Milk Marketing
Tools, Strategies, Market
Planning, and Mindset!
Kevin Bernhardt
UW-Extension and Center for Dairy Profitability
January 21, 2010
2
3
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5
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8
Outlook
•
•
Better than 2009
… 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)
© 2008
Farm & Risk Management Team
9
Agenda
•
•
Motivation
Basic Tools and Strategies - Review
–
•
•
•
Advanced Strategies - Awareness
Marketing Plan
Being Realistic and Having the Right Mindset
Practicing our Marketing Savvy!
© 2008
Farm & Risk Management Team
10
The Importance of Timing
[Person 1]
•
July 2008: Input prices at record highs, but
they are just going higher. 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
11
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
12
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
13
The Importance of Timing
[Person 1]
•
March 2009: I’m feeding $8.00 corn and
$430/ton SBM. Milk price turned out to be
$10.44. I never did lock in my milk price.
•
Profits: - $120,000
(Return M&L)
© 2008
Farm & Risk Management Team
14
The Importance of Timing
[Person 2]
•
•
I forward contracted my March 2009 milk
in May 2008 at $16.50/cwt (could have had
more if I had waited awhile).
At the same time I bought a $5.25 CALL
option for my corn for $.10/bu and 330/ton
SBM option for $8.50/ton. This gave me
the right to buy my feed at those prices, but
I did not have to.
© 2008
Farm & Risk Management Team
15
The Importance of Timing
[Person 2]
•
March 2009: Corn = $3.75 SBM $311.50
•
My price, after the cost of the options was
$3.85 for corn (3.75+.10) and $320 for
SBM (311.5+8.5).
•
March 2009 Profits: $74,925
© 2008
Farm & Risk Management Team
16
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
17
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
18
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
19
Another Real-Life Example
Announced Marketing
Gain
•
How much did
I pay for feed,
fertilizer, and
fuel?
•
I only did 25%
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
Which Type of Marketer
Are You?
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
WHEN IT COMES TO
MANAGEMENT, WE ARE
NOT ALL THE SAME
MANAGEMENT
MATTERS
22
Return to Management and Labor
19,000
21,000
23,000
(123,977)
(103,977)
Production
Matters
25,000
10
(143,977)
11
(124,977)
12
(105,977)
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
(102,977)
(83,977)
(80,977)
(58,977)
(81,977)
(57,977)
Price
Matters
(33,977)
$137 hay, $4.00 corn, $300 SBM
23
Increase in Feed Costs
Decrease in Feed Costs
-15%
10
11
12
13
14
15
16
17
18
-10%
-5%
23,000
Avg
5%
10%
15%
Input Costs Matter
(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
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
25
Management Matters
•
110 MN and WI farms, Average of 2006
and 2007
Net Ret.
Bottom
20%
20-40% 40-60% 60-80% Top 20%
7,737
22,232 52,427 39,856 110,988
Acres
340
308
407
237
416
Yield
164
165
178
174
183
Direct
Exp.
385
387
392
376
372
© 2008
Farm & Risk Management Team
26
Volatility in 2008-09 was
Unprecedented
•
•
•
How many of you think this volatility will
happen sometime again?
How many of you think that volatility may
be less than this wild time, but still at a level
where profit margins can swing
significantly?
My guess is your shaking your heads
“YES”
© 2008
Farm & Risk Management Team
27
What Are The Lessons?
•
•
•
•
•
Timing is important.
It’s the margin (difference between price
and costs) that counts.
We need a mindset that manages for
profitability and risk - not the homerun
Volatility is a fact of life (output and inputs)
Management matters A Great Deal
© 2008
Farm & Risk Management Team
28
Basic Marketing Tools
and Strategies
A Review
© 2005
2008
Farm & Risk Management Team
29
Two Markets
•
Two Different Markets
–
Cash:

–
What you are in every day when you produce and
sell milk
Futures:

What you can choose to be in if you buy and sell
Futures or buy and sell Options on the Chicago
Mercantile Exchange

You do not need to be a producer. You do not need to
own a single cow. Anyone can be a farmer in the futures
market!!!!
