Transcript No Slide Title

1
Maneuver in the Right Direction: It’s
All About Margin
PDPW
Dairy Profit Symposium
December 10, 2010
Mark Stephenson and Kevin Bernhardt
Center for Dairy Profitability
http://cdp.wisc.edu/
2
Agenda for the Day
Test our Marketing Savvy
 What’s Your Marketing Mindset
 Volatility
 What’s Your “Real” Marketing Goal
 Where’s Your Margin Risk
 Marketing Management
 Situation and Outlook
 Spillover Impact of Good Marketing Mgt.

Goals For the Day
1.
2.
3.
Make your head hurt
Get “Real” about marketing
management
Hopefully send you home with
something you can put to work
tomorrow morning after breakfast
3
Let’s Practice Our Marketing Savvy!!
1st of 4 Pricing
Opportunities
Futures: 14.00
20
19
18
17
16
15
14
13
12
11
10
1/21/2009 7 3/21/2009
months
out
Put Prices
$13.75 @ .64: 13.11
$13.25 @ .50: 12.75
Futures Close
5/21/2009
7/21/2009
2nd of 4 Pricing
Opportunities
Futures: 13.74
20
19
18
17
16
15
14
13
12
11
10
1/21/2009 7 3/21/2009 5 5/21/2009
months
months
out
out
Put Prices
$13.50 @ .60: 12.90
$13.00 @ .35: 12.65
Futures Close
7/21/2009
3rd of 4 Pricing
Opportunities
Futures: 15.15
20
19
18
17
16
15
14
13
12
11
10
4
1/21/2009 7 3/21/20095 5/21/2009
months
mos mos
out
out out
Put Prices
$15.00 @ .70: 14.30
$14.75 @ .58: 14.17
Futures Close
7/21/2009
4th and Last Pricing
Opportunity
Futures: 17.40
20
19
18
17
16
15
14
13
12
11
10
4
3 7/21/2009
1/21/2009 7 3/21/20095 5/21/2009
months
mos mos mos
out
out out
out
Put Prices
$17.25 @ .83: 16.42
$16.25 @ .42: 15.83
Futures Close
9
Markets Closed
What’s Your
Price?
10
Case Farm
Price
Targets
Description
Price needed above feed costs for
Red
minimal family living and critical cash
Ribbon
costs.
Price needed above feed costs for total
Blue
Costs of Production and normal family
Ribbon
living.
Purple Price needed above feed costs for Red,
Ribbon Blue, and 10% ROROA
$/cwt
$7.13
$8.61
$9.67
Current Feed Cost Estimates
Roll the
World Situation
Dice
%
Feed Costs per
CWT
A
B
C
D
E
2
3,4,5
6,7,8
9,10,11
12
3
25
44
25
3
5.70
6.63
7.49
8.63
9.45
11
12
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 + critical cash costs
Blue Ribbon: Normal family living + all Costs of Production
Purple: 10% ROROA
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
Announced
Class III = $10.90
Mailbox = 12.20
Futures Close
3/21/2009
5/21/2009
7/21/2009
Summary of Locked-in Pricing Opportunities
vs Red Ribbon Target ($/Cow/Year)
Red
Target
Announced
10.90 base
2nd Date
13.74 base
3rd Date
15.15 base
14
4th Date
17.40 base
Your Price: Your Price: Your Price: Your Price:
12.20
15.04
16.45
18.70
A
B
12.83
13.76
(145)
(359)
508
294
833
619
1,350
1,136
C
D
14.62
(557)
97
421
938
15.76
E
16.58
(819)
(1,007)
(166)
(354)
159
(30)
676
488
Negative means less than Red Ribbon Target
Summary of Locked-in Pricing Opportunities
vs Blue Ribbon Target ($/Cow/Year)
Blue
Target
Announced
10.90 base
2nd Date
13.74 base
3rd Date
15.15 base
15
4th Date
17.40 base
Your Price: Your Price: Your Price: Your Price:
12.20
15.04
16.45
18.70
A
B
14.31
15.24
(485)
(699)
168
(46)
492
278
1,010
796
C
D
16.10
17.24
(897)
(244)
80
598
E
18.06
(1,159)
(1,348)
(506)
(695)
(182)
(370)
336
147
Negative means less than Blue Ribbon Target
Pricing Opportunities for
November 1999
17
16.5
16
15.5
15
14.5
14
13.5
13
12.5
12
11.5
11
10.5
10
9.5
1/5/19993/5/19995/5/19997/5/19999/5/1999
11/5/1999
Announced
Class III = $9.79
Futures Close
Median (12.48)
Top Third (12.95)
Top 16% (14.47)
Self Assessment of Marketing
Management Readiness
17
Marketing Mindset
18
Volatility and What’s Your Real
Marketing Goal - Mark
19
Marketing Management Case
Study
Gary Grow versus
Paula Purchase
20
Per Cwt Production Costs, 20062010
1.2
1
0.8
0.6
0.4
0.2
Vet/med
Bedding
Marketing
Custom Services
Repairs
Interest on Operating
Hired Labor
Capital Recovery
Fuel, Lube, Electricity
Total Feed Costs
Which of these inputs
costs the most?
Which of these inputs
is most subject to
price risk, that is the
price going
significantly higher
or lower?
0
Source: USDA, Economic Research Service
Per Cwt Production Costs, 20062010
Feed
Capital
Labor, Vet
Source: USDA, Economic Research Service
Per Cwt Production Costs, 20062010
Total Feed Costs
11
All but Feed
10
9
8
7
6
2006
2007
2008
2009
2010
Source: USDA, Economic Research Service
Per Cwt Range from 5% Low to 95%
High Cost Over Last Five Years
Source: USDA, Economic Research Service
Add Feed Costs
Source: USDA, Economic Research Service
26
Cost at Risk (2000-2009)
Source: CFFM
Average
Maximum
Increase
Maximum
Decrease
% change from 10 year avg.
16.3
38.7
20.1
Change from previous year
8.3
24.2
11.6
% change from 10 year avg.
17.6
40.8
24.9
Change from previous year
9.4
24.4
11.3
Expected
Feed Costs
Max
potential
increase
Maximum
potential
decrease
258,000
62,952
-29,154
Total Direct Expenses
Feed Costs
200 Cows
Case Study
200 cows, 22,000 lbs/yr
Gary Grow


