marketing and management avoid playing eeny, meeny, miny mo with your future kevin bernhardt...
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Marketing and ManagementMarketing and ManagementAvoid Playing Avoid Playing
Eeny, Meeny, Miny Mo Eeny, Meeny, Miny Mo With Your Future With Your Future
Kevin BernhardtKevin BernhardtUW-Extension, Center for Dairy Profitability, and UW-UW-Extension, Center for Dairy Profitability, and UW-
PlattevillePlattevilleMarch 17, 2010March 17, 2010
Farm & Risk Management Team
© 2008
The Take Home MessagesThe Take Home Messages
• Management Matters• Marketing is a part of Management not an
activity that sits in a vacuum by itself– Know Your Market– Have the Right Mindset– It’s the Margin that Counts– Have a Plan and then Adapt
• Think long-run – act short-term
2
WHEN IT COMES TO WHEN IT COMES TO MANAGEMENT, WE ARE MANAGEMENT, WE ARE
NOT ALL THE SAMENOT ALL THE SAME
MANAGEMENT MANAGEMENT MATTERSMATTERS
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%
Farm & Risk Management Team
© 2008
18,000 21,000 24,000 27,000
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
5
$137 hay, $4.00 corn, $300 SBM
Production and Price Matter
Farm & Risk Management Team
© 2008
-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
6
Increase in Feed CostsDecrease in Feed Costs
Input Costs Matter
Farm & Risk Management Team
© 2008
7
Volatility is a Growing Challenge Class III Prices - 1962-Dec 2009
0
5
10
15
20
Jan-62
Jan-67
Jan-72
Jan-77
Jan-82
Jan-87
Jan-92
Jan-97
Jan-02
Jan-07
Cla
ss I
II/B
FP
Pri
ces
1962-79 1980-87 1988-95 1996-99 2000-2003 2004-2009
Farm & Risk Management Team
© 2008
8
Is There More Milk Price Risk Today?C-III Price Distributions (8 year time periods)
0
5
10
15
20
8 9 10 11 12 13 14 15 16 17 18 19 20 21
25 Cent Range, Midpoints Are Shown
Per
cent
Occ
uren
ce
1980-Dec 87 1988-Dec 95 1996-Dec 03 2004-Dec 09
Farm & Risk Management Team
© 2008
9
Is There More Milk Price Risk Today?C-III Price Distributions
January
05
10152025303540
8 9 10 11 12 13 14 15 16 17 18 19 20
25 Cent Range, Midpoints Are Shown
Per
cent
Occ
uren
ce
1980-1987 1988-1995 1996-2003 2004-2009
Farm & Risk Management Team
© 2008
10
Is There More Milk Price Risk Today?C-III Price Distributions
March
05
10152025303540
8 9 10 11 12 13 14 15 16 17 18 19 20
25 Cent Range, Midpoints Are Shown
Per
cent
Occ
uren
ce
1980-1987 1988-1995 1996-2003 2004-2009
Farm & Risk Management Team
© 2008
11
Is There More Milk Price Risk Today?C-III Price Distributions
July
05
10152025303540
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
25 Cent Range, Midpoints Are Shown
Per
cent
Occ
uren
ce
1980-1987 1988-1995 1996-2003 2004-2009
Farm & Risk Management Team
© 2008
12
Is There More Milk Price Risk Today?C-III Price Distributions
November
05
10152025303540
8 9 10 11 12 13 14 15 16 17 18 19 20
25 Cent Range, Midpoints Are Shown
Per
cent
Occ
uren
ce
1980-1987 1988-1995 1996-2003 2004-2009
MARKETINGMARKETING
-Know Your Market-Know Your Market-Mindset-Mindset
-It’s the Margin-It’s the Margin-Planning-Planning
Farm & Risk Management Team
© 2008
Must be a New Era (Nominal Corn Prices, 1866-2009)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1865 1885 1905 1925 1945 1965 1985 2005 2025
14
4.30
3.50
2.50
Futures Average (2/9/10): 2010 = 3.78 2011 = 4.12
Farm & Risk Management Team
© 2008
15
Class III Prices - 1980-Dec 2009
9
11
13
15
17
19
21
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
Cla
ss I
II/B
FP
Pri
ces
1980-04 2004-2009 Avg 80-04 Avg 04-09
Top 25% (80-04) Top 25% (04-09) Low 25% Low 25%
80-03 04-09Average: 11.94 14.69Median: 11.89 14.24Top 25%: 12.54 17.04Low 25%: 11.10 12.27
Farm & Risk Management Team
© 2008
What’s 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
16
Farm & Risk Management Team
© 2008
17
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)
Farm & Risk Management Team
© 2008
What’s the Point?
