Sponsors: University of Minnesota Extension Service North Central Risk Management Education Center College of Agricultural, Food and Environmental Sciences

Sponsors:

University of Minnesota Extension Service

North Central Risk Management Education Center

College of Agricultural, Food and Environmental Sciences

Center for Farm Financial Management

Copyright © 2004 Center for Farm Financial Management, University of Minnesota

About Our “Winning the Game” Series*

WTG 1: Gain the Pre-harvest Marketing

Advantage

WTG 2: Launch Your Pre-harvest Marketing

Plan

WTG 3: The Post-harvest Marketing Challenge

*Winner - 2004 AAEA Distinguished Extension Program - Group Award!


New for 2005!WTG: The Dairy Edition

A practical approach to milk marketing with the goal of employing strategies that reduce price variability.


Agenda

IntroductionGameSeasonality in PricesPrice Variability and RiskTarget Prices Pricing Tools Results of the Game Writing Your Marketing Plan


Workshop Theme

“Selectively using processor contracts can help smooth out the bumps in your milk check!”


Marketing is Important!

Data collected from Minnesota farms shows that since 1997 the average dairy farm has earned $1.42 per cwt each year*

The mythical “average” year… Low: 1997 @ 0.42 High: 1998 @ 2.78 Range from the lowest to highest year

is 2.36/cwt*Source: www.finbin.umn.edu


Playing the Game

One forward-pricing tool available Class III processor milk contracts

Processor contracts start at 20,000 lbs, then go up in 5,000 lb increments

Cannot contract more than 120,000 lbs per delivery month


Playing the Game

The game starts in November, ends the following June

Each month there is one opportunity to look at Class III futures prices 3, 7, and eleven months out

Any milk not contracted in the marketing month is sold at the announced Class III price

• Cow numbers are down 3,000 head from a year ago and down 2,000 from last month

• Cheese demand remains strong but butter demand is weakening

• Steep price declines are expected to begin after the holidays

November 18Class III Futures Quotes

Feb 13.65June12.10Oct 12.80

Last Month

Announced Class III 16.04

Mailbox Price 18.44


ID #

October

Announced Class III -->

Mailbox Price -->

Average Production

Contracted Amount

Class III Price

Contracted Amount

Class III Price

February 177,500

March 195,000

April 186,000

May 189,500

June 186,000

July 191,000

August 191,000

September 184,500

October 184,000

November 178,000

December 191,000

Decision #1 Decision #2November December

Example

20 12.10

99

20 12.80

13.65-

16.04

18.44

Seasonality in Milk Prices


Seasonality is evident -Supply - spring flush/lower late

summer -Demand - schools, holidays, supper

bowlMN Class III and Basis seasonality

similar A good price in February may not be

a good price in September.

Seasonality in Milk Prices

Price Variability and Risk


November Class III1998-2004

0%

10%

20%

30%

40%

50%

60%

$8.00 $10.00 $12.00 $14.00 $16.00 $18.00

Announced Futures


Quiz TimeMay Milk, 1998-2004

Announced Price• $9.50?• $10.00• $11.50• $12.00

Futures Price• $9.50?• $10.00• $11.50• $12.00


Quiz TimeMay Milk, 1998-2004

Announced Price• $9.50? 6 / 7 yrs• $10.00 5 / 7 yrs• $11.50 2 / 7 yrs• $12.00 2 / 7 yrs

Futures Price• $9.50? 7 / 7 yrs• $10.00 7 / 7 yrs • $11.50 5 / 7 yrs• $12.00 5 / 7 yrs


0%

20%

40%

60%

80%

100%Futures

Announced

Frequency that May Class III Milk Prices Exceeded Given Price Level, 1998-2004

Target Prices


Target Prices Target prices make your marketing

plan pro-active (plan for action) What is a good price from the

market? What is a good price for me? Calculating basis

• May impact target price, but doesn’t impact marketing actions.

Pricing Tools


Pricing Tools

Fixed Prices• Cash forward contracts• Using futures contracts (hedging)

Minimum Price Tools• Put options• Minimum price contracts with

processorsAdvantages and Disadvantages

Participation Agreements

Being allowed to play


Fact or Fiction # 1

Fiction• A participation agreement does not

require you to execute a forward contract with your processor

• You may execute a forward contract with your processor

“Signing a participation agreement means I am forward pricing all my production.”


