Steve Watrin
Email: SDWatrin@landolakes.com
Cell: 612-875-2512
Minneapolis, Minnesota
Nov. 3,4, 2011
The Markets We Live With
Managing Business Risk
Why Risk Management In Dairy
Risk Tools, Education and Tracking
Business Trends And Risk
• Supply Demand Fundamentals
• Review of cheese and NFDM Markets
• Impacts to Milk Price
$2.20
$2.10
$2.00
Cheese Price ($/lb)
$1.90
$1.80
$1.70
2001 +25%
2002 -18%
2003 +12%
2004 +25%
2005 -10%
2006 -17%
20087+42%
2008 +5%
2009 -30%
2010 +10%
$1.60
$1.65
$1.76
$1.85
$1.44
$1.32
$1.50
$1.49
$1.53
5-year
Avg.
$1.50
$1.40
$1.30
$1.20
$1.10
$1.15
$1.30
$1.18
$1.24
$1.00
$0.90
00 l-00 -01 l-01 -02 l-02 -03 l-03 -04 l-04 -05 l-05 -06 l-06 -07 l-07 -08 l-08 -09 l-09 -10 l-10 -11 l-11 -12 l-12
n
n
n
n
n
n
n
n
n
n
n
n
n
Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju
Exports are Picking Up the Slack
Total & Domestic Cheese Consumption (USDA data)
11,000
Cheese Consumption (million lbs)
10,500
10,000
9,500
9,000
Total cheese disappearance 2010
3.55% Increase
Domestic disappearance 2010
2.21% Increase
Export disappearance 2010
1.34% Increase
8,500
8,000
7,500
7,000
6,500
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
48
45
42
39
Million Pounds
36
33
30
27
24
21
18
15
12
9
6
3
0
0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1
-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-1 l-1 n-1 l-1
n
Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju
2.40
Oceania
US
Spread
1.90
1.40
0.90
0.40
-0.10
-0.60
0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 1 1 1
-0 r-0 l-0 t-0n-0 r-0 l-0 t-0n-0 r-0 l-0 t-0 n-0 r-0 l-0 t-0 n-0 r-0 l-0 t-0 n-0 r-0 l-0 t-0n-0 r-0 l-0 t-0n-0 r-0 l-0 t-0n-0 r-0 l-0 t-0n-0 r-0 l-0 t-0n-1 r-1 l-1 t-1 n-1 r-1 l-1
n
u c
u c
u c
u c
u c
u c
u c
u c
u c
u c
u c
u
Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J O Ja Ap J
Ja
n9
Oc 7
t- 9
7
Ju
l-9
Ap 8
r- 9
Ja 9
n0
Oc 0
t- 0
0
Ju
l-0
Ap 1
r- 0
Ja 2
n0
Oc 3
t- 0
3
Ju
l-0
Ap 4
r- 0
Ja 5
n0
Oc 6
t- 0
6
Ju
l-0
Ap 7
r- 0
Ja 8
n0
Oc 9
t- 0
9
Ju
l-1
Ap 0
r- 1
1
Price ($/lb)
$2.20
$1.90
$1.60
$0.70
$0.40
Oceania Blue
U.S.
Red
Spread Green
Support prices lowered
$1.30
$1.00
US skim powder
exports increase, prices
follow
$0.10
-$0.20
-$0.50
• The Outlook for the first half of 2012 is mixed
• Global Dairy Trade (gDT) trading down
• Global economic growth slowing 3.2 vs.
3.9%
• Imports are likely to slow causing prices to
moderate
• Markets more likely unpredictable and
volatile
$21.75
$20.75
$19.75
Class III Price ($/lb)
$18.75
$17.75
$16.75
$15.75
$14.75
$13.75
$12.75
Year Class III
2000 $9.74
2001 $13.10
2002 $10.42
2003 $11.42
2004 $15.39
2005 $14.05
2006 $11.84
2007 $18.04
2008 $17.44
2009 $11.35
2010 $14.41
Change
- 28%
+26%
-26%
+9%
+26%
- 10%
-19%
+34%
- 4%
-54%
+27%
2011 $18.12
+25%
2012
Futures
$17.10
- 6.0 %
5 year
Avg.
$ 14.63
$11.75
$10.75
$9.75
$8.75
0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2
-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-1 l-1 n-1 l-1 n-1 l-1
n
Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju
A Risk Matrix
•
How in the world did we get this volatility
•
•
What’s a hedge
Explain a potential Strategy
• The cost will vary but one thing is for sure
none of the risk management options will
be covered easily or cheaply
• The payoff can be significant because risk
can mean potential as well as peril
• Apathy
• Inertia
“Doing nothing is easier than doing
something”
• Assess for:
• Significance
• Frequency
• Capability to handle
• Keep it
• Move it
Frequency High
of a risk event Operational Risk
Manage for performance.
