Dec 03
2004-Dec 09
© 2008
Farm & Risk Management Team
9
Is There More Milk Price Risk Today?
C-III Price Distributions
20
19
18
17
16
15
14
13
12
11
10
9
40
35
30
25
20
15
10
5
0
8
Percent Occurence
January
25 Cent Range, Midpoints Are Shown
1980-1987
1988-1995
1996-2003
2004-2009
© 2008
Farm & Risk Management Team
10
Is There More Milk Price Risk Today?
C-III Price Distributions
20
19
18
17
16
15
14
13
12
11
10
9
40
35
30
25
20
15
10
5
0
8
Percent Occurence
March
25 Cent Range, Midpoints Are Shown
1980-1987
1988-1995
1996-2003
2004-2009
© 2008
Farm & Risk Management Team
11
Is There More Milk Price Risk Today?
C-III Price Distributions
22
21
20
19
18
17
16
15
14
13
12
11
10
9
40
35
30
25
20
15
10
5
0
8
Percent Occurence
July
25 Cent Range, Midpoints Are Shown
1980-1987
1988-1995
1996-2003
2004-2009
© 2008
Farm & Risk Management Team
12
Is There More Milk Price Risk Today?
C-III Price Distributions
20
19
18
17
16
15
14
13
12
11
10
9
40
35
30
25
20
15
10
5
0
8
Percent Occurence
November
25 Cent Range, Midpoints Are Shown
1980-1987
1988-1995
1996-2003
2004-2009
© 2008
Farm & Risk Management Team
MARKETING
-Know Your Market
-Mindset
-It’s the Margin
-Planning
14
Must be a New Era
(Nominal Corn Prices, 1866-2009)
4.50
4.00
3.50
4.30
Futures Average (2/9/10):
2010 = 3.78
2011 = 4.12
3.50
3.00
2.50
2.50
2.00
1.50
1.00
0.50
0.00
1865
1885
1905
1925
1945
1965
1985
2005
2025
© 2008
Farm & Risk Management Team
Class III/BFP Prices
Class III Prices - 1980-Dec 2009
Average:
Median:
21 Top 25%:
19 Low 25%:
80-03
11.94
11.89
12.54
11.10
15
04-09
14.69
14.24
17.04
12.27
17
15
13
11
9
Jan-80
Jan-85
1980-04
Top 25% (80-04)
Jan-90
Jan-95
2004-2009
Top 25% (04-09)
Jan-00
Avg 80-04
Low 25%
Jan-05
Jan-10
Avg 04-09
Low 25%
© 2008
Farm & Risk Management Team
What’s This Mean To Your Cash
Flow?
•
16
The change in total revenue from the top
25th percentile price to the low 25th for 207
cows at a 22,361 lb average
– 1980-2003:
$66,521
– 2004-2009: $220,350
© 2008
Farm & Risk Management Team
17
Seasonality (Averages)
15
1980-87 (8)
1988-95 (8)
1996-03 (8)
2004-09 (6)
14
13
12
Ju
l
A
ug
Se
p
O
ct
N
ov
D
ec
11
Ja
n
Fe
b
M
ar
A
pr
M
ay
Ju
n
C-III/BFP Price
16
© 2008
Farm & Risk Management Team
18
What’s the Point?
•
•
The long-term average price of milk may
have shifted up
The Volatility of prices around that average
have increased
–
–
•
Increased risk of lower prices than average
Increased opportunity of higher prices than
average
Cash Flow and Working Capital
management more important
© 2008
Farm & Risk Management Team
19
Most Important
Slide of the Day is
NEXT
Marketing Mindset
Cool!
I’m getting a
great return
on my
investment
And
could
have had
$21.25
#@%$^&
I lost
$2.07!!!
Both
Forward
Contracted
for $18.00
Announced
Price Was
$20.07
20
21
My Own Real Life Example
•
It’s April 9, 2004
–
–
•
•
November 2004 Forward Contract is available
at $13.68
December 2004 F.C. is available for $12.90
That is a top 25th percentile price for both
months and well above blue ribbon price.
Pull the trigger and sell!!!!
© 2008
Farm & Risk Management Team
22
My Own Real-Life Example
•
As of December 8th,
–
November announced at $14.89