• The long-term average price of milk may have shifted up
• The Volatility of prices around that average have increased– Increased risk of lower prices than average– Increased opportunity of higher prices than average
• Cash Flow and Working Capital management more important
18
19
Most Important Most Important Slide of the Day is Slide of the Day is
NEXTNEXT
20
Marketing MindsetMarketing Mindset
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
Farm & Risk Management Team
© 2008
21
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!!!!
Farm & Risk Management Team
© 2008
22
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
Farm & Risk Management Team
© 2008
23
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.
Farm & Risk Management Team
© 2008
24
Another Real-Life Example
• How much did I pay for feed, fertilizer, and fuel?
• I only did 20% 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
Farm & Risk Management Team
© 2008
In MarketingYOU WILL BE WRONG
Good producers hate to be wrong!
Good marketers have to get use to being wrong!
25
Farm & Risk Management Team
© 2008
The Importance of Timing[Person 1] • July 2008: Input prices at record highs, but
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
26
Farm & Risk Management Team
© 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!
27
Farm & Risk Management Team
© 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.
28
Farm & Risk Management Team
© 2008
The Importance of Timing[Person 1] • March 2009:
– I’m feeding $8.00 corn and $430/ton meal.– Milk price: $10.44.
I never did lock in my milk price.
• Profits: - $120,000 Annualized
29
Farm & Risk Management Team
© 2008
The Importance of Timing[Person 2] • It’s May 2008: Forward contracted March
2009 milk @ $16.50/cwt.• Set a ceiling price for corn and meal @
$5.25/bu and $330/ton.
• Assured coverage of costs of production plus family living
30
Farm & Risk Management Team
© 2008
The Importance of Timing[Person 2] • March 2009:
– Feed costs fell– After marketing costs, my price was $3.85
corn and $320 meal. – Milk price was 10.44, but I contracted for
$16.50
• March 2009 Profits: $74,925 annualized
31
Farm & Risk Management Team
© 2008
What’s the Point
• Timing of decisions is a new challenge
• It’s the Margin That Counts!It’s the Margin That Counts!
32
Farm & Risk Management Team
© 2008
Marketing is Part of ManagementMarketing is Part of Management33
Farm & Family
Strategic Plan
Production Management
Marketing Management
Financial & Investment
Management
SpreadsheetSpreadsheet
Farm & Risk Management Team
© 2008
Outlook?
• … 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)
• There’s a place for outlook, but use it wisely! It’s information, not an answer!
34
Farm & Risk Management Team
© 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
35
Farm & Risk Management Team
© 2008
Parts of a Marketing Plan
Getting ready1. Take an Inventory: marketing resources, risk
tolerance, and non-price marketing objectives Computer Relationship with lender & broker Relationship with spouse!