30
Tools in the Marketing Toolbox
Cash Market
Forward Contract
Minimum Price Contract
Futures Market
Futures Contract
PUT Option
CALL Option
And all kinds of combinations of the above!
LGM-Dairy
© 2008
Farm & Risk Management Team
31
Forward Contract (Cash Market)
•
Transaction with your milk buyer for a
contracted quantity and price
–
–
–
–
–
You must deliver
You will get the contracted price
(nothing more – nothing less
3rd party risk
Contracted price is futures price less a premium
No broker, no broker’s fee, no margin account
© 2008
Farm & Risk Management Team
32
Futures Contract (Futures Mrkt)
•
Transaction through a broker with the
Chicago Mercantile Exchange
–
–
Sell a futures contract for a set price and
quantity (200,000 or 100,000 lbs)
Has nothing to do with your physical
production and nothing to do with what your
milk plant pays you

–
You don’t even have to have any cows!
But, it will connect in the end to lock-in a price
© 2008
Farm & Risk Management Team
33
Futures Contract (Futures Mrkt)
–
–
–
You must pay a broker’s fee
You must maintain a margin account
You may get margin calls


–
–
Market moves up $.25 one day, then you may have
to send the broker a check for $500 (.25*2000 cwt)
If mrkt moves down you receive $500
You can get out of the contract at any time.
There is no physical delivery requirement
© 2008
Farm & Risk Management Team
34
PUT Option (Futures Mrkt)
•
Buying a PUT Option gives you the right to
sell a futures contract at a set price, but not
the obligation. You pay a premium for this
right. [Protects against the risk of falling
prices]
•
Selling a PUT Option gives you the obligation to buy a
futures contract. Someone pays you for taking on this
obligation (by itself this is NOT risk management)!
© 2008
Farm & Risk Management Team
35
CALL Option (Futures Mrkt)
•
Buying a CALL Option gives you the right
to buy a futures contract at a set price, but
not the obligation. You pay a premium for
this right. [Protects against the risk of
rising prices]
•
Selling a CALL Option gives you the obligation to sell a
futures contract. Someone pays you for taking on this
obligation (by itself this is NOT risk management)!
© 2008
Farm & Risk Management Team
Basic Strategies
(2 Basic Strategies & 2 Tools)
1.
Lock-in a known price. The price you set is
the price you will get.
1.
2.
2.
36
Forward contract with your milk buyer
Sell a futures contract on the CME
Set a Floor price. You will get no less than the
floor price, but you may get more.
1.
2.
Minimum price contract with your milk buyer
Buy a PUT option on the CME
© 2008
Farm & Risk Management Team
37
Basic Strategy 1:
Lock It In!
- Forward Contract with milk buyer, or
- Sell June futures contract at CME for 15.35
60
50
40
30
20
10
0
9.35
10
10.23
12
13.51
15
16.8
18
21
15.35
© 2008
Farm & Risk Management Team
38
Locking In a Price
By Selling a Futures Contract
Advantages
1) Achieves a “specific” price or
profit objective
2) Can get out if markets change
3) Not tied to a milk buyer
•
Disadvantage:
1) Margin account and calls
2) Forgo higher prices
3) 200,000 lb. Contracts
By Forward Contracting
Advantages:
1) Achieves a “specific” price or
profit objective
2) Flexible in terms of quantities
of milk to contract
3) Simple to use
4) No margin account or calls
Disadvantages:
1) Locked into a milk buyer
2) Can’t get out of contract if
markets change, must deliver!
3) Forgo higher prices
•
© 2008
Farm & Risk Management Team
39
Let’s Practice Selling Futures
Always Ask and Answer –
“What am I doing to myself?”
•
May Futures are trading at $14.75
–
What price position have you secured for 200,000 lbs
of milk in May?