Grows all his own feed
needs except some
purchased mineral and
protein supplement mixes
5.3 crop & forage acres per
cow
Paula Purchase


Purchases virtually all feed
needs
Less than 1 crop & forage
acre per cow
28
WHY MARKETING and
WHY A MARKETING PLAN?
29
30
WhichMARKETING?
Circle Does Your
WHY
Marketing Management Fit Into?
What You Have
No Influence or
Control Over
What You
Influence
What
You
Control
31
WHY MARKETING?
1.
Put profit margins more in your circle of control
2.
Reduce the variability of prices and profit margins
3.
It is a key component of farm business and production
planning
a. Forces attention to farm management
b. May expose other shortcomings
4. Get a higher price??????
a. Sometimes --- maybe
32
WHY A MARKETING PLAN?
1.
Instills discipline into an emotionally driven decision
2.
Provides the means to learn more about the economics of
your farm business
a. Marketing may not be what needs your management
attention most!
3.
Provides a means to evaluate, benchmark, and learn the
science and art of marketing (and of making profits)
33
WHY A MARKETING PLAN?
Because without a pre-thought-out
marketing plan the decision-maker
is vulnerable to making decisions
based on short-term trends, news,
perceptions, feelings, fears, greed,
and other emotions.
34
Why a Marketing Plan
Hmmm, I only
have 75 cows,
maybe I should
have given the
contractor a
blueprint!
35
Most Important!
Good Price Risk
Management is a
Mindset
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
36
So, How
Do I Make It
Happen?
38
8-Step Marketing Plan
1.
2.
3.
4.
5.
6.
7.
8.
Know Yourself (and your business partners)
Know Your Market
Know Your Marketing Toolbox
Know Your Marketing Philosophy
Know Your Business
Establish Profit Margin Targets & Price Triggers
Establish Marketing Protocols
Implement and Evaluate
39
8-Step Marketing Plan
1. Know Yourself (and partners)
a. Tolerance and attitude towards risk
b. Are you equipped for successful marketing
c. Human relationships
a. Lender, broker, market advisors
d. What is your marketing mindset, goals, and
philosophy
40
8-Step Marketing Plan
2. Know Your Market
a. Historical price behavior (average, top of
market, etc.)
b. Trends, seasonality, cycles
c. Situation and Outlook
d. Significant supply and demand factors
41
Step 2: Know Your Markets
Class III/BFP Prices
Class III Milk
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
Jan12
2004-2010
Class III/BFP Prices
Class III Prices - 1962-Dec 2010
Top 25%:
Average:
21 Median:
19 Low 25%:
17
80-03
12.54
11.94
11.89
11.10
04-09
17.04
14.69
14.24
12.27
2011 Futures (12/1/10):
$14.66
15
13
11
9
Jan-80
Jan-85
1980-04
Top 25% (80-04)
Jan-90
Jan-95
2004-2010
Top 25% (04-09)
Jan-00
Avg 80-04
Low 25%
Jan-05
Jan-10
Avg 04-09
Low 25%
42
What Does This Mean To Your
Cash Flow?

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
43
Seasonality and Variability,
2004-2010
Handout of Historical Prices
44
45
Pricing Opportunities

Historical Class III prices tell you a lot
about final announced prices, but what
