dairy situation and outlook for 2009: weathering the storm geoff benson dept. of agricultural &...

Dairy Situation and Outlook for 2009: Weathering the Storm

Geoff BensonGeoff BensonDept. of Agricultural & Dept. of Agricultural & Resource EconomicsResource EconomicsNC State UniversityNC State University

March 10, 2009March 10, 2009

TopicsSituation & Outlook

ProductionSalesPrices

Weathering the StormFinancial ManagementHerd Management

GEOFF BENSON, ARE, NCSU 2

Situation & Outlook for 2009

3GEOFF BENSON, ARE, NCSU

Price Recovery

How do you get the price up?Sell more milk

ExportsAt home

Reduce milk production

Dairy Exports For 2007 and the first part of 2008

exports of dried milk powders, butter and cheese showed strong growthLow US prices for part of the periodWeak dollarReduced production & exports from NZ &

AustraliaReduced exports from the EUDemand growth, especially in Asia

Then came the global economic crisis & exports slumped both in volume and in value


Export Prospects Continued world economic crisis Weaker

world demand Stronger US$ Supply-demand balance has weakened in the

EU27 since quota was expanded, and export subsidies have increased

More normal supplies from New Zealand and Australia

More competition for export sales World market prices will soften US export opportunities will be greatly

reduced


Sales Outlook US Demand

Continued population growth

Continued producer & processor funded advertising and promotion

Lower consumer prices v. 2008

US economic recession

Projected commercial sales:Butterfat slightly lower than 2008, with small

government purchasesSkim-solids lower than 2008, with significant

government purchases


“US Comm. Disappearance”, bil. lb.

2007 2008 % 2009F %

B’fat 188.4 192.7 +2.3 190.7 -1.0

Skim 188.2 189.9 +0.9 185.1 -2.5

Cheese 10.14 10.14 0 -- --

Butter 1.519 1.715 +12.6 -- --

Powder 1.216 1.364 +11.8 -- --

Fluid 55.09 55.14 0 -- --

Supply Outlook Butter & Cheese inventories are edging up January 1, 2009 cow numbers were up 76,000

over Jan. 2008 (up 0.8%) and up 92,000 over Jan ’07 (up 1.0%) – have been increasing since 2004

January 1, 2009 heifer inventory was down 5,000 head but is still adequate

Cow cull rate up sharply in January 2009 v. Jan 2008

Milk/cow will be affected by less rBST use Feed costs have increased and income over

feed cost is unfavorable Higher fertilizer and energy related costs



.

Source: USDA, “World Agricultural Supply & Demand Situation


Prices Paid Index for Selected Inputs

USDA Index

1990-92 = 100Jan 2006

Jan 2007

Jan 2008

Jan 2009

% (06/07) to ‘09

Nitrogen fert. 236 202 283 380 + 74%

P & K fert. 168 149 257 353 + 126%

Diesel fuel 236 241 332 232 - 3%

Field Crop Seeds 177 191 218 287 + 56%

Source: Agricultural Prices, NASS, USDA, January 2009

Production

2007 2008 % 2009F %

Cows, mil.

9.15 9.27 1.3% 9.17 -1.1%

Milk/ cow, lb

20,279 20,462 0.9% 20,620 +0.8%

Milk Prod. bil. lb.

185.6 189.7 2.2% 189.1 -0.3%

Source: USDA, “Livestock, Dairy and Poultry Report”

Milk Prices, $ per 100 lb.

2007 2008 $ 2009F $

Class I 19.13 18.32 -0.81 11.30 -7.02

Class III

18.04 17.44 -0.60 10.05 -7.39

Class IV

18.36 14.65 -3.71 9.75 -4.90

Source: USDA, “Livestock, Dairy and Poultry Report”Forecast is the mid-point of a range

Class III prices, $/100 lb.


Futures & Market Prices The current futures prices suggest an

average Class III price of around $12.10/100 lb. for 2009 v. USDA’s forecast of $10.05/100 lb.

