marketing basics dipping your toe in the shallow end of the marketing pool kevin bernhardt...

Marketing BasicsMarketing BasicsDipping Your Toe in the Shallow Dipping Your Toe in the Shallow

End of the Marketing PoolEnd of the Marketing Pool

Kevin BernhardtKevin BernhardtUW-Extension and Center for Dairy ProfitabilityUW-Extension and Center for Dairy Profitability

January 27, 2010January 27, 2010

Farm & Risk Management Team

© 2008

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)

9


© 2008

Agenda

• Motivation• Basic Marketing Tools and Strategies

– Advanced Strategies - Awareness

• Marketing Plan Basics • Practicing our Marketing Savvy!

10


© 2008

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

11


© 2008

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!

12


© 2008

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.

13


© 2008

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)

14


© 2008

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, using marketing tools, I assured a ceiling cost for corn of $5.35 and $338.50 for SBM.– $5.25 CALL for $.10/bu – 330/ton SBM option for $8.50/ton.

15


© 2008

$3.85

The Importance of Timing[Person 2] • March 2009 Market Prices:

Corn = $3.75 SBM $311.50 – My protected ceiling price turned out to not be

needed. After adding the cost of having that protection my feed costs are:

• March 2009 Profits: $74,925$74,925

16

$320


© 2008

17

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

18

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

19

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

20

Another Real-Life Example

• How much did I pay for feed, fertilizer, and fuel?

• I only did 25% of my production!!

Announced Marketing Gain

Jun 20.25 -.34

Aug 17.32 2.59

Oct 17.06 2.85

Dec 15.28 4.63

Feb 9.31 10.60

Apr 10.78 9.13

Jun 9.97 9.94

Aug 11.2 8.71

Oct 12.82 7.09

21

Which Type of Marketer Are You?

Both Forward

Contracted for $18.00

Announced Price Was

$20.07

Cool!I’m getting a great return

on my investment

#@%$^& I lost

$2.07!!!

And could

have had $21.25

WHEN IT COMES TO WHEN IT COMES TO MANAGEMENT, WE ARE MANAGEMENT, WE ARE

NOT ALL THE SAMENOT ALL THE SAME

MANAGEMENT MANAGEMENT MATTERSMATTERS

19,000 21,000 23,000 25,000

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

23

Production Matters

Price Matters

$137 hay, $4.00 corn, $300 SBM

Return to Management and Labor

-15% -10% -5%23,000

Avg 5% 10% 15%

10 (85,938) (93,206) (101,166) (109,923) (119,117) (128,311) (137,505)

11 (62,938) (70,206) (78,166) (86,923) (96,117) (105,311) (114,505)

12 (39,938) (47,206) (55,166) (63,923) (73,117) (82,311) (91,505)

13 (16,938) (24,206) (32,166) (40,923) (50,117) (59,311) (68,505)

14 6,062 (1,206) (9,166) (17,923) (27,117) (36,311) (45,505)

15 29,062 21,794 13,834 5,077 (4,117) (13,311) (22,505)

16 52,062 44,794 36,834 28,077 18,883 9,689 495

17 75,062 67,794 59,834 51,077 41,883 32,689 23,495

18 98,062 90,794 82,834 74,077 64,883 55,689 46,495

24

Input Costs Matter

Increase in Feed CostsDecrease in Feed Costs

ROROE (mrkt basis w economic depreciation)CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic)

-10

-5

0

5

10

15

20

25

2006 2007 2008

Low 25%

Middle 25%

High 25%


© 2008

Management Matters

• 110 MN and WI farms, Average of 2006 and 2007

26

Bottom 20%

20-40% 40-60% 60-80% Top 20%

Net Ret. 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

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”

27


© 2008

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

28

A Great Deal


© 2008

29

Basic Marketing Tools and Strategies

A Review


© 2005

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


© 2008

31

Tools in the Marketing Toolbox

Cash MarketForward Contract

Minimum Price Contract

Futures MarketFutures Contract

PUT OptionCALL Option

And all kinds of combinations of the above!LGM-Dairy


© 2008

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

32


© 2008

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

33


© 2008

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

34

35

You

Local Broker

CME

Pit/Trading Floor

Other Party

Margin Account!!36

Margin Account


© 2008

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]