($14.75)
© 2008
Farm & Risk Management Team
40
May Milk Announced at $17.00
Jan 21 Sold milk on futures market for:
May
Sell my milk to the milk plant for:
May
Cash settled (buy back) futures at:
+14.75
My base price before brokers fees
+14.75
+17.00
-17.00
41
May Milk Announced at $12.00
Jan 21 Sold milk on futures market for:
May
Sell my milk to the milk plant for:
May
Cash settled (buy back) futures at:
+14.75
My base price before brokers fees
+14.75
+12.00
-12.00
Forward Contract
May Milk Announced at $17.00
Jan 21 Forward contract May milk for
$14.45 (14.75-.30):
May
Sell my milk to the milk plant for:
+14.45
42
Forward Contract
May Milk Announced at $12.00
Jan 21 Forward contract May milk for
$14.45 (14.75-.30):
May
Sell my milk to the milk plant for:
+14.45
43
44
Basic Strategy 2:
Set a Floor Price
- Minimum Price contract with milk buyer, or
- Buy a PUT Option at the CME
(15.25 strike price for $.79) for a floor of $14.46
60
50
40
30
20
10
0
9.35
10
10.23
12
13.51
15
16.8
18
21
14.46
© 2008
Farm & Risk Management Team
Let’s Practice: Setting a Floor
Price via Buying a PUT Option
45
Always Ask and Answer –
“What am I doing to myself?”
•
Buy a $15.50 July PUT Option for $.62
–
What price position have you secured for
200,000 lbs of July milk?
$14.88 minimum
(15.50-.62)
© 2008
Farm & Risk Management Team
46
May Milk Announced at $17.00
Jan 21 Purchased right to sell milk for
$15.50, but I don’t have to (PUT).
My cost for that right (premium):
May
Sell my milk to the milk plant for:
May
I have the right to sell milk for
$15.50 and buy back for $17.00.
Thanks, but no thanks (PUT expires
worthless)
My base price before brokers fees
-.62
+17.00
0
+16.38
47
May Milk Announced at $12.00
Jan 21 Purchased right to sell milk for
$15.50, but I don’t have to (PUT).
My cost for that right (premium):
May
Sell my milk to the milk plant for:
May
I have the right to sell milk for
$15.50 and buy back for $12.00.
Thanks, I’ll do it (exercise my PUT)
My base price before brokers fees
-.62
+12.00
+3.50
+14.88
48
Advanced Strategies
•
Want to increase your protection?
Take advantage of market gains?
Premiums to costly?
–
–
–
–
–
Roll up to futures
Roll up to a higher PUT
Forward contract and buy a CALL option
Buy a PUT and sell a CALL
Roll down futures to a PUT
© 2008
Farm & Risk Management Team
49
Marketing
Plan
50
MARKETING PLAN – WHY?
1.
Instills discipline into a
normally emotionally driven
decision
2.
Provides a means to evaluate,
benchmark, and learn the
science and art of marketing
51
Marketing Plan Instills
Discipline Into Normally
Emotional Decisions
$9.99 Soybeans
52
YOU WILL BE WRONG
You Can’t Outguess The Market!!
Good producers hate to be
wrong!
Good marketers have to get
use to being wrong!
© 2008
Farm & Risk Management Team
Emotions of Fear and Greed are Killers of
Good & Sound Marketing Decisions
53
Fear often blinds us to opportunity
Greed blinds us to danger
Source: Smith, Linda. Top Producer, A8-9, 1999.
© 2008
Farm & Risk Management Team
Parts of a Marketing Plan
54
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
55
Marketing Resources, Risk
Tolerance, Non-Price Objectives
•
Marketing Resources
–
•
Skill level, computer power and savvy,
marketing services, relationship with broker,
banker, market advisors, skills of other
partners/spouse
Risk Tolerance
–
–
What are your personal attitudes towards risk
What is your operation’s capacity to absorb risk
© 2008
Farm & Risk Management Team
Marketing Resources, Risk
Tolerance, Non-Price Objectives
•
56
Non-Price Objectives
–
–
–
–
Develop relationships (banker, broker,
advisors)
Start/join a marketing club
Subscribe to an advisory service
Weekly/monthly farm marketing meetings
What’s your non-price objective?
What will you do after breakfast
tomorrow to make it happen?