–
“LOSS” OF $1.21/cwt.
December settled at $16.55

“LOSS” OF $3.65
© 2008
Farm & Risk Management Team
23
Another Real-Life Example
•
•
•
•
It’s July, 2008
The word’s out that milk is going to
$25/cwt.
I slammed my fingers in the drawer at $17,
$18, and $19.
Finally Forward Contracted for next 18
months at $19.91.
© 2008
Farm & Risk Management Team
24
Another Real-Life Example
Announced Marketing
Gain
•
How much did
I pay for feed,
fertilizer, and
fuel?
•
I only did 20%
of my
production!!
-.34
2.59
Jun
20.25
Aug
Oct
17.32
17.06
Dec
Feb
15.28
9.31
Apr
Jun
10.78
9.97
Aug
11.2
9.94
8.71
Oct
12.82
7.09
2.85
4.63
10.60
9.13
© 2008
Farm & Risk Management Team
In Marketing
YOU WILL BE WRONG
25
Good producers hate to
be wrong!
Good marketers have to
get use to being wrong!
© 2008
Farm & Risk Management Team
26
The Importance of Timing
[Person 1]
•
July 2008: Input prices at record highs, but
people are talking:
–
–
•
$10-12 corn, $600/ton SBM,
Nitrogen is already at $1,200/ton.
I’m locking in my Corn and SBM for first
quarter 2009 before it gets any higher.
– $8.00/bu
corn
$430/ton SBM
© 2008
Farm & Risk Management Team
27
The Importance of Timing
[Person 1]
•
Still July 2008: March 2009 Milk prices
are great too, but……..
–
–
–
•
New Zealand is in a drought,
It’s hot in California, and
Europeans are buying.
People say milk will get to $25 before it is
over.
I’m waiting!
© 2008
Farm & Risk Management Team
28
The Importance of Timing
[Person 1]
•
September 2008: Milk prices have really
slid to about $15.50.
But, it’s a correction and the market needed
a correction. I’m going to wait now until
prices come back.
Besides, I kinda locked in those feed prices at the wrong
time and I need a higher milk price to make it pay.
© 2008
Farm & Risk Management Team
29
The Importance of Timing
[Person 1]
•
March 2009:
–
–
I’m feeding $8.00 corn and $430/ton meal.
Milk price: $10.44.

•
I never did lock in my milk price.
Profits: - $120,000 Annualized
© 2008
Farm & Risk Management Team
30
The Importance of Timing
[Person 2]
•
•
•
It’s May 2008: Forward contracted March
2009 milk @ $16.50/cwt.
Set a ceiling price for corn and meal @
$5.25/bu and $330/ton.
Assured coverage of costs of production
plus family living
© 2008
Farm & Risk Management Team
31
The Importance of Timing
[Person 2]
•
March 2009:
–
–
–
•
Feed costs fell
After marketing costs, my price was $3.85
corn and $320 meal.
Milk price was 10.44, but I contracted for
$16.50
March 2009 Profits: $74,925 annualized
© 2008
Farm & Risk Management Team
32
What’s the Point
•
Timing of decisions is a new challenge
•
It’s the Margin That Counts!
© 2008
Farm & Risk Management Team
33
Marketing is Part of Management
Farm &
Family
Strategic Plan
Financial &
Investment
Management
Marketing
Management
Spreadsheet
Production
Management
© 2008
Farm & Risk Management Team
34
Outlook?
•
•
… logic leads one to believe that all
commodity prices will be lifted, including
dairy, but buyers and sellers of dairy
commodities should be advised that the
outlook for 2010 is uncertain at the
moment, with differing viewpoints (Ken
Bailey, Feedstuffs, Dec 14)
There’s a place for outlook, but use it
wisely! It’s information, not an answer!
© 2008
Farm & Risk Management Team
Parts of a Marketing Plan
35
Getting ready

1.
2.
3.
Take an Inventory: marketing resources, risk tolerance, and
non-price marketing objectives
Know the Playing Field: situation, outlook, & historical prices.
Know Your Toolbox: Marketing Tools and Strategies
Take Aim

1.
2.
3.
4.
Costs of production and Financial objectives
Personal Price Targets
Basis and Triggers for Action
Marketing Protocols (what do you do when your trigger’s
tripped!)
Fire

1.
Evaluation, control, and record-keeping
© 2008
Farm & Risk Management Team
36
Parts of a Marketing Plan
Getting ready

Take an Inventory: marketing resources, risk
tolerance, and non-price marketing objectives
1.
Computer
Relationship with lender & broker
Relationship with spouse!



