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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!
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
New for 2005!WTG: The Dairy Edition
A practical approach to milk marketing with the goal of employing strategies that reduce price variability.
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Agenda
IntroductionGameSeasonality in PricesPrice Variability and RiskTarget Prices Pricing Tools Results of the Game Writing Your Marketing Plan
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Workshop Theme
“Selectively using processor contracts can help smooth out the bumps in your milk check!”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
0%
20%
40%
60%
80%
100%Futures
Announced
Frequency that May Class III Milk Prices Exceeded Given Price Level, 1998-2004
Target Prices
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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.”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The Game Recap
Let’s meet the celebrity players…
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Your Game Results
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Game Results
Each participant gets individual results• Monthly milk checks• Annual marketing summary• “You are here” chart• Celebrity comparison
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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?
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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.”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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.”
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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).
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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).
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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.
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model
Local sponsor responsibilities…• Host the workshop• Provide the facility and refreshments• Recruit participants• Pay a sponsorship fee of $600
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
The WTG Sponsorship Model
University responsibilities…• Provide promotion materials to
sponsor• Present the workshop• Provide the participant materials
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
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
Copyright © 2004 Center for Farm Financial Management, University of Minnesota
Contacts
Paul Mahoney• mahon018@umn.edu
Margot Rudstrom• rudstrmv@morris.umn.edu
Wynn Richardson• wynn@umn.edu
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