© 2008
Farm & Risk Management Team
57
Know the Playing Field
Situation, Outlook, and
Historical Prices
© 2008
Farm & Risk Management Team
58
Situation and Outlook
•
U.S. Production
–
–
•
•
•
•
Cow numbers
Production per cow
Demand
Value of the dollar (export demand)
Corn, soybean, and forage supplies and
quality
“……..”
© 2008
Farm & Risk Management Team
Historical Prices
What is a Good Price Based on What
the Market Provides
•
59
History
–
–
–
–
What is the average price for each month
What is the top third price, top 16% price
What is the seasonality of prices
What is the average, top 1/3, etc. based on
forward pricing opportunities
Word of Caution
History may have changed?
© 2008
© 2005
Farm & Risk Management
Team
60
Class III Prices
1980-2009
Jan 1980
Mar 1982
May 1984
Jul 1986
Sep 1988
Nov 1990
Jan 1993
Mar 1995
May 1997
Jul 1999
Sep 2001
Nov 2003
Jan-06
Mar-08
21
19
17
15
13
11
9
1980-2004
Average: 11.94
Median: 11.89
Top 25%: 12.54
Avg + SD: 13.35
2004-2009
Average: 14.69
Median: 14.24
Top 25%: 17.04
Avg + SD: 17.80
© 2008
Farm & Risk Management Team
61
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
62
Know Your Marketing Toolbox
Cash Market
Forward Contract
Minimum Price Contract
Futures Market
Futures Contract
PUT Option
CALL Option
And all kinds of combinations of the above!
LGM-Dairy
© 2008
Farm & Risk Management Team
63
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
64
Financial Objectives - Example
•
•
•
120 cows @22,000 lbs = 26,400 cwt per yr.
Costs of Production = $14.75
Financial Objectives beyond cost recovery:
$40,000 (family living contribution from cows)
$40,000 (retained earnings for business - future
expansion plans, improvements, etc.)
$30,000 (misc)
$110,000 (approx. 9-12 % ROROA)
© 2008
Farm & Risk Management Team
65
Personal Price Targets
Purple Ribbon:
Blue Ribbon:
Red Ribbon:
White Ribbon: (cash costs)
66
Item
Total
Cost
Basic cash costs
Costs of Production
Family Living
40,000
Retained Earnings 40,000
Misc
30,000
Cost per Cumulative
cwt
12.73
14.75
1.52
1.52
1.14
12.73
14.75
16.27
17.79
18.93
-Based on 26,400 cwt produced per year
© 2008
Farm & Risk Management Team
67
Basis
•
Difference between announced price and
mailbox price
© 2008
© 2005
Farm & Risk Management
Team
Marketing Price Triggers for
Action
Your Personal Expected
Mailbox Price
Basis
Target
18.93
1.25
68
Marketing
Price
Triggers
17.68
17.79
1.25
16.54
16.27
1.25
15.02
12.73
1.25
11.48
Error on your basis estimate to the low side. Being
wrong leaves more money in your pocket.
© 2008
Farm & Risk Management Team
69
Price Triggers For Action
- Gun is loaded
- Duck is in my sights
- It’s duck season
- It’s a big duck
A Pricing opportunity:
- Exceeds my purple
ribbon price target
- Is top 15% historically
PULL THE TRIGGER!
PULL THE TRIGGER!
© 2008
© 2005
Farm & Risk Management
Team
70
Marketing Protocols
Your Marketing Rules
Tough, Tough, Tough
© 2008
Farm & Risk Management Team
71
Months Away
From Market
Month
How Does The
Price Compare
to Historical
Prices
What is the
General
Outlook for
Prices
Marketing Action What
is My Marketing
Decision

Set floor with
unlimited upside
Less than 3
Top 1/3
Trigger Price
At What Price
Will I Engage
This Action


Hedge 80%

3-6
Middle 1/3



Low 1/3


More than 6
© 2005
72
What is Your Marketing
Philosophy?
73
Marketing Tools and Strategies
What are they?
When is it best to use them?
Market
Do Nothing
Do Something
Hedge, Put
Outlook is up
???
74
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
75
Following are
some people we
know who made
their plans
happen!!!
© 2005
76
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
77
His music teacher once said of him, “As a
composer he is hopeless.”