37


© 2008

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]

38


© 2008

39

Basic Strategies (2 Basic Strategies & 2 Tools)

1. Lock-in a known price. The price you set is the price you will get.

1. Forward contract with your milk buyer

2. Sell a futures contract on the CME

2. Set a Floor price. You will get no less than the floor price, but you may get more.

1. Minimum price contract with your milk buyer

2. Buy a PUT option on the CME


© 2008

0102030405060

9.35 10 10.23 12 13.51 15 16.8 18 21

40

15.35

- Forward Contract with milk buyer, or- Sell June futures contract at CME for 15.35

Basic Strategy 1: Lock It In!


© 2008

41

• 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 ContractingAdvantages:1) Achieves a “specific” price or

profit objective2) Flexible in terms of quantities

of milk to contract3) Simple to use4) No margin account or callsDisadvantages:1) Locked into a milk buyer2) Can’t get out of contract if

markets change, must deliver!3) Forgo higher prices

Locking In a Price


© 2008

42

Let’s Practice Selling Futures

• May Futures are trading at $14.75 – What price position have you secured for 200,000 lbs

of milk in May?

Always Ask and Answer – Always Ask and Answer – “What am I doing to myself?”“What am I doing to myself?”

($14.75)

May Milk Announced at $17.0043

Jan 21 Sold milk on futures market for:

May Sell my milk to the milk plant for:

May Cash settled (buy back) futures at:

My base price before brokers fees

+14.75

+17.00

-17.00

+14.75


Jan 21 Sold milk on futures market for:


May Cash settled (buy back) futures at:


+14.75

+12.00

-12.00

+14.75

Forward Contract May Milk Announced at $17.00

45

Jan 21 Forward contract May milk for $14.45 (14.75-.30):

May Sell my milk to the milk plant for: +14.45

Forward Contract May Milk Announced at $12.00

46

Jan 21 Forward contract May milk for $14.45 (14.75-.30):

May Sell my milk to the milk plant for: +14.45


© 2008

0102030405060

9.35 10 10.23 12 13.51 15 16.8 18 21

47

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

14.46


© 2008

48

Let’s Practice: Setting a Floor Price via Buying a PUT Option

• 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)

Always Ask and Answer – Always Ask and Answer – “What am I doing to myself?”“What am I doing to myself?”


Jan 21 Purchased right to sell milk for $15.50, but I don’t have to (PUT). My cost for that right (premium):


May I have the right to sell milk for $15.50 and buy back for $17.00. Thanks, but no thanks (PUT expires worthless)


-.62

+17.00

0

+16.38


Jan 21 Purchased right to sell milk for $15.50, but I don’t have to (PUT). My cost for that right (premium):


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)


-.62

+12.00

+3.50

+14.88


© 2008

51

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

52

Focus on Basics first, but a Taste of Advanced Strategies

• Forward Contract and Buy a Call Option

– Why?

You don’t want to risk getting a lower price in case markets fall, but you don’t want to miss out if there is a super rally!


© 2008

53

Forward Contract and Buy a Call Option

– Forward contract March 2010 milk for $14.45 ($14.70 futures price less $.25 discount).

– At the same time buy a $16.00 CALL option for $.32

Remember, CALL option gives you the right to buy a futures contract for $16.00 and sell it back at the then prevailing price


© 2008

54

Forward Contract and Buy a Call Option

– What are you doing to yourself?What are you doing to yourself?

– You will receive a minimum of $14.13 class III price for your milk (14.70 - .25 - .32).

– However, if markets rally beyond $16.00, then you will receive payment back from your CALL Option, which gives you the right to buy at $16.00 and sell at the higher price.


© 2008

55

Forward Contract and Buy a Call Option• March 2010 turns out to be $13.50

– Sell milk to plant for $14.13 (14.70 - .25 - .32)– Your CALL option expires worthless (don’t

want to buy milk at $16.00 and then sell it at $13.50).