about the opportunities in futures to preprice your milk?
46
May 2010
47
July 2010
48
September 2010
January
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
49
2010
(14.50)
2009
(10.78)
2008
(19.32)
2007
(13.56)
2006
(13.39)
2005
(14.14)
0
0
0
0
0
11
48
49
95
49
26
9
8
0
0
0
0
0
0
1
30
63
62
18
45
18
0
0
0
0
0
0
42
19
32
24
31
50
51
0
6
63
86
174
14
11
1
0
0
0
0
0
0
0
0
29
162
61
0
0
0
0
0
0
0
0
0
47
150
12
3
4
4
1
2
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 >
50
2010
(16.26)
2009
(12.11)
2008
(16.28)
2007
(20.07)
2006
(12.29)
2005
(14.30)
0
0
0
0
0
0
0
12
37
136
151
44
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
51
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
15.50
June
13.00
14.50
15.50
July
13.00
14.50
16.00
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
16.00
December
13.50
13.50
15.50
52
8-Step Marketing Plan
3. Know Your Marketing Toolbox and
Strategies
a.
b.
c.
d.
e.
Local marketing tools
Commodity exchange marketing tools
Insurance instruments
Government tools
Basic and Advanced strategies
Step 3: Know Your
Marketing Toolbox
53
TOOLS
Milk
Grain/Oilseeds
Cash Market
Forward Contract
Minimum Price Contract
Cash Market
Forward Contract
Basis Contract
Hedge to Arrive
Minimum Price Contract
Price Later Contracts
Futures Market
Futures Contract
PUT and CALL Options
Other
LGM Dairy
Futures Market
Futures Contract
PUT and CALL Options
Other
Crop Insurance
Marketing Loans
Step 3: Know Your
Marketing Toolbox
1.
STRATEGY
Lock-in a Known Price
a.
b.
2.
54
The price you set is the price you will receive
Or the price you pay
Set a Floor (Ceiling) Price
a.
b.
Floor: You will receive no less than the floor price
you set, but you may receive more.
Ceiling: You will pay no more than the ceiling
price you set, but you may pay less.
Step 3: Know Your
Marketing Toolbox
3.
STRATEGY
Protect a Profit Margin
a.
b.
4.
55
Use a combination of tools to secure input costs
and milk prices to protect a profit margin
LGM-Dairy
Protect the Risk  Market the Gain
a.
Protect against rising feed costs and/or falling
milk prices early THEN use advanced strategies to
market for gains if and as they occur.
Step 3: Know Your Marketing
Toolbox - 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
56
57
Marketing Tools and Strategies
What are they?
When is it best to use them?
Market
Do Nothing
Do Something
Hedge, Put
Outlook is up
???
Marketing Tools Worksheet
58
Let’s Take a Breath and Commit to
Marketing Preparation
Self Assessments
1. Know Yourself (and your business partners)
2. Know Your Market
3. Know Your Marketing Toolbox
Marketing Preparation Objectives
Worksheet
59
60
8-Step Marketing Plan
4. Know Your Marketing Philosophy
a.
b.
c.
d.
e.
f.
Marketing Goals
Marketing Mindset
What can you live with
What can’t you live with
What is your comfort level with strategies
What about your spouse or other partners!!!!
Marketing Philosophy Worksheet
61
62
8-Step Marketing Plan
5. Know Your Business
a. Production capacity
b. Costs of production
c. Capacity of business to withstand risk