Who was it?
Beethoven
© 2005
78
This person’s teacher told him he was too stupid to
learn anything.
Who was it?
Thomas Edison
© 2005
79
He was cut from his high school basketball team.
Who was it?
Michael Jordan
© 2005
80
This person was fired from his first job because he
lacked imagination.
Who was it?
Walt Disney
© 2005
81
This person failed the 6th grade.
Who was it?
Winston Churchill
© 2005
82
Be Realistic
•
Are you reducing price risk or are you
wanting a higher price?
© 2008
Farm & Risk Management Team
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
$15,000
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Cumulative Marketing Gain/Loss
Think of Marketing in Two Levels
Reduce Price Risk
- Easy to do, Passive
- Effective
- Likely will not result in
higher price
Increase Price
- More complex, Active
- More involved
- More Time
- New set of skills required
- May result in higher price
87
Which Type of Marketer
Are You?
Cool!
I’m getting a
great return
on my
investment
#@%$^&
I lost
$2.07!!!
Both
Forward
Contracted
for $18.00
Announced
Price Was
$20.07
88
© 2008
Farm & Risk Management Team
Let’s Practice Our Marketing Savvy!!
A Game Based on Managing and
Marketing the Margin
90
Case Farm
•
•
•
•
•
•
100 lactating cows
Parlor/Free Stall facilities
Ration based on 23,000 lb herd average
$1.30 of income beyond class III milk sales
Budget based on current forecasts for 2010
Estimates based on the “Wisconsin Dairy
Enterprise Planning Budget 2008” (Bruce Jones
and Ken Barnett with modifications by Ken
Bolton), Center for Dairy Profitability
© 2008
Farm & Risk Management Team
91
Case Farm
Price
Targets
Description
Feed
Costs
$/cwt
$7.50
Total income and price needed to cover
Red
feed costs and minimum family living,
Ribbon
livestock, replacement, and labor costs.
$14.63
Total needed to cover feed, Red Ribbon,
Blue
and facility and equip (Cost of
Ribbon
Production).
$16.11
Purple 10% ROROA
Ribbon Total needed above feed costs.
$17.17
92
First of Three
Marketing Dates
You can price protect feed costs and
milk now, the 2nd date or the 3rd date
OR you can let it ride
© 2008
Farm & Risk Management Team
93
Current Feed Cost Estimates
Dice
%
Hay
SBM &
Corn
Protein
A
2
3
114
3.00
200
350
5.70
B
3,4,5
25
126
3.50
275
450
6.63
C
6,7,8
44
132
4.25
340
550
7.49
D 9,10,11
25
152
5.00
380
650
8.63
E
3
165
5.50
420
750
9.45
12
Min.
Mix
Feed Costs
per CWT
Decision: You can 1) lock these costs in or 2) let them ride
What is Your Decision?
94
Price Targets Given Feed Costs
Red
Blue
Purple
A
B
Feed
Costs
5.70
6.63
12.83
13.76
14.31
15.24
15.37
16.30
C
D
E
7.49
8.63
9.45
14.62
15.76
16.58
16.10
17.24
18.06
17.16
18.30
19.12
Red Ribbon: minimum family living + livestock + replacement, + labor
Blue Ribbon: Red + facility and equipment costs
Purple: Red + Blue + 10% ROROA
1st of 3 Pricing
Opportunities
Outlook:
Futures: 14.00
20
19
18
17
16
15
14
13
12
11
10
1/21/20097 3/21/2009
months
out
Put Prices
$13.75 @ .64: 13.11
$13.25 @ .50: 12.75
Futures Close
Average (14.40)
Top 1/3rd (15.50)
5/21/2009
7/21/2009
96
1st of 3: Make a Decision and Record It
What you can do
C-III
Basis
Your Price
--
--
unknown
Lock-in with Futures
14.00
1.30
15.30
High Floor price
13.11
1.30
14.41 or higher
Put Prices
Low Floor Price
12.75
1.30
14.05 or higher
$13.75 @ .64: 13.11
$13.25 @ .50: 12.75
Do Nothing
A
Feed
Costs
Red
Blue
Purple
5.70
12.83
14.31
15.37
Futures: 14.00
Outlook:
20
19
18
B
6.63
13.76
15.24
16.30
17
16
C
7.49
14.62
16.10
17.16
15
14
13
D
8.63
15.76
17.24
18.30
12
11
E
9.45
16.58
18.06
19.12
10
1/ 2 1/ 2 030/ 92 1/ 2 05/
0 92 1/ 2 07/
0 92 1/ 2 0 0 9
97
Second of Three
Marketing Dates
Feed costs may have changed. The dice will be
thrown with the following result:
Dice Result
2, 3, 4, or 5
6, 7, or 8
9, 10, 11, or 12
Probability
Result
28%
Feed costs decrease one step
44%
Feed Costs do not change
from what they were
28%
Feed costs increase one step
98
Current Feed Cost Estimates
Dice
%
Hay
SBM &
Corn
Protein
A
2
3
114
3.00
200
350
5.70
B
3,4,5
25
126
3.50
275
450
6.63
C
6,7,8
44
132
4.25
340
550
7.49
D 9,10,11
25
152
5.00
380
650
8.63
E
3
165
5.50
420
750
9.45
12
Min.