FO 5 Class I prices for 2009 will be down a little less because of a higher January price plus the increases in Class I differentials in May, 2008

VA Dairy Commission Class I prices remain above equivalent FO prices


US & FO5 Milk Prices, $/cwt.

Item 2004 2005 2006 2007 2008 2009F

US All Milk

16.04 15.15 12.90 19.15 18.34 ~14.00

US Class III Milk

15.39 14.05 11.89 18.04 17.44 ~12.50

FO 5

Blend17.01 16.23 13.99 20.49 19.90 ~16.00

MILC 0.22 0.04 0.60 0.01 0.00 0.75


Price Support Program Government has made purchases of

nonfat dry milk starting in October, 2008 and butter starting in early January, 2009

No “milk” support price under the 2008 Farm Bill – Product prices are set directly: Block Cheese = $1.13/lb. Barrel Cheese = $1.10/lb. Butter = $1.05/lb. Nonfat Dry Milk Powder = $0.80/lb. All unchanged from previous prices


MILC Continues the current version through

9/30/08 and in Sept. 2012 Maintains the current trigger price but

Adds a feed cost adjusterIncreases the payment % from 34% (back)

to 45% from 10/1/08 through 8/31/12 Increases the payment cap from 2.4

mil. lb to 2.985 mil. lb from 10/1/08 through 8/31/12 – 150 cows approx.

Has an income qualification test


CWT CWT – Cooperatives Working

Together – ProgramVoluntary, funded at 10¢/100 lb.Herd retirements by bid – 6 so farExport subsidies

Current initiativeTwo year commitment by

contributorsBorrow against future incomeFund a new herd retirement program

with a 12-month commitment


Outlook Summary Higher net incomes in 2007 & 2008 because

higher milk prices more than offset increases in production costs

Outlook for 2009 The global financial crisis will affect demand for

dairy products Higher world production & subsidies Stronger dollar Reduced exports & sluggish domestic salesLower milk prices until production is reduced Higher production costsNet income will be low in 2009 and cash flow

management will be very important


Financial Trends A 20-year history of large and

unpredictable price swings causing cash flow problems

Historically, periods of really low and really high prices are short

Length of time from peak to peak or trough to peak varies widely

Price fluctuations are getting more extreme

Milk prices must cover cost of production on average -- and will be higher


Conclusions and Implications The future will look a lot like the past Profit margins per cow and per cwt of milk

are slim, on average, and getting slimmer Nothing in the farm bill or the economic

environment suggests past trends will change – continued “structural change”

Regional competitiveness determines the market share of the national milk production “pie”

Dairy diversity means at least some farms in a state and region are profitable (on average) and competitive



Financial Performance for Selected New York Dairies, 2006 & 2007

Item

2006 2007

Bottom

10%Ave-rage

Top

10%

Bottom

10%Ave-rage

Top

10%

Total Cost, $/cwt $24.96 $15.30 $12.93 $28.29 $17.46 $14.86

Net Farm Income, $/cow

-$653 $118 $811 $67 $1,146 $1,985

Return on Assets, % (+ apprec.)

-11% 4.0% 12% -2% 18.2% 29%

Source: 2006 & 2007 Dairy Farm Business Summary, Cornell UniversityItems in each column are ranked independently

Key Questions

Long-termCan I make it through this

downturn?If I can, do I want to?

If I can and want to, what can I do in the near-term until prices recover?


“What financial shape are you in?” Is the farm profitable most years based on

returns on assets & to management? Do you normally have adequate cash flow to

meet operating expenses, debt service, family living needs in a timely manner?

Is the business solvent – is debt load low and equity high as collateral for loans and as a reserve?

Financial performance cannot be predicted from farm performance There are relatively few production practices that can be recommended in all situations


“Do you know your cost of production?”

