Marketing Basics Dipping Your Toe in the Shallow

Marketing Basics Dipping Your Toe in the Shallow End of the Marketing Pool Kevin Bernhardt UW-Extension and Center for Dairy Profitability January 27, 2010

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9 Outlook • • Better than 2009 … 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) © 2008 Farm & Risk Management Team

10 Agenda • • Motivation Basic Marketing Tools and Strategies – • • Advanced

The Importance of Timing [Person 1] • July 2008: Input prices at record highs, but they are just going higher. People are talking: – – • 11 $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 © 2008 Farm & Risk Management Team

The Importance of Timing [Person 1] • Still July 2008: March 2009 Milk prices are great too, but……. . – – – • 12 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! © 2008 Farm & Risk Management Team

The Importance of Timing [Person 1] • 13 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. © 2008 Farm & Risk Management Team

The Importance of Timing [Person 1] 14 • March 2009: I’m feeding $8. 00 corn and $430/ton SBM. Milk price turned out to be $10. 44. I never did lock in my milk price. • Profits: - $120, 000 (Return M&L) © 2008 Farm & Risk Management Team

The Importance of Timing [Person 2] • • 15 I forward contracted my March 2009 milk in May 2008 at $16. 50/cwt (could have had more if I had waited awhile). At the same time, using marketing tools, I assured a ceiling cost for corn of $5. 35 and $338. 50 for SBM. – – $5. 25 CALL for $. 10/bu 330/ton SBM option for $8. 50/ton. © 2008 Farm & Risk Management Team

The Importance of Timing [Person 2] • March 2009 Market Prices: Corn = $3. 75 SBM $311. 50 – • 16 My protected ceiling price turned out to not be needed. After adding the cost of having that protection my feed costs are: $3. 85 $320 March 2009 Profits: $74, 925 © 2008 Farm & Risk Management Team

17 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 25 th percentile price for both months and well above blue ribbon price. Pull the trigger and sell!!!! © 2008 Farm & Risk Management Team

18 My Own Real-Life Example • As of December 8 th, – November announced

19 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. © 2008 Farm & Risk Management Team

20 Another Real-Life Example Announced Marketing Gain • How much did I pay for feed, fertilizer, and fuel? • I only did 25% of my production!! -. 34 Jun Aug Oct Dec Feb 20. 25 17. 32 17. 06 15. 28 9. 31 2. 59 2. 85 4. 63 10. 60 Apr Jun Aug Oct 10. 78 9. 97 11. 2 12. 82 9. 13 9. 94 8. 71 7. 09 © 2008 Farm & Risk Management Team

Which Type of Marketer Are You? Cool! I’m getting a great return on my investment And could have had $21. 25 #@%$^& I lost $2. 07!!! Both Forward Contracted for $18. 00 Announced Price Was $20. 07 21

WHEN IT COMES TO MANAGEMENT, WE ARE NOT ALL THE SAME MANAGEMENT MATTERS

23 Return to Management and Labor 19, 000 21, 000 23, 000 (123, 977) Production (103, 977) Matters 25, 000 10 (143, 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 Price Matters $137 hay, $4. 00 corn, $300 SBM (83, 977)

24 Increase in Feed Costs Decrease in Feed Costs -15% 10 11 12 13 14 15 16 17 18 -10% -5% 23, 000 Avg 5% 10% 15% Input Costs Matter (85, 938) (93, 206) (101, 166) (109, 923) (119, 117) (128, 311) (137, 505) (62, 938) (70, 206) (78, 166) (86, 923) (96, 117) (105, 311) (114, 505) (39, 938) (47, 206) (55, 166) (63, 923) (73, 117) (82, 311) (91, 505) (16, 938) (24, 206) (32, 166) (40, 923) (50, 117) (59, 311) (68, 505) 6, 062 (1, 206) (9, 166) (17, 923) (27, 117) (36, 311) (45, 505) 29, 062 21, 794 13, 834 5, 077 (4, 117) (13, 311) (22, 505) 52, 062 44, 794 36, 834 28, 077 18, 883 9, 689 495 75, 062 67, 794 59, 834 51, 077 41, 883 32, 689 23, 495 98, 062 90, 794 82, 834 74, 077 64, 883 55, 689 46, 495