Mix
Feed Costs
per CWT
Decision: If you have not already locked in costs,
You can 1) lock these costs in or 2) let them ride
What is Your Decision?
2nd of 3 Pricing
Opportunities
Outlook:
Futures: 13.74
20
19
18
17
16
15
14
13
12
11
10
1/21/2009 73/21/20095 5/21/2009 7/21/2009
months months
out
out
Put Prices
$13.50 @ .60: 12.90
$13.00 @ .35: 12.65
Futures Close
Average (14.40)
Top 1/3rd (15.50)
100
2nd Date: Make a Decision and Record It
What you can do
C-III Basis
Do Nothing
Your Price
--
--
unknown
Lock-in with Futures
13.74
1.30
15.04
High Floor price
12.90
1.30
14.20 or higher
Low Floor Price
12.65
1.30
13.95 or higher
Futures: 13.74
Put Prices
$13.50 @ .60: 12.90
$13.00 @ .35: 12.65
Outlook:
Feed
Costs
Red
A
5.70
12.83
14.31
15.37
B
6.63
13.76
15.24
16.30
C
7.49
14.62
16.10
17.16
D
8.63
15.76
17.24
18.30
E
9.45
16.58
18.06
19.12
Blue
Purple
20
19
18
17
16
15
14
13
12
11
10
1/21/2009
3/21/2009
5/21/2009
7/21/2009
101
Third and Last
Marketing Date
Feed costs may have changed. The dice will be
thrown with the following result:
Dice Result
2, 3, 4, or 5
6, 7, or 8
9, 10, 11, or 12
Probability
Result
28%
Feed costs decrease one step
44%
Feed Costs do not change
from what they were
28%
Feed costs increase one step
102
Current Feed Cost Estimates
Dice
%
Hay
Corn
SBM &
Protein
Min.
Mix
Feed Costs
per CWT
A
2
3
114
3.00
200
350
5.70
B
3,4,5
25
126
3.50
275
450
6.63
C
6,7,8
44
132
4.25
340
550
7.49
D 9,10,11
25
152
5.00
380
650
8.63
E
3
165
5.50
420
750
9.45
12
Decision: If you have not already locked in costs,
You can 1) lock these costs in or 2) let them ride
What is Your Decision?