2. Know the Playing Field: situation, outlook, & historical prices.
3. Know Your Toolbox: Marketing Tools and Strategies
Forward contracts, Futures, PUT, CALL, LGM-Dairy
36
Farm & Risk Management Team
© 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
37
© 2005
Red Ribbon:
Blue Ribbon:
Purple Ribbon:
38
Personal Price Targets
White Ribbon: (cash costs)
Farm & Risk Management Team
© 2008
Personal Price Targets
Item Mailbox Price
Needed
Expected Basis
Marketing Price
Triggers
Basic Cash Costs 12.73 1.25 11.48
Family Living 16.27 1.25 15.02
Retained Earnings 17.79 1.25 16.54
Misc 18.93 1.25 17.68
39
Farm & Risk Management Team
© 2008
Marketing ProtocolsMarketing ProtocolsYour Marketing RulesYour Marketing Rules
40
Tough, Tough, ToughTough, Tough, Tough
Do Futures Offer Do Futures Offer OpportunitiesOpportunities
To Capture ProfitsTo Capture ProfitsTo Minimize LossesTo Minimize Losses
To Reduce Price RiskTo Reduce Price Risk
42
Year(Annced Price)
2010 (14.50)
2009(10.78)
2008(19.32)
2007(13.56)
2006(13.39)
2005(14.14)
< 11.00 0 0 0 0 0 0
11.00-11.49 0 0 0 6 0 0
11.50-11.99 0 0 0 63 0 47
12.00-12.49 0 0 0 86 29 150
12.50-12.99 0 0 0 174 162 12
13.00-13.49 11 0 0 14 61 3
13.50-13.99 48 1 42 11 0 4
14.00-14.49 49 30 19 1 0 4
14.50-14.99 95 63 32 0 0 1
15.00-15.49 49 62 24 0 0 2
15.50-15.99 26 18 31 0 0 0
16.00-16.49 9 45 50 0 0 0
16.50-16.99 8 18 51 0 0 0
17.00 > 63 120 26 0 0 0
January
43
Year(Annced Price)
2010 (12.66)3/10
2009(10.78)
2008(16.76)
2007(16.09)
2006(10.93)
2005(14.61)
< 11.00 0 45 0 0 17 011.00-11.49 0 15 0 0 14 011.50-11.99 0 3 0 53 7 5712.00-12.49 0 2 0 97 61 15012.50-12.99 10 6 0 76 172 2613.00-13.49 15 4 26 12 25 513.50-13.99 20 6 22 44 0 2514.00-14.49 52 18 14 17 0 2014.50-14.99 97 20 49 23 0 1415.00-15.49 99 50 44 5 0 415.50-15.99 58 23 100 10 0 316.00-16.49 4 36 43 0 0 016.50-16.99 8 28 35 0 0 017.00 > 0 121 20 0 0 0
April
44
Year(Annced Price)
2010(15.10)3/10
2009(12.11)
2008(16.28)
2007(20.07)
2006(12.29)
2005(14.30)
< 11.00 0 0 0 0 0 011.00-11.49 0 11 0 0 0 011.50-11.99 0 15 0 0 61 012.00-12.49 0 16 0 39 63 012.50-12.99 0 16 0 27 20 3013.00-13.49 0 9 0 56 72 9313.50-13.99 0 34 0 35 162 4314.00-14.59 0 38 0 26 0 8414.50-14.99 5 34 0 34 0 6415.00-15.49 70 10 39 10 0 1615.50-15.99 141 35 86 35 0 016.00-16.49 43 6 77 18 0 016.50-16.99 0 19 38 3 0 017.00 > 0 135 133 96 0 0
September
Futures higher at least 10 days, 05-106 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 15.00
June 13.00 14.50 15.50
July 13.00 14.50 16.50
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 15.50
December 13.50 13.50 15.50
45
Futures higher at least 10 days, 00-10* 6 of 6
(100%)10 of 10(100%)
5 of 6(83%)
8 of 10(80%)
4 of 6(67%)
6 of 10(60%)
January 13.00 11.40 13.50 12.00 13.50 12.40
February 13.00 11.00 13.50 12.00 15.00 12.00
March 13.00 11.20 14.50 12.00 15.00 12.00
April 13.00 11.80 14.50 12.00 15.50 12.00
May 13.00 11.80 14.50 12.00 15.00 12.20
June 13.00 11.80 14.50 12.00 15.50 12.40
July 13.00 12.40 14.50 12.60 16.50 13.20
August 13.00 12.80 15.00 13.20 16.00 13.80
September 13.50 13.00 15.00 13.40 16.00 14.40
October 13.00 12.80 14.00 13.00 16.00 14.00
November 13.00 12.60 13.50 12.80 15.50 13.40
December 13.50 12.20 13.50 12.40 15.50 12.40
46
47
• Minimum futures opportunities for the six years from 2005-2010
– 100% of time (6 of 6) years: $13.00– 83% of time (5 of 6 years): $14.00– 67% of time (4 of 6 years): $15.50
– $16 or greater was available 50% of the years– $17 and greater all but two months for 50% of years
Farm & Risk Management Team
© 2008
What’s the Point?What’s the Point?
