dairy today’s elite producers business conference … at the crossroads - mendes.pdf ·...
TRANSCRIPT
Dairy Today’s Elite Producers Business Conference
November 8, 2010
Dairy Situation and Outlook
California’s Golden Age of Dairying 1970 – 2008Growth rates averaged 3‐4% annually (US 1.2%)1993 – Top Ranking Dairy StateEra Mega‐Dairies – lowest cost per cwt in world
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1973 1978 1983 1988 1993 1998 2003 2008
Mill
ion
lbs.
California Milk Production, 1973 to 2010
Annual Average:+3.7%
Trendline @+4.0%
per year
2008‐09 Dairy Financial CrisisNegative margins due to low milk prices, high feed costsUnprecedented loss of producer equityNumber of dairies declined from >2000 in 2004 to 1600 in 2010Major disruption in dairy families – my storyIs this the beginning of the end?
Challenge #1 – Access to Operational Capital
Commercial Banks & Farm Credit are our major sourceBanks demanding the re‐establishment of equitySome banks announced scaling back or exiting from dairy lendingInterest expense is a larger line item on financials
What happens if high interest rates return?
Meeting Challenge #1 – Access to Operational Capital
Must seek refinancing on different termsMust protect against inflation with hedge tools, e.g. SWAPSMust involve Lender by education, communication , more frequent contact regarding long term
Challenge #2 – Positive Income over Feed Costs
Dairymen are price takers – little controlVolatility of milk & feed markets is our enemyGrain and forage are approx. 50% of operating costs
Grain imported from MidwestForages are home‐grown
Meeting Challenge #2 – Positive Income over Feed Costs
Must mitigate volatility in markets with hedging tools:Milk Future Options and SWAPS“Margin Protection” concept hedging
Must continue/expend use of California’s many byproductsMust focus on acquiring additional water
Challenge #3 – Plant Capacity
California – an attractive location for plantsMilk supply, location, population, make allowance
But, some huge negativesHigher building and operating costs, more regulations
Major new plants built by dairymen, i.e. cooperatives
16.71
5.77 4.29
38.37
43.81
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Class 1 Class 2 Class 3 Class 4a Class 4b
Mil
lion
lbs.
per
day
Estimated Plant Processing Capacity by Class, 2009(based on pooled solids utilzation and available milk supply)
Milk production = 109 million lbs. per dayor 40 billion lbs. per year
Meeting Challenge #3 – Plant Capacity
Why build more plants?Growth by dairymen is essential to long‐term survivalCooperatives must build plants to:
Balance production growth with demand of new, primarily foreign, buyersConcentrate building/expansion for niche domestic markets.
Challenge #4 – Increase efficiencies & Meet Environmental Regulations
Few new dairies built due to environmental costsGet more production per cowAdded environmental costs affect our competitiveness
Initial costs of compliance ‐ $60,000 my dairyAnnual costs budgeted $40,000Regulation “targets” are moving more slowly
Meeting Challenge #4 – Increase Efficiencies & Meet Environmental Regulations
Must find efficiencies in per cow production using latest technologies – genetics and genomics, sexed semen, nutrition advancesMust continue finding alternative technologies to reduce air & water pollutionAs environmental rules move East, our competitive position will improve
Summary – Future of Dairying in California
Less “facility” ownerships but with more cows and production per cowNew mega‐dairies will be built but at slower rateDairymen will be more educated & more exposed to financing practices & commodity tradingNew/expanded plants will be built primarily by cooperatives with emphasis on specialty products
Summary – Future of Dairying in California (cont.)
Dairymen will spend less time with cows and more in the office where critical business decisions become paramount.Decide whether or not to support National Supply ManagementSurvival in the absence of a relevant support price program