 Dairy
 Heifers
 Crops
Strategic Risk
Adjust to participate.
Government
Consumers
Industry
Low
Risk Category Mitigation
Strategic Risk Adjust to it
Operational Risk Manage it
Financial Risk Hedge it
Catastrophic Risk Insure it
Financial Risk
Hedge to protect margins
 Revenues
 Purchasing
 Financing
Catastrophic Risk
Insure to protect assets
 Fire
 Liability
 Death
Severity
High
of a risk event
• Cost of production Information
• Actual and forecast
• Basis Information
• Actual and forecast
• Forecasted Production
• Impact of a change in production per cow
• Defined Strategy
• Business Communication
• Tracking System
•
•
•
•
Agreement on Strategy
Agreement on Implementation Plan
On-going Market and Futures market updates
On-going execution updates
• Basis Information
• Monthly
• Yearly
• Offered Contracts
• Accepted Contracts
• Settled Contracts
•
•
•
•
Price
Contracted Volume
Type
Open Volume
• Risk Position of 100% open or closed ( hedged or contracted)
• All right or all wrong
• Example Risk Strategy
• 50% contracted 100% of the time
• 50% correct 100% of the time
• A determined level of acceptable profit
• Plan for implementation
•
•
•
•
•
Who (In the business)
When (price points)
What ( volume)
How (which tools)
Where (Co-op, broker)
• Managerial Accounting
•
•
•
•
•
Feed Cost
Replacements
Labor
Expenses
Financing
Cost of Goods
Feed
$
January
February
March
April
May
June
July
August
September
October
November
December
Cost/Cow
Cost / Cwt
$
Cost/Cow/Day $
Cost % / Cwt
BE Milk/cwt
BE Milk/Day
Cost of Milk
Replace Cost of
ments Goods
$
26,199.74
7,800.00
23,037.15
7,800.00
25,225.06
7,800.00
24,310.96
7,800.00
25,092.51
7,800.00
24,285.55
7,800.00
25,110.39
7,800.00
25,130.51
7,800.00
24,340.70
7,800.00
25,173.61
7,800.00
24,381.86
7,800.00
25,214.77
7,800.00
$ / cwt
5.54
5.72
5.59
5.64
5.60
5.65
5.60
5.60
5.64
5.60
5.64
5.59
1,182
372
1,554
Expenses
$
Labor
$
Financing Cost
Mgt Draw
$
26,727.11
18,086.44
704.52
23,500.86
15,903.21
619.48
25,732.82
17,413.59
678.31
24,800.31
16,782.56
653.73
25,597.59
17,322.08
674.75
24,774.39
16,765.02
653.05
25,615.83
17,334.43
675.23
25,636.36
17,348.32
675.77
24,830.65
16,803.09
654.53
25,680.32
17,378.07
676.93
24,872.64
16,831.50
655.64
25,722.32
17,406.49
678.04
1,206
816
32
Asset Cost
Variable
Culling & Cash Fixed
Funded Cost Of
Cost of
Cost to Death
Milk
Interest Principle Cash Flow Loss
Capital Milk
$ /Cwt
$
$
$ / cwt
$
$
$ / cwt
12.97 3,469.78 9,687.21
15.11
2,656.41
7,338.06
3.21
13.14 3,050.94 8,517.86
15.29
2,586.01
6,452.28
3.37
13.02 3,340.70 9,326.83
15.16
2,557.58
7,065.07
3.21
13.07 3,219.64 8,988.84
15.21
2,547.07
6,809.05
3.22
13.02 3,323.14 9,277.81
15.17
2,544.14
7,027.94
3.21
13.07 3,216.27 8,979.45
15.21
2,544.40
6,801.93
3.22
13.02 3,325.51 9,284.43
15.17
2,545.96
7,032.95
3.21
13.02 3,328.18 9,291.87
15.17
2,548.00
7,038.59
3.21
13.07 3,223.58 8,999.84
15.21
2,550.18
6,817.38
3.22
13.02 3,333.88 9,307.80
15.17
2,552.37
7,050.66
3.21
13.06 3,229.03 9,015.06
15.21
2,554.49
6,828.90
3.22
13.02 3,339.34 9,323.02
15.16
2,556.54
7,062.19
3.21
3,607
157
437
4,201
122
331
453
4.27 $
1.34 $ 5.62
$
4.36 $
2.95 $ 0.11 $ 13.04 $
0.57 $
1.58 $ 15.19
$
0.44 $
1.20 $ 3.22
3.67 $
25.4
21
18
1.16 $
8.0
7
6
$
3.75 $
