The Volatile Ag Economy Management Matters

1. The Volatile Ag EconomyManagement Matters Kevin BernhardtUW-Extension and Center for Dairy Profitability March 2009

2. Three Ways to Navigate 2009 • Manage Your Profit Margin • Develop Your Team • Think Counter Cyclically

3. Agenda • A look backwards at 10 months of market mayhem • A look forward • Management Implications

4. March 2009 Pricing Opportunities What price of Milk would you choose? What price of Milk would you choose if you secured feed costs at the same time?

5. March 2009 Pricing Opportunities Milk Corn SB Meal

6. March 2009 Futures Prices

7. March 2009 Pricing Opportunities Return to Management and Labor

8. The Importance of Timing • It’s July and input prices are at record highs, but they are just going to get 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. • $8.00/bu $430/ton

9. The Importance of Timing • March 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!

10. The Importance of Timing • It’s September and prices have really slid. But, it’s a correction and the market needed a correction. I’m going to wait now until prices come back.

11. The Importance of Timing • It’s almost March. I’m feeding $8.00 corn and $430/ton SBM. Milk prices are at $10.00. I didn’t lock in my milk price. • Projected Profits: - $120,760 (Ret M&L)

12. The Importance of Timing • I sold my March milk too quickly at $16.50. At the same time I bought a $5.25 call option for my corn for $.10/bu and 330/ton SBM option for $8.50/ton. This gave me the right to buy my feed at those prices, but I did not have to. My feed price is now 3.85 (3.75+.10) and SBM is 320 (311.5+8.5). • Projected Profits: $74,925

13. 2008A Year of Market Mayhem

14. Must be a New Era (Nominal Corn Prices, 1866-2008

15. It’s July 2008 May SB @ $16 + May Corn @ $8+ March Milk @ $20 + April Live Cattle @ 1.17 +

16. How Did Prices Get to the July Highs? – A Perfect Storm

17. Economics of Supply & Demand Price Supply and Demand changes can be short-term shocks or long-term trends S D P2 P1 P0 Quantity

18. Supply Growth Rate in Productivity slowed R & D funding down Non-farm uses for land Constraints on factors of production (water) Climate Change?? Impact on Price

19. World Wheat and Course Grain Ending Stocks Source: USDA: WASDE, June 10, 2008 Report

20. Supply Weather Shocks 2006 Russia and Ukraine Australia South Africa 2007 SE Europe Russia and Ukraine Turkey, Australia, Argentina, etc. Impact on Price Historically, two successive years of lower global production occurs about once per decade.

21. Supply Impact on Price • Change in stock holding policies • 80’s and 90’s were an era of: • Surpluses • Stability • Free Trade • Not a big impact, but it exacerbates impact of any short falls Why go through the expense of holding stocks?

22. Supply Higher Oil Prices Direct Affect: Higher energy costs for transportation, drying, etc. Indirect: Higher fertilizer costs andfuel surcharges on other inputs Impact on Price

23. Impact on Price

24. Demand Population Growth rate is slowing, but in absolute number of mouths to feed the world is growing at about 75 million per year That’s ¼ of US population per year That’s almost 1 billion more people in next 12 years

25. Where is Population Growth Source: World Bank Group:

26. Where’s the Population 45.1 Source: U.S. Bureau of Census

27. Demand Income Growing at a faster rate Growing especially in middle income countries and in Asia

28. Gross National Income per Capita(through 2007, current US dollars) High Income people don’t eat more food when they get more money – they buy boats! Source: World Bank Group:

29. Gross National Income per Capita (through 2007, current US dollars) With more income this group buys food and often more animal protein. Source: World Bank Group:

30. Gross National Income per Capita (through 2007, current US dollars) Source: World Bank Group:

31. Demand, U.S. $ Index Impact on Price

32. U.S. Corn & SB Export Estimates (1980-2008 MY (Sept-Aug) Thousand MT) Source: USDA/FAS PS&D data

33. U.S. Beef and Pork Exports (1980-2008, Calendar Year, TMT) Source: USDA/FAS PS&D data

34. Demand Hedge and Index Funds Impact on Price

35. Increased exports Increased domestic demand Increased input costs Milk

36. SUPPLY Productivity has slowed World stocks are tight: Policy World stocks are tight: Weather shocks Increasing Input Prices CRP and etc. Switch in production Demand Population Per capita income US dollar decline Oil prices (ethanol demand) Hedge and Index Funds Price of other goods Impact on Price

37. In July Prices Were the Result of A Perfect Storm

38. It’s Not July Anymore

39. World Wheat and Course Grain Ending Stocks Source: USDA, WASDE, March 11, 2009

40. Demand, U.S. $ Index

41. U.S. Corn and Soybean Exports (1980-2008 MY (Sept-Aug) Thousand MT) Source: USDA/FAS PS&D data

43. Anything Else Happen Since July? • A Dow that fell and rose by record levels • A potential world-wide financial collapse • A $700 billion dollar bailout – Twice • Similar actions by other countries • Favre played for the Jets and retired again • Cardinals played in the Super Bowl • Taxpayers paying bonuses to AIG Execs.

45. It’s Not July Anymore May Corn@ $8+ Mar SB @ $16 + Now $9.65 Now $4.01 March Milk @ $20 + April Live Cattle @ 1.17 + Now $10.49 Now $.86

46. Input Prices Source: University of Illinois Extension

47. What Will It Be In2009? 2010? 2011?

48. We could assess the fundamentals of S & D Grain Production: world U.S. World stocks: Policy World stocks: Input Prices CRP release Switch in production Population Per capita income China’s growth ??? US dollar ( US Exports) Oil prices (ethanol demand) ???? Hedge and Index Funds I Don’t Know and I Don’t Trust My Guess

49. Price Outlook

50. Nominal Corn Prices(Future Range Based on Average of Prior Periods) 5.24 4.13 3.14