Long run competitiveness depends on relative profitability

There is wide variation among farms, for a variety of reasons

You cannot control your milk price You can only manage your cost of

productionCowsHeifer raisingCrop production


“Do you know your cost of production?”

Operating cost - out of pocket expenses, e.g. bought feed, forage production, vet, hired labor, fuel, repairs

Fixed/Ownership/Investment costsDepreciation InterestTaxes & insurance

Cost or charge for the value of your time (if unpaid) and your investment (equity)

How do you compare to other farms? Specific benchmarks are needed


“Do you know where the money went?” Four sources and uses of cash:

Farm OperationsNew investments & asset salesFinancing – new debt & debt repaymentsNon-farm income and family living

Severe problems can have several causesLow profits

High cost of production Low milk price

Recent large new investments Large debt repayments Large family living needs


Cash Flow “Stretchers” Draw on financial reserves Sell non-farm assets, e.g., timber, lots Postpone non-essential maintenance

and new investments Reschedule (extend) or refinance debt

payments Borrow more (if you will be able to pay it

back) Family members seek new off-farm

income Cut family living expenditures


Herd Management Re-evaluate the profitability of production

practices. Focus first on areas that have the biggest potential impact on profitability and cash flow

Milk still pays the bills and feed is the biggest costMilking herd rations must still be nutritionally

sound – cows don’t care what the price of milk is

Feed prices have been volatile – shop aroundSome ration ingredients may not be profitable

at low milk pricesContinue with recommended practices for

transition cows, cow comfort, cow health


Herd Management Revisit other practices most affected by

lower milk prices and higher input prices, particularly feed & fertilizersVoluntary culling decisionsHerd health, including mastitis,

involuntary culling, death lossReproduction management programsGenetic progress – focus on milk income

& productive lifeHeifer raising is expensive!Crop production is expensive!


Financial Tools There are few practices and products that

work for everyone or that work in all farm and financial situations

Use budgeting to assess profitability Partial Budgeting – changes in specific costs and

income associated with small changes within an enterprise, e.g., ration changes for the heifers

Enterprise Budgeting – Evaluate the cost, revenue and net income of an entire enterprise when other parts of the farm are unaffected, e.g., heifer raising, crop production

Whole farm budgeting – For major changes would affect the entire farm operation, e.g., expansion


Financial Tools Budgeting (profitability) should include

Operating (out-of-pocket) costsFixed or ownership costs – depreciation,

interest on investment, taxes & insuranceOpportunity costs of unpaid family time and

money invested Cash flow -- looks only at changes in cash

outflows and cash inflows Ideally, in a cash flow squeeze, you want

to make changes that are both profitable and contribute to cash flow right away


Summary The future will look a lot like the past

Trends to fewer and larger farms, regional shifts will continue

Some farms in all regions will be profitable Price volatility and low average returns will

continue – but milk prices will average higher Carefully evaluate your production practices,

particularly those that might be sensitive to changes on milk price or input prices

However, you pretty much manage a well run farming operation in low price periods the same way you should be managing when prices are more favorable


Summary Measure, monitor and evaluate financial,

herd and farm performance to identify problems promptlyFinancial information on cost of production,

profitability, cash flow and solvency is essential

Set farm and financial performance benchmarks, e.g. Milk income over feed costs, feed costs per cwt.

Measure and evaluate performance regularly

Bring in outside advisors to help evaluate financial and farm performance


Summary Higher prices will come mostly from

a reduction in milk production – fewer cows and fewer dairy farms

Some cannot survive this downturn and some who could will choose to retire from dairy farming. For those who will cease production, develop and execute a timely exit plan that considers tax consequences as well as the preservation of equity.


Geoff Benson Phone: 919.515.5184 Fax: 919.515.6268 E-mail: [email protected] Web page: http://www.ag-econ.ncsu.edu/

faculty/benson/benson.html

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dairy situation and outlook for 2009: weathering the storm geoff benson dept. of agricultural &...

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