– C-III Base Price: $14.13– If you had forward contracted only: $14.45– If you had done nothing: $13.50


© 2008

56

Forward Contract and Buy a Call Option• March 2010 turns out to be $17.50

– Sell milk to plant for $14.13 (14.70 - .25 - .32)– Exercise your CALL option (that is, buy milk at

$16.00 and sell at $17.50 for a $1.50 gain)

– C-III Base (14.13) + Call Gain (1.50): $15.63– If you had forward contracted only: $14.45– If you had done nothing: $17.50

57

MarketingMarketingPlanPlan

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

58


© 2008

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!

59


© 2008

Parts of a Marketing Plan

Getting ready1. Take an Inventory: marketing resources, risk tolerance, and

non-price marketing objectives 2. Know the Playing Field: situation, outlook, & historical prices.3. Know Your Toolbox: Marketing Tools and Strategies

Take Aim1. Costs of production and Financial objectives2. Personal Price Targets3. Basis and Triggers for Action4. Marketing Protocols (what do you do when your trigger’s

tripped!) Fire

1. Evaluation, control, and record-keeping

60


© 2008

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

61


© 2008

Marketing Resources, Risk Tolerance, Non-Price Objectives• Non-Price Objectives

– Develop relationships (banker, broker, advisors)

– Start/join a marketing club– Subscribe to an advisory service– Weekly/monthly farm marketing meetings

62

What’s your non-price objective?

What will you do after breakfast tomorrow to make it happen?


© 2008

Know the Playing Field

Situation, Outlook, and Situation, Outlook, and

Historical PricesHistorical Prices

63


© 2008

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• “……..”

64


© 2008

Historical PricesWhat is a Good Price Based on What

the Market Provides• 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

65

© 2005

Word of CautionWord of CautionHistory may have changed?History may have changed?


© 2008

66

Class III Prices

2004-2009Average: 14.69Median: 14.24Top 25%: 17.04Avg + SD: 17.80

1980-2004Average: 11.94Median: 11.89Top 25%: 12.54Avg + SD: 13.35

9

11

13

15

17

19

21

Jan

1980

Mar

198

2M

ay 1

984

Jul 1

986

Sep

1988

Nov

199

0Ja

n 19

93M

ar 1

995

May

199

7Ju

l 199

9Se

p 20

01N

ov 2

003

Jan-

06M

ar-0

8

1980-2009


© 2008

67

Seasonality (Averages)

11

12

13

14

15

16

Jan

FebM

ar AprM

ay Jun

Jul

AugSep O

ctNov Dec

C-I

II/B

FP

Pri

ce

1980-87 (8)1988-95 (8)1996-03 (8)2004-09 (6)


© 2008

68

Know Your Marketing Toolbox

Cash MarketForward Contract

Minimum Price Contract

Futures MarketFutures Contract

PUT OptionCALL Option

And all kinds of combinations of the above!LGM-Dairy


© 2008

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

69

© 2005


© 2008

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)$110,000 (approx. 9-12 % ROROA)

70

Red Ribbon:

Blue Ribbon:

Purple Ribbon:

71

Personal Price Targets

White Ribbon: (cash costs)


© 2008

Item Total Cost

Cost per cwt

Cumulative

Basic cash costs 12.73 12.73

Costs of Production 14.75 14.75

Family Living 40,000 1.52 16.27

Retained Earnings 40,000 1.52 17.79

Misc 30,000 1.14 18.93

72

-Based on 26,400 cwt produced per year


© 2008

Basis

• Difference between announced price and mailbox price

73

© 2005


© 2008

Marketing Price Triggers for Action

Your Personal Mailbox Price

Target

Expected Basis

Marketing Price

Triggers

18.93 1.25 17.68

17.79 1.25 16.54

16.27 1.25 15.02

12.73 1.25 11.48

74

Error on your basis estimate to the low side. Being wrong leaves more money in your pocket.


© 2008

Price Triggers For Action75

- 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!

© 2005


© 2008

Marketing ProtocolsMarketing ProtocolsYour Marketing RulesYour Marketing Rules

76

Tough, Tough, ToughTough, Tough, Tough

3-6

Less than 3

More than 6

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

Middle 1/3

Low 1/3

Top 1/3

Trigger Price At What Price Will I Engage This Action

Hedge 80%

Set floor with unlimited upside

77

© 2005

78

What is Your Marketing Philosophy?