Know the Playing Field:
2.
situation, outlook, & historical prices.

Know Your Toolbox:
3.
Marketing Tools and Strategies


Forward contracts, Futures, PUT, CALL, LGM-Dairy
© 2008
Farm & Risk Management Team
37
Costs of Production, Financial Objectives,
and Personal Price Targets
 What
price do you uniquely need/want:
–
Cost of production
–
Other farm business and family financial
objectives that you want the milk check to
cover
© 2008
© 2005
Farm & Risk Management
Team
38
Personal Price Targets
Purple Ribbon:
Blue Ribbon:
Red Ribbon:
White Ribbon: (cash costs)
39
Personal Price Targets
Item
Basic Cash Costs
Family Living
Retained Earnings
Misc
Mailbox
Price
Needed
12.73
16.27
17.79
18.93
Expected Marketing
Basis
Price
Triggers
1.25
11.48
1.25
15.02
1.25
16.54
1.25
17.68
© 2008
Farm & Risk Management Team
40
Marketing Protocols
Your Marketing Rules
Tough, Tough, Tough
© 2008
Farm & Risk Management Team
Do Futures Offer
Opportunities
To Capture Profits
To Minimize Losses
To Reduce Price Risk
January
42
2010
(14.50)
2009
(10.78)
2008
(19.32)
2007
(13.56)
2006
(13.39)
2005
(14.14)
< 11.00
0
0
0
0
0
0
11.00-11.49
0
0
0
6
0
0
11.50-11.99
0
0
0
63
0
47
12.00-12.49
0
0
0
86
29
150
12.50-12.99
0
0
0
174
162
12
13.00-13.49
11
0
0
14
61
3
13.50-13.99
48
1
42
11
0
4
14.00-14.49
49
30
19
1
0
4
14.50-14.99
95
63
32
0
0
1
15.00-15.49
49
62
24
0
0
2
15.50-15.99
26
18
31
0
0
0
16.00-16.49
9
45
50
0
0
0
16.50-16.99
8
18
51
0
0
0
17.00 >
63
120
26
0
0
0
Year
(Annced Price)
April
Year
(Annced Price)
< 11.00
11.00-11.49
11.50-11.99
12.00-12.49
12.50-12.99
13.00-13.49
13.50-13.99
14.00-14.49
14.50-14.99
15.00-15.49
15.50-15.99
16.00-16.49
16.50-16.99
17.00 >
43
2010
(12.66)3/10
2009
(10.78)
2008
(16.76)
2007
(16.09)
2006
(10.93)
2005
(14.61)
0
0
0
0
10
15
20
52
97
99
58
4
8
0
45
15
3
2
6
4
6
18
20
50
23
36
28
121
0
0
0
0
0
26
22
14
49
44
100
43
35
20
0
0
53
97
76
12
44
17
23
5
10
0
0
0
17
14
7
61
172
25
0
0
0
0
0
0
0
0
0
0
57
150
26
5
25
20
14
4
3
0
0
0
September
Year
(Annced Price)
< 11.00
11.00-11.49
11.50-11.99
12.00-12.49
12.50-12.99
13.00-13.49
13.50-13.99
14.00-14.59
14.50-14.99
15.00-15.49
15.50-15.99
16.00-16.49
16.50-16.99
17.00 >
44
2010
(15.10)3/10
2009
(12.11)
2008
(16.28)
2007
(20.07)
2006
(12.29)
2005
(14.30)
0
0
0
0
0
0
0
0
5
70
141
43
0
0
0
11
15
16
16
9
34
38
34
10
35
6
19
135
0
0
0
0
0