The Game Recap

Let’s meet the celebrity players…



Your Game Results


Game Results

Each participant gets individual results• Monthly milk checks• Annual marketing summary• “You are here” chart• Celebrity comparison


Celebrity Results, 1998-2004

CarlGrandm

aAl Terry Harriet Ollie

Weighted Average

14.03 13.82 13.96 14.11 13.90 14.23

HighestPrice *

3 2 - 1 1 -

80% of Prices

11.90 … 16.10

13.05…14.55

12.78…15.20

12.46…15.63

13.00…15.07

12.68…15.69

* Out of 7 years


Carl vs. Harriet1998-2004

0

5

10

15

20

25

10.

50

11.

50

12.

50

13.

50

14.

50

15.

50

16.

50

17.

50

18.

50

19.

50

Mor

e

Monthly Mailbox Price

Nu

mbe

r of

Tim

es

Carl

Harriet

Sizing Up the Market

What are the celebrities doing today?What is your plan?


Sizing Up the

MarketYour plan?

Contract

Month

FuturesAs of

4/6/05 Target Prices

Amount Contracte

d

July 05 $14.16

Aug 05 $14.80

Sept 05

$14.78

Oct 05 $13.80

Nov 05 $13.49

Dec 05 $13.17

Jan 06 $13.10

Feb 06 $13.15


SummarySeasonal pattern in milk pricesBy being proactive and taking

action, you can reduce price variability

Have target prices in mindGood marketing is not about

getting the highest price, it’s about getting a good average price more consistently


Why WTG Dairy?

Based on our experience with more intensive milk price risk management programs, we didn’t see the results we expected

Focus the messageAny size farm can use processor

contracts


Winning the Game – The Trifecta Concept!

Half-day program A simulation game using historical

data with real time results and no risk

The goal of giving participants an attitude that “this is so easy my kids could do it”


Producer Reviews “The game helps producers learn what

they are afraid to try in the market.”“The game is by far the best. It was great

to have a comparison between all marketing options.”

“Good display of information and getting the information across! I do understand the process a little better.”

“Thank you! It was very interesting and opened my eyes a bit. It made me think !”

“Excellent workshop! I would like to attend more like this.”


Sponsor/Other Reviews Radio Broadcaster: “The workshop allowed

for a lot of producer interaction and input. That makes for a very practical presentation producers can relate to.”

Sponsor Lender: “Very good information-great hands on involvement.”

Milk Plant Field Rep: “Nice and informal, knowledgeable speakers, very nicely done, Thank you!”

Farm Business Management Instructor: “Great Job-Thank you! Gets producers involved which is the best way to learn. Thanks to the sponsor, Eastwood Bank, and the U of M presenters.”


Evaluation Results

7 workshops, 149 attendees, 110 evals returned (99 producer 11 other)

Average Herd Size: 145 Median: 100Average RHA: 21263 lbs

Median: 21900 lbsCash forward contracts most

frequently used marketing tool(97% of those fwd pricing use this tool).


Evaluation ResultsAs a result of the WTG-TDE workshop:74 participants indicated they plan

on forward pricing milk (64 currently forward pricing).

Only 13 participants indicated they will continue to take the announced price (previously 35 participants indicated they always took the announced price).


Evaluation ResultsAs a result of the WTG-TDE workshop:Planned 12% increase in forward

priced production.86% of producers indicated they plan

to develop and implement a marketing plan.

10% of participants who are not forward pricing, plan to begin forward pricing.


The WTG Sponsorship Model

Local sponsor responsibilities…• Host the workshop• Provide the facility and refreshments• Recruit participants• Pay a sponsorship fee of $600


The WTG Sponsorship Model

University responsibilities…• Provide promotion materials to

sponsor• Present the workshop• Provide the participant materials


The WTG Sponsorship Model -- Advantages

Local presence for promotion, advertising and partnership

Local meeting arrangements handled by sponsor

Cover direct program costs (travel, printing, etc.)

Pressure on presenters to deliver quality program


The WTG Sponsorship Model -- Challenges

Private vs. public meetingsLogistics of sponsor care

• Recruiting, promotion, billing• Make sure sponsors understand their

responsibilities• Follow-up

Pressure on presenters to deliver quality program


Contacts

Paul Mahoney• [email protected]

Margot Rudstrom• [email protected]

Wynn Richardson• [email protected]

Documents

Sponsors: University of Minnesota Extension Service North Central Risk Management Education Center College of Agricultural, Food and Environmental Sciences