Debt:Asset
Working Capital
Repayment capacity
d. Cost structure (what’s at risk for price change)
63
8-Step Marketing Plan
6. Establish Profit Margin Targets and
Price Triggers
a. What is your red, blue and purple ribbon
profit goals
b. What margin above costs of production do
you need to achieve your profit goals
c. Basis
d. What does this mean in terms of price
targets
64
Price Triggers
- 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!
Profit Margins and Price Triggers
Worksheet
65
66
Sidebar on Calculating COP
Total
Per CWT Sold
Per CWT EQ
CWT Sold per year
44,000
49,042
Other income
95,000
2.16
Basis
61,600
1.40
Class III
767,360
17.44
Total Income
923,960
21.00
Feed Purchases
400,451
9.10
8.16
Vet/Medicine
23,000
.52
.47
Total Costs
819,951
18.64
16.72
?? What does $9.10 of feed per cwt mean?
Profit Margins and Trigger Prices
- EXAMPLE
22,000 lbs sold per cow per year
 200 cows
 Total CWT Sold = 44,000


Per Cwt Income other than milk = $2.85
–
–
1.30 basis
$68,000 ($1.55/cwt)
67
68
Profit Margins and Trigger Prices

Per Unit Sold Costs of Production = $16.17
–

NOTE!: Do not compare to milk price, rather
to income per cwt.
Income desired beyond COP (profit margin)
–
Red Ribbon: $30,000 ($.68/cwt)
 $30,000/44,000
–
–
cwt sold
Blue Ribbon: $75,000 ($1.70/cwt)
Purple Ribbon: $125,000 ($2.84/cwt)
69
Cost at Risk (2000-2009)
Source: CFFM
Average
Maximum
Increase
Maximum
Decrease
% change from 10 year avg.
16.3
38.7
20.1
Change from previous year
8.3
24.2
11.6
% change from 10 year avg.
17.6
40.8
24.9
Change from previous year
9.4
24.4
11.3
Expected
Feed Costs
Max
potential
increase
Maximum
potential
decrease
258,000
62,952
-29,154
Total Direct Expenses
Feed Costs
200 Cows
70
Profit Margins and Trigger Prices