0
0
0
0
39
86
77
38
133
0
0
0
39
27
56
35
26
34
10
35
18
3
96
0
0
61
63
20
72
162
0
0
0
0
0
0
0
0
0
0
0
30
93
43
84
64
16
0
0
0
0
45
Futures higher at least 10 days, 05-10
6 of 6 Years
(100%)
5 of 6 Years
(83%)
4 of 6 Years
(67%)
January
13.00
13.50
13.50
February
13.00
13.50
15.00
March
13.00
14.50
15.00
April
13.00
14.50
15.50
May
13.00
14.50
15.00
June
13.00
14.50
15.50
July
13.00
14.50
16.50
August
13.00
15.00
16.00
September
13.50
15.00
16.00
October
13.00
14.00
16.00
November
13.00
13.50
15.50
December
13.50
13.50
15.50
46
Futures higher at least 10 days, 00-10*
6 of 6
(100%)
10 of 10
(100%)
5 of 6
(83%)
8 of 10
(80%)
4 of 6
(67%)
6 of 10
(60%)
January
13.00
11.40
13.50
12.00
13.50
12.40
February
13.00
11.00
13.50
12.00
15.00
12.00
March
13.00
11.20
14.50
12.00
15.00
12.00
April
13.00
11.80
14.50
12.00
15.50
12.00
May
13.00
11.80
14.50
12.00
15.00
12.20
June
13.00
11.80
14.50
12.00
15.50
12.40
July
13.00
12.40
14.50
12.60
16.50
13.20
August
13.00
12.80
15.00
13.20
16.00
13.80
September
13.50
13.00
15.00
13.40
16.00
14.40
October
13.00
12.80
14.00
13.00
16.00
14.00
November
13.00
12.60
13.50
12.80
15.50
13.40
December
13.50
12.20
13.50
12.40
15.50
12.40
47
•
Minimum futures opportunities for the six
years from 2005-2010
–
–
–
–
–
100% of time (6 of 6) years:
83% of time (5 of 6 years):
67% of time (4 of 6 years):
$13.00
$14.00
$15.50
$16 or greater was available 50% of the years
$17 and greater all but two months for 50% of
years
48
What’s the Point?
•
What are your red, blue, and purple ribbon
price targets?
–
•
What do those targets buy you.
What is at risk from the input cost side?
–
–
What can be price protected.
Do you have a control process for continuous
checks
© 2008
Farm & Risk Management Team
49
What’s the Point
•
How much are you willing to pay for
marketing per cwt?
•
Is your lender with you?
•
Does your broker know your plans?
•
Does your spouse and business partners
know your plans?
© 2008
Farm & Risk Management Team
50
What’s the Point?
•
What is your blueprint for marketing when:
–
price opportunities are low?
Temptation is to spend all my
time
on
this
slide,
BUT!
– when price opportunities hit your
financial triggers?
–
when price opportunities are high?
© 2008
Farm & Risk Management Team
51
Months Away
From Market
Month
Pricing
Opportunities
Outlook
Less than 3