Do Nothing Do Something

Hedge, Put Outlook is up

???

Marketing Tools and Strategies What are they? When is it best to use them?

MarketMarket

Do

Not

hing

Forward

SaleShort

Fence

CallPut

Hedge

79

ControlEvaluate Records

80

• 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

Following are Following are some people we some people we know who made know who made

their plans their plans happen!!!happen!!!

81

© 2005

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

82

© 2005

His music teacher once said of him, “As a composer he is hopeless.”

Who was it?

Beethoven

83

© 2005

This person’s teacher told him he was too stupid to learn anything.

Who was it?

Thomas Edison

84

© 2005

He was cut from his high school basketball team.

Who was it?

Michael Jordan

85

© 2005

This person was fired from his first job because he lacked imagination.

Who was it?

Walt Disney

86

© 2005

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Cash With Mrkt

(40,000)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

J-00

J-01

J-02

J-03

J-04

J-05

J-06

Months

Marketing Gain/Loss

TR Low to High Range per Month With and

W/O Marketing

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

($200,000)

($150,000)

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

J-00

J-01

J-02

J-03

J-04

J-05

J-06

Months

Cumulative Marketing Gain/Loss

FC 100% at $10.00 Trigger

$11.00 PUT for $.15

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Cash With Mrkt Desired Revenue

(2,000)

0

2,000

4,000

6,000

8,000

10,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

$0$5,000

$10,000$15,000

$20,000$25,000

$30,000$35,000

$40,000$45,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


TR Low to High Range per Month With and W/O Marketing

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

FC 10%, 15% and 25% at 50th, 70th and 90th %-tile

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Cash With Mrkt Desired Revenue

(12,000)

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months

Marketing Gain/Loss

($30,000)

($20,000)

($10,000)

$0

$10,000

$20,000

$30,000

J-00 J-01 J-02 J-03 J-04 J-05 J-06

Months


TR Low to High Range per Month With and W/O Marketing

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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

93

Which Type of Marketer Are You?

Both Forward

Contracted for $18.00

Announced Price Was

$20.07

Cool!I’m getting a great return

on my investment

#@%$^& I lost

$2.07!!!


© 2008

94

Let’s Practice Our Marketing Savvy!!

A Game Based on Managing and Marketing the Margin


© 2008

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

96

Case FarmPrice

Targets Description$/cwt

Feed Costs

$7.50

Red Ribbon

Total income and price needed to cover feed costs and minimum family living, livestock, replacement, and labor costs.

$14.63

Blue Ribbon

Total needed to cover feed, Red Ribbon, and facility and equip (Cost of Production).

$16.11

Purple Ribbon

10% ROROA Total needed above feed costs.

$17.17

97


© 2008

First of Three First of Three Marketing DatesMarketing DatesYou can price protect feed costs and milk now, the 2nd date or the 3rd date

OR you can let it ride

98

Current Feed Cost Estimates

Dice % Hay CornSBM & 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 12 3 165 5.50 420 750 9.45

99

Decision: You can 1) lock these costs in or 2) let them Decision: You can 1) lock these costs in or 2) let them rideride

What is Your Decision?What is Your Decision?

Price Targets Given Feed Costs

FeedCosts

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

100

Red Ribbon: minimum family living + livestock + replacement, + laborBlue Ribbon: Red + facility and equipment costsPurple: Red + Blue + 10% ROROA

1st of 3 Pricing Opportunities

1011121314151617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009

Futures CloseAverage (14.40)Top 1/3rd (15.50)

7 months

out

Futures: 14.00

Put Prices$13.75 @ .64: 13.11$13.25 @ .50: 12.75

Outlook:

1st of 3: Make a Decision and Record It102

Futures: 14.00

Put Prices$13.75 @ .64: 13.11$13.25 @ .50: 12.75

Outlook:

10

11

12

13

14

15

16

17

18

19

20

1/21/20093/21/20095/21/20097/21/2009

FeedCosts

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

What you can do C-III Basis Your Price

Do Nothing -- -- unknown

Lock-in with Futures 14.00 1.30 15.30

High Floor price 13.11 1.30 14.41 or higher

Low Floor Price 12.75 1.30 14.05 or higher

Second of Three Second of Three Marketing DatesMarketing Dates

103

Feed costs may have changed. The dice will be thrown with the following result:

Dice Result Probability Result

2, 3, 4, or 5 28% Feed costs decrease one step

6, 7, or 8 44% Feed Costs do not change from what they were

9, 10, 11, or 12 28% Feed costs increase one step



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 12 3 165 5.50 420 750 9.45

104

Decision: If you have not already locked in costs, Decision: If you have not already locked in costs, You can 1) lock these costs in or 2) let them rideYou can 1) lock these costs in or 2) let them ride


1011121314151617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009


7 months

out

5 months

out

Futures: 13.74

Put Prices$13.50 @ .60: 12.90$13.00 @ .35: 12.65

Outlook:

2nd of 3 Pricing Opportunities

106

Futures: 13.74

Put Prices$13.50 @ .60: 12.90$13.00 @ .35: 12.65

Outlook:

101112131415

1617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009

FeedCosts

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






2nd Date: Make a Decision and Record It

Third and Last Third and Last Marketing DateMarketing Date

107





Feed costs may have changed. The dice will be thrown with the following result:



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 12 3 165 5.50 420 750 9.45

108

Decision: If you have not already locked in costs, Decision: If you have not already locked in costs, You can 1) lock these costs in or 2) let them rideYou can 1) lock these costs in or 2) let them ride


1011121314151617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009


3 months

out

Futures: 17.40

Put Prices$17.25 @ .83: 16.42$16.25 @ .42: 15.83

7 months

out

5 months

out

Outlook:

3rd and Last Pricing Opportunity

110

FeedCosts

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






3rd Date: Make a Decision and Record It

101112131415

1617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009

Futures: 17.40

Put Prices$17.25 @ .83: 16.42$16.25 @ .42: 15.83

Outlook:

Final Feed Costs 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 12 3 165 5.50 420 750 9.45

111






© 2008

1011121314151617181920

1/21/2009 3/21/2009 5/21/2009 7/21/2009


Announced Class III = $10.90Your Price = 12.20

Markets Are Closed and Class III Announced at: $10.90/cwt$10.90/cwt

What Was Your Price Compared to the Price Targets?

FeedCosts

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

113

Red Ribbon: minimum family living + livestock + replacement, + laborBlue Ribbon: Red + facility and equipment costsPurple: Red + Blue + 10% ROROA

114Summary of Locked-in Pricing Opportunities (Profit/Cow/Month)

COPAnnounced10.90 base

Your Price:12.20

2nd Date13.74 base

Your Price:15.04

1st Date14.00 base

Your Price:15.30

3rd Date17.40 base

Your Price:18.70

A 5.70 (4,050) 1,393 1,892 8,408 B 6.63 (5,842) (398) 100 6,617 C 7.49 (7,475) (2,032) (1,533) 4,983 D 8.63 (9,667) (4,223) (3,725) 2,792 E 9.45 (11,233) (5,790) (5,292) 1,225

115Summary of Locked-in Pricing Opportunities (Profit/Cow/Annualized)

COPAnnounced10.90 base

Your Price:12.20

2nd Date13.74 base

Your Price:15.04

1st Date14.00 base

Your Price:15.30

3rd Date17.40 base

Your Price:18.70

A 5.70 (48,600) 16,720 22,700 100,900 B 6.63 (70,100) (4,780) 1,200 79,400 C 7.49 (89,700) (24,380) (18,400) 59,800 D 8.63 (116,000) (50,680) (44,700) 33,500 E 9.45 (134,800) (69,480) (63,500) 14,700

Final Comment116

Advice and counsel from others is critical - Extension Agents - Lenders - Consultants - Marketing Specialist - Etc.

BUT, in the end it is your call:


© 2008

118

Futures Prices in Context(Comparison of Feb 7 to Sept. 14, 2007)

111213141516171819202122

C-I

II/B

FP P

rice

Average

75 %tile

On Feb 7,2007

On Sep 14,2007

1996-2006 data


© 2008

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

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

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

What Have I Done To Myself?

Date Description of Transaction

Cash Flow

123

Date Description of Transaction

Cash Flow

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