ROROE (mrkt basis w economic depreciation) CDP: 100 -250 Cow Dairies in WI (freestall, no pasture, not organic)

26 Management Matters • 110 MN and WI farms, Average of 2006 and 2007 Bottom 20% Net Ret. 20 -40% 40 -60% 60 -80% Top 20% 7, 737 22, 232 52, 427 39, 856 110, 988 Acres 340 308 407 237 416 Yield 164 165 178 174 183 Direct Exp. 385 387 392 376 372 © 2008 Farm & Risk Management Team

Volatility in 2008 -09 was Unprecedented • • • 27 How many of you think this volatility will happen sometime again? How many of you think that volatility may be less than this wild time, but still at a level where profit margins can swing significantly? My guess is your shaking your heads “YES” © 2008 Farm & Risk Management Team

28 What Are The Lessons? • • • Timing is important. It’s the margin (difference between price and costs) that counts. We need a mindset that manages for profitability and risk - not the homerun Volatility is a fact of life (output and inputs) Management matters A Great Deal © 2008 Farm & Risk Management Team

29 Basic Marketing Tools and Strategies A Review © 2008 2005 Farm & Risk

30 Two Markets • Two Different Markets – Cash: § – What you are in every day when you produce and sell milk Futures: § What you can choose to be in if you buy and sell Futures or buy and sell Options on the Chicago Mercantile Exchange Ø You do not need to be a producer. You do not need to own a single cow. Anyone can be a farmer in the futures market!!!!

31 Tools in the Marketing Toolbox Cash Market Forward Contract Minimum Price Contract Futures Market Futures Contract PUT Option CALL Option And all kinds of combinations of the above! LGM-Dairy © 2008 Farm & Risk Management Team

32 Forward Contract (Cash Market) • Transaction with your milk buyer for a contracted quantity and price – – – You must deliver You will get the contracted price (nothing more – nothing less 3 rd party risk Contracted price is futures price less a premium No broker, no broker’s fee, no margin account © 2008 Farm & Risk Management Team

33 Futures Contract (Futures Mrkt) • Transaction through a broker with the Chicago Mercantile Exchange – – Sell a futures contract for a set price and quantity (200, 000 or 100, 000 lbs) Has nothing to do with your physical production and nothing to do with what your milk plant pays you § – You don’t even have to have any cows! But, it will connect in the end to lock-in a price © 2008 Farm & Risk Management Team

34 Futures Contract (Futures Mrkt) – – – You must pay a broker’s fee You must maintain a margin account You may get margin calls § § – – Market moves up $. 25 one day, then you may have to send the broker a check for $500 (. 25*2000 cwt) If mrkt moves down you receive $500 You can get out of the contract at any time. There is no physical delivery requirement © 2008 Farm & Risk Management Team

You Pit/Trading Floor 35 Local Broker CME Other Party

Margin Account!! Margin Account 36

37 PUT Option (Futures Mrkt) • Buying a PUT Option gives you the right to sell a futures contract at a set price, but not the obligation. You pay a premium for this right. [Protects against the risk of falling prices] © 2008 Farm & Risk Management Team

38 CALL Option (Futures Mrkt) • Buying a CALL Option gives you the right to buy a futures contract at a set price, but not the obligation. You pay a premium for this right. [Protects against the risk of rising prices] © 2008 Farm & Risk Management Team

Basic Strategies (2 Basic Strategies & 2 Tools) 1. Lock-in a known price. The price you set is the price you will get. 1. Forward contract with your milk buyer 2. Sell a futures contract on the CME 2. 39 Set a Floor price. You will get no less than the floor price, but you may get more. 1. Minimum price contract with your milk buyer 2. Buy a PUT option on the CME © 2008 Farm & Risk Management Team

Basic Strategy 1: Lock It In! 40 - Forward Contract with milk buyer, or

41 Locking In a Price By Selling a Futures Contract Advantages 1) Achieves a “specific” price or profit objective 2) Can get out if markets change 3) Not tied to a milk buyer • Disadvantage: 1) Margin account and calls 2) Forgo higher prices 3) 200, 000 lb. Contracts By Forward