High
Marketing Action
Trigger Price
At What Price
Will I Engage
This Action
FC and buy CALL
Option


Hedge 80%

3-6
Medium



Low
Set low floor with
unlimited upside


More than 6
© 2005
52
Some Final
Thoughts
53
Good Marketers
–
–
–
–
–
–
–
Will be wrong,
Are patient
Are long run thinkers,
Hit singles with a double here and there.
Are disciplined to a plan
Make marketing decisions to meet management
goals
Brag about their Return on Assets over the last
five years.
© 2008
Farm & Risk Management Team
54
Bad Marketers
–
–
–
–
Decide to get in and out based on “gut” instinct
Go for the homerun
Think milk prices are too low
Brag about the price they locked in this month
© 2008
Farm & Risk Management Team
55
Think Long Run
•
What is your strategic plan
–
–
–
–
•
Exit with equity in 7-10 years
Build equity for expansion
Transition
Double digit ROROE
What return do you need to accomplish
your long-term plan
© 2008
Farm & Risk Management Team
56
Act Short Term
•
With your long run strategic plan as the
blue print - plan this next year given
–
–
–
–
–
Input prices, production, output prices
New capital investment
New management processes/systems
Labor
And, of course, MARKETING
© 2008
Farm & Risk Management Team
57
Marketing is not a silver bullet.
It is not a new profit center.
It won’t make up for poor
production.
FC 100% at $10.00 Trigger
20,000
$80,000
$70,000
10,000
$60,000
J-06
J-05
J-04
J-03
J-02
J-00
$40,000
J-01
0
$50,000
(10,000)
$30,000
(20,000)
$20,000
$10,000
(30,000)
$0
J-00
J-01
J-02
J-03
J-04
J-05
J-06
(40,000)
M onths
M onths
Cash
Marketing Gain/Loss
With Mrkt
TR Low to High Range pe r M onth With and
W/O M ark e ting
$150,000
$100,000
$75,000
$50,000
$65,000
J-06
J-05
J-04
J-03
J-02
J-01
J-00
$0
$55,000
($50,000)
$45,000
($100,000)
$35,000
($150,000)
$25,000
($200,000)
M onths
ov
N
S
ep
Ju
l
M
ay
M
ar
Ja
n
$15,000
Cumulative Marketing Gain/Loss
$11.00 PUT for $.15
10,000
$80,000
$70,000
8,000
$60,000
6,000
$50,000
$40,000
4,000
$30,000
2,000
$20,000
$10,000
$0
J-00
0
J-01
J-02
J-03
J-04
J-05
J-06
J-00
(2,000)
J-01
J-02
With Mrkt
J-04
J-05
J-06
J-05
J-06
Months
Months
Cash
J-03
Marketing Gain/Loss
Desired Revenue
TR Low to High Range per Month With and W/O Marketing
$75,000
$65,000
$55,000
$45,000
$35,000
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
J-00
$25,000
J-01
J-02
J-03
J-04
Months
$15,000
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Cumulative Marketing Gain/Loss
FC 10%, 15% and 25% at 50th, 70th and 90th %-tile
$80,000
6,000
$70,000
4,000
$60,000
2,000
$50,000
0
$40,000
(2,000)J-00
$30,000
(4,000)
J-02
J-03
J-04
J-05
J-06
J-05
J-06
(6,000)
$20,000
(8,000)
$10,000
$0
J-00
J-01
(10,000)
J-01
J-02
J-03
J-04
J-05
J-06
(12,000)
Months
Months
Cash
With Mrkt
Marketing Gain/Loss
Desired Revenue
TR Low to High Range per Month With and W/O Marketing
$30,000
$75,000
$20,000
$65,000
$10,000
$55,000
$0
$45,000
J-00
($10,000)
$35,000
($20,000)
$25,000
($30,000)
J-01
J-02
J-03
J-04
Months
$15,000
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Cumulative Marketing Gain/Loss
Think of Marketing in Two Levels
Reduce Price Risk
- Easy to do, Passive
- Effective
- Likely will not result in
higher price
Increase Price
- More complex, Active
- More involved
- More Time
- New set of skills required
- May result in higher price
62
Marketing Discipline
Market
Do Nothing
Do Something
Hedge, Put
Outlook is up
???
64
Futures Prices in Context
22
21
20
19
18
17
16
15
14
13
12
11
Ja
n
Fe
b
M
ar
Ap
r
M
ay
Ju
n
Ju
l
Au
g
Se
p
O
ct
No
v
De
c
C-III/BFP Price
(Comparison of Feb 7 to Sept. 14, 2007)
Average
1996-2006 data
75 %tile
On Feb 7,
2007
On Sep 14,
2007
© 2008
Farm & Risk Management Team
65
Control
Evaluate
Records
•
•
•
Set aside specific time for marketing just as you set time
aside for doing the milking
Always Review and Revise (with spouse, partner, banker,
Extension agent, broker, marketing club etc.)
Market for the long run
66
The Take Home Messages
•
Management Matters
•
Marketing is a part of Management not an
activity that sits in a vacuum by itself
•
Think long-run – act short-term
© 2008
Farm & Risk Management Team
67
Following are
some people we
know who made
their plans
happen!!!
© 2005
68
This child, at four years old, could not speak.
Some thought he would not make it in life due to
lack of intelligence.
Who was it?
Albert Einstein
© 2005
69
His music teacher once said of him, “As a
composer he is hopeless.”
Who was it?
Beethoven
© 2005
70
This person’s teacher told him he was too stupid to
learn anything.
Who was it?
Thomas Edison
© 2005
71
He was cut from his high school basketball team.
Who was it?
Michael Jordan
© 2005
72
This person was fired from his first job because he
lacked imagination.
Who was it?
Walt Disney
© 2005
73
This person failed the 6th grade.
Who was it?
Winston Churchill
© 2005
74
Class III Prices - 1980-Dec 2009
Class III/BFP Prices
21
19
17
15
13
11
9
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
1980-04
© 2008
Farm & Risk Management Team