Class III Price Triggers
Income
Plus
to Cover
Planned
Total
Profits
Costs
Less
Accounting
for Other
Income and
Basis
High Feed
Class III
Costs
Trigger
C-III
Trigger
Costs
RED
16.17
16.17
0
.68
2.85
2.85
13.32
14.00
13.62
14.30
BLUE
16.17
1.7
2.85
15.02
15.32
PURPLE
16.17
2.84
2.85
16.16
16.46
71
Remember Seasonality,
2000-2009
Average
110.0
105.0
100.0
95.0
90.0
85.0
80.0
Average
72
Monthly Trigger Prices
% of Season Average
Price (2000-2009)
Red
($14.00)
Blue
($15.02)
Purple
($16.16)
94.9
91.5
93.4
97.9
100.2
101.9
102.2
102.4
106.4
105.5
100.6
103.1
13.28
12.82
13.07
13.71
14.03
14.26
14.30
14.34
14.90
14.78
14.08
14.43
14.25
13.75
14.03
14.71
15.05
15.30
15.34
15.38
15.99
15.85
15.11
15.48
15.33
14.79
15.09
15.82
16.19
16.46
16.51
16.55
17.20
17.06
16.26
16.66
8-Step Marketing Plan
7. Establish Marketing Protocols
What are your rules for marketing
 Price Triggers
 Other Criteria for marketing action
 What will the action be?
Toughest Part Of Marketing!
73
74
Months
Away From
Market
Month
Less
than 3
How Does The
Price Compare to
Historical Prices
Top 1/3
What is the
General
Outlook for
Prices



3-6
More
than 6
Middle 1/3



Low 1/3



Marketing Action What
is My Marketing
Decision
Set floor with
unlimited upside
Hedge 80%
??????
Trigger Price
At What Price
Will I Engage
This Action
75
Marketing Protocols Worksheet

No form/procedure/rules will fit all!
–

Come up with what works for you
Criteria to consider
–
–
How far out are you
Comparison of the pricing opportunity
 Historically
 Current
Situation and Outlook
 What you need for your profit margin
–
Your marketing goals, your marketing comfort
76
8-Step Marketing Plan
8. Implement and Evaluation
Evaluate – Learn - Adjust
77
Make It Happen
Source: Smith, Linda. Top Producer, A8-9, 1999.





Set aside specific time for marketing just as you set time
aside for doing the milking
Define and understand your tolerances (internal and
external)
Develop your personal marketing rules
– time frame within which you make a decision
– buy, sell, hedge, option, forward contract, and do
nothing parameters
Always, Always, Always Review and Revise (with spouse,
partner, banker, Extension agent, broker, etc.)
Market for the long run
© 2005
78
Following are
some people we
know who made
their plans
happen!!!
© 2005
79
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
80
His music teacher once said of him, “As a
composer he is hopeless.”
Who was it?
Beethoven
© 2005
81
This person’s employer would not let him wait on
customers because he did not have enough sense to
close a sale.
Who was it?
F.W. Woolworth
© 2005
82
He was cut from his high school basketball team.
Who was it?
Michael Jordan
© 2005
83
This person was fired from his first job because he
lacked imagination.
Who was it?
Walt Disney
© 2005
84
This person failed the 6th grade.
Who was it?
Winston Churchill
© 2005
85
Resources




“Be Safe! Get to Know Your COP,” Gary Frank, 2008
(article, worksheet, & powerpoint)
(http://cdp.wisc.edu/Milk%20Production%20Costs.htm)
“Class III Marketing Benchmarks,” Kevin Bernhardt,
2010. (http://cdp.wisc.edu/)
PDPW Dairy Profit Symposium materials
 Under “What’s New” at http://cdp.wisc.edu/
“Understanding Dairy Markets”
(http://future.aae.wisc.edu/)
87
Futures Prices in Context
22
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Ja
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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
88
Case Study Based In 2008 Fact



AgFA data sorted by Purchased Feed per cow
Second sort for only those who sold less than
$10,000 worth of crops
Created Paula Purchase
–

Created Gary Grow
–

Top 10% high purchased feed per cow
Low 10% purchased feed per cow
Corroborated with 2nd AgFA sort for 2007-2009
To Gary Grow and Paul Purchase Case Study