3rd and Last Pricing
Opportunity
Outlook:
Futures: 17.40
20
19
18
17
16
15
14
13
12
11
10
1/21/2009 73/21/20095 5/21/20093 7/21/2009
months months
months
out
out
out
Put Prices
$17.25 @ .83: 16.42
$16.25 @ .42: 15.83
Futures Close
Average (14.40)
Top 1/3rd (15.50)
104
3rd Date: Make a Decision and Record It
What you can do
C-III Basis
Do Nothing
Your Price
Futures: 17.40
--
--
unknown
Lock-in with Futures
17.40
1.30
18.70
Put Prices
High Floor price
17.25
1.30
18.55 or higher
Low Floor Price
16.25
1.30
17.55 or higher
$17.25 @ .83: 16.42
$16.25 @ .42: 15.83
Outlook:
Feed
Costs
Red
Blue
Purple
A
5.70
12.83
14.31
15.37
B
6.63
13.76
15.24
16.30
C
7.49
14.62
16.10
17.16
D
8.63
15.76
17.24
18.30
E
9.45
16.58
18.06
19.12
20
19
18
17
16
15
14
13
12
11
10
1/21/2009
3/21/2009
5/21/2009
7/21/2009
105
Final Feed Costs
3.00
SBM &
Protein
200
Min.
Mix
350
Feed Costs
per CWT
5.70
126
3.50
275
450
6.63
44
132
4.25
340
550
7.49
D 9,10,11
25
152
5.00
380
650
8.63
E
3
165
5.50
420
750
9.45
Dice
%
Hay
Corn
A
2
3
114
B
3,4,5
25
C
6,7,8
12
Dice Result
2, 3, 4, or 5
Probability
Result
28%
Feed costs decrease one step
6, 7, or 8
44%
9, 10, 11, or 12
28%
Feed Costs do not change
from what they were
Feed costs increase one step
Markets Are Closed and Class III
Announced at: $10.90/cwt
20
19
18
17
16
15
14
13
12
11
10
1/21/2009 3/21/2009 5/21/2009 7/21/2009
Announced
Class III = $10.90
Your Price = 12.20
Futures Close
Average (14.40)
Top 1/3rd (15.50)
© 2008
Farm & Risk Management Team
What Was Your Price Compared
to the Price Targets?
A
B
C
D
E
Feed
Costs
5.70
6.63
7.49
8.63
9.45
Red
Blue
Purple
12.83
13.76
14.31
15.24
15.37
16.30
14.62
15.76
16.58
16.10
17.24
18.06
17.16
18.30
19.12
107
Red Ribbon: minimum family living + livestock + replacement, + labor
Blue Ribbon: Red + facility and equipment costs
Purple: Red + Blue + 10% ROROA
Summary of Locked-in Pricing
Opportunities (Profit/Cow/Month)
Announced
COP 10.90 base
2nd Date
13.74 base
1st Date
14.00 base
108
3rd Date
17.40 base
Your Price: Your Price: Your Price: Your Price:
12.20
15.04
15.30
18.70
A
B
5.70
6.63
(4,050)
(5,842)
1,393
(398)
1,892
100
8,408
6,617
C
D
7.49
8.63
(7,475)
(2,032)
(1,533)
4,983
E
9.45
(9,667)
(11,233)
(4,223)
(5,790)
(3,725)
(5,292)
2,792
1,225
Summary of Locked-in Pricing
Opportunities (Profit/Cow/Annualized)
Announced
COP 10.90 base
2nd Date
13.74 base
1st Date
14.00 base
109
3rd Date
17.40 base
Your Price: Your Price: Your Price: Your Price:
12.20
15.04
15.30
18.70
A
B
5.70
6.63
(48,600)
(70,100)
16,720
(4,780)
22,700
1,200
100,900
79,400
C
D
7.49
8.63
(89,700)
(24,380)
(18,400)
59,800
E
9.45
(116,000)
(134,800)
(50,680)
(69,480)
(44,700)
(63,500)
33,500
14,700
110
Final Comment
Advice and counsel from others is critical
- Extension Agents
- Lenders
- Consultants
- Marketing Specialist
- Etc.
BUT, in the end it is your call:
112
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
113
114
How to Play the Game
•
•
•
•
•
Explain the case farm, importance of feed costs, and thoroughly explain the price targets and where
they came from.
Explain that there will be three early marketing dates where both feed costs and milk prices can be
secured or the participant can wait.
First Market Date
–
Roll dice for current feed costs
 Make a decision to lock-in feed costs or let them ride
–
Show pricing opportunity
 Make a decision on protecting milk price
Do the same for 2nd and 3rd Marketing Dates
Final Date
–
•
Roll the Dice for the final feed costs. If participants have not protected feed costs prior they are
“stuck” with the results of this final roll. If they had secured earlier then the earlier price is
what they get no matter what.