• What are your red, blue, and purple ribbon price targets?– What do those targets buy you.
• What is at risk from the input cost side?– What can be price protected.– Do you have a control process for continuous
checks
48
Farm & Risk Management Team
© 2008
What’s the PointWhat’s the Point
• How much are you willing to pay for marketing per cwt?
• Is your lender with you?
• Does your broker know your plans?
• Does your spouse and business partners know your plans?
49
Farm & Risk Management Team
© 2008
What’s the Point?What’s the Point?
• What is your blueprint for marketing when:
– price opportunities are low?price opportunities are low?
– when price opportunities hit your when price opportunities hit your financial triggers?financial triggers?
– when price opportunities are high?when price opportunities are high?
50
Temptation is to spend all my Temptation is to spend all my time on this slide, BUT!time on this slide, BUT!
3-6
Less than 3
More than 6
Months Away From Market
Month
Pricing Opportunities Outlook Marketing Action
Medium
Low
High
Trigger Price At What Price Will I Engage This Action
Hedge 80%
FC and buy CALL Option
51
© 2005
Set low floor with unlimited upside
52
Some Final Some Final ThoughtsThoughts
Farm & Risk Management Team
© 2008
Good MarketersGood Marketers
– Will be wrong, – Are patient– Are long run thinkers, – Hit singles with a double here and there.– Are disciplined to a plan– Make marketing decisions to meet management
goals– Brag about their Return on Assets over the last five
years.
53
Farm & Risk Management Team
© 2008
Bad MarketersBad Marketers
– Decide to get in and out based on “gut” instinct– Go for the homerun– Think milk prices are too low– Brag about the price they locked in this month
54
Farm & Risk Management Team
© 2008
Think Long RunThink Long Run
• What is your strategic plan– Exit with equity in 7-10 years– Build equity for expansion– Transition– Double digit ROROE
• What return do you need to accomplish your long-term plan
55
Farm & Risk Management Team
© 2008
Act Short TermAct Short Term
• With your long run strategic plan as the blue print - plan this next year given– Input prices, production, output prices– New capital investment– New management processes/systems– Labor– And, of course, MARKETING
56
57
Marketing is not a silver bullet. Marketing is not a silver bullet.
It is not a new profit center.It is not a new profit center.
It won’t make up for poor It won’t make up for poor production.production.
$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
Cumulative 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
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
Cumulative 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
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
Do Nothing Do Something
Hedge, Put Outlook is up
???
Marketing DisciplineMarketMarket
Do
Not
hing
Forward
SaleShort
Fence
CallPut
Hedge
62
Farm & Risk Management Team
© 2008
64
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
ControlEvaluate Records
65
• 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
Farm & Risk Management Team
© 2008
The Take Home MessagesThe Take Home Messages
• Management Matters
• Marketing is a part of Management not an activity that sits in a vacuum by itself
• Think long-run – act short-term
66
Following are Following are some people we some people we know who made know who made
their plans their plans happen!!!happen!!!
67
© 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
68
© 2005
His music teacher once said of him, “As a composer he is hopeless.”
Who was it?
Beethoven
69
© 2005
This person’s teacher told him he was too stupid to learn anything.
Who was it?
Thomas Edison
70
© 2005
He was cut from his high school basketball team.
Who was it?
Michael Jordan
71
© 2005
This person was fired from his first job because he lacked imagination.
Who was it?
Walt Disney
72
© 2005
This person failed the 6th grade.
Who was it?
Winston Churchill
73
© 2005
Farm & Risk Management Team
© 2008
74
Class III Prices - 1980-Dec 2009
9
11
13
15
17
19
21
Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Cla
ss I
II/B
FP
Pri
ces
1980-04