25.9
21
18
2.54 $
17.5
14
12
0.49 $
3.4
3
2
1.36 $
9.4
8
7
$
0.38 $
2.6
2
2
1.03 $
7.1
6
5
4.83
33.4
27
24
0.10 $ 11.21 $
0.7
77.5
1
64
0
55
13.06
90.3
74
64
Total
Business
Cost
$ / cwt
16.74
17.08
16.79
16.86
16.80
16.86
16.80
16.80
16.86
16.80
16.85
16.79
2.77
19.1
16
14
4,654
$
$
16.82
14.47
100.0
82
71
• Basis is defined as: The cash value of milk greater than or less
than the Class III settlement price
• Producer Website
• Multi Year Average
• Quarterly
• Discounting basis value
2008
My Cash
Class III Price Basis
January
February
March
April
May
June
July
August
September
October
November
December
$19.32
17.03
18.00
16.76
18.18
20.25
18.24
17.32
16.28
17.06
15.51
15.28
$ 21.53 $ 2.21
$
$
$
$
$
$
$
$
$
$
$
2.21
1.13
1.64
0.95
0.86
0.81
1.05
1.32
0.95
1.65
1.30
$17.63 $18.78
High
$20.25 $21.53
Low
$15.51 $16.58
Range(spread) $ 4.74 $ 4.95 $
$1.34
$2.21
$0.81
1.40
Average
$
$
$
$
$
$
$
$
$
$
$
19.24
19.13
18.40
19.13
21.11
19.05
18.37
17.60
18.01
17.16
16.58
2009
My Cash
Class III Price Basis
$10.78
9.31
10.44
10.78
9.84
9.97
9.97
11.20
12.11
12.82
14.08
14.98
$ 12.73 $ 1.95
$
$
$
$
$
$
$
$
$
$
$
10.77
11.66
12.25
11.47
11.17
11.23
12.38
13.29
14.24
15.36
16.48
$11.36 $12.75
$14.98 $16.48
$9.31 $10.77
$ 5.67 $ 5.71
$
$
$
$
$
$
$
$
$
$
$
1.46
1.22
1.47
1.63
1.20
1.26
1.18
1.18
1.42
1.28
1.50
2010
My Cash
Class III Price
$14.50
14.28
12.78
12.92
13.38
13.62
13.74
15.18
16.26
16.94
15.44
13.83
Basis
$ 16.00 $ 1.50
$ 15.50 $ 1.22
$ 13.92
$ 13.91
$ 14.69
$ 15.02
$ 15.23
$ 16.03
$ 17.53
$ 19.01
$ 17.83
$ 16.66
Discount $ $1.40
$14.41 $ 14.72
$1.95
$16.94 $19.01
$1.18
$12.78
$0.00
$ 0.77 $ 4.16 $ 19.01
$
$
$
$
$
$
$
$
$
$
$
$
1.14
0.99
1.31
1.40
1.49
0.85
1.27
2.07
2.39
2.83
1.54
1.54
$2.83
$0.85
$ 1.98
2011
My Cash
Class III Price
Average
Basis
My Basis
$13.48 $ 16.37 $ 2.89 $
17.00 $ 19.42 $ 2.42 $
19.40
$ (19.40) $
16.87
$ (16.87) $
16.52
$ (16.52) $
19.11
$ (19.11) $
21.39
$ (21.39) $
21.67
$ (21.67) $
$ $
$ $
$ $
$ $
$18.18 $17.90 ($9.14)
$21.67 $19.42 $2.89
$13.48 $16.37 ($21.67)
$ 8.19 $ 3.05 $ 24.56
2.14
1.83
1.16
1.37
1.30
1.15
1.19
1.03
1.26
1.48
1.77
1.88
$1.46
• Futures
•
•
•
•
Monthly
Quarterly flat price
Semi Annual flat price
Market Orders
• Options
• Puts
• Calls
• Fence
• OTC Cash Contract
• Product contracts (Cheese, NFDM, Butter)
• Class Price
• Social Expectations
• Food production practices
• Food Quality (value)
• Governmental Regulations
• Food Safety
• Environmental Protection
• Volatility
• Cost of Inputs
• Global Markets
• Access to Capital
• Liquidity
• Working Capital
• Solvency
• Debt to Capital
Frequency High
Operational Risk
of an event
Social Expectations
Food Safety
Food Value
Strategic Risk
Government Regulations
 Food Production
Practices
Environmental
Protection
Low
Risk Category Mitigation
Strategic Risk Adjust to it
Operational Risk Manage it
Financial Risk Hedge it
Catastrophic Risk Insure it
Financial Risk
Volatility
• Cost of Inputs
• Revenues, Global
Markets
Catastrophic Risk
Capital Access
Liquidity
Solvency
Severity
High
of an event
• Risk is present in all business
• Price risk is hear to stay
• Risk management requires resources
• Future business risk trends can be
cataloged an approached with a
management plan
Questions