Show Final Announced Price and make sure each participant works through
the final results.
© 2008
Farm & Risk Management Team
Sources: Websites
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
The Oil Drum: http://www.theoildrum.com/story/2006/10/5/215316/408
Association for the Study of Peak Oil: http://aspo-usa.com/
Oil Market Report: http://omrpublic.iea.org/
Now and Future: http://www.nowandfutures.com/index.html
WTRG Economics: http://www.wtrg.com/
World Bank Group: http://ddp-ext.worldbank.org/ext/DDPQQ/member.do?method=getMembers
Farm Foundation: http://www.farmfoundation.org/
USDA Economic Research Service: http://www.ers.usda.gov/
Trading Charts, Inc: http://futures.tradingcharts.com/
CHOICES: http://www.choicesmagazine.org/magazine/issue.php
Foreign Agricultural Service: http://www.fas.usda.gov/default.asp
University of Illinois Farmdoc website: http://www.farmdoc.uiuc.edu//
Iowa State University Ag Decision Maker: http://www.extension.iastate.edu/agdm/
University of Wisconsin, Center for Dairy Profitability: http://cdp.wisc.edu/
University of Minnesota Center for Farm Financial Management: http://www.finbin.umn.edu/
© 2008
Farm & Risk Management Team
Sources: Written Articles
•
•
Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food
Commodity Prices. USDA/ERS, July 2008. http://www.ers.usda.gov/Publications/WRS0801/
Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term
Adjustments?” Choices, AAEA, 2nd qrt 2008 23(2).
http://www.choicesmagazine.org/magazine/issue.php
•
•
•
•
•
•
Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now?” Choices, AAEA, 2nd qrt
2008 23(2).
Lawrence, John D., James Mintert, John D. Anderson, and David P. Anderson. “Feed Grains and Livestock:
Impacts on Meat Supplies and Prices.” Choices, AAEA, 2nd qrt 2008 23(2).
Irwin, Scott H., Philip Garcia, Darrel L. Good and Eugene L. Kunda. “Recent Convergence Performance of
CBOT Corn, Soybean, and Wheat Futures Contracts.” Choices, AAEA, 2nd qrt 2008 23(2).
Mark, Darrell R., B. Wade Brorsen, Kim B. Anderson, and Rebecca M. Small. “Price Risk Management
Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants.” Choices, AAEA, 2nd
qrt 2008 23(2).
Abbott, Philip C., Christopher Hurt, and Wallace E. Tyner. “What’s Driving Food Prices?” Issue
Report from the Farm Foundation, July 2008.
http://www.farmfoundation.org/news/templates/template.aspx?articleid=404&zoneid=26
Fortenbery, T. Randall and Hwanil Park. “The Effect of Ethanol Production on the U.S. National
Corn Price.” Univ. of WI-Madison Dept. of Ag and Applied Econ: Staff Paper no. 523, April 2008.
© 2008
Farm & Risk Management Team
Sources: Written Articles
•
•
•
•
•
Irwin, Scott. “Crop value and volatility in a new era” 2008 Illinois Farm Economics Summit,
http://www.farmdoc.uiuc.edu//presentations/index.asp .
Schnitkey, Gary. “Prospects for Crop Production Costs” 2008 Illinois Farm Economics Summit,
http://www.farmdoc.uiuc.edu//presentations/index.asp .
Schnitkey, Gary. “Farm Economics Facts & Opinions”, Department of Agricultural and Consumer
Economics, College of Agricultural, Consumer, and Environmental Sciencds, university of Illinois at
Urbana-Shampaign, FEFO 08-13, July 11, 2008.
Duffy, Michael, and Darnell Smith. “Estimated Costs of Crop Production in Iowa- 2009,” Ag
Decision Maker, Iowa State University, University Extension, FM-1712 Revised, December 2008.
Duffy, Mike. “Estimating costs of crop production for 2009,” Ag Decision Maker Newsletter, Iowa
State University, University Extension, January 2009
© 2008
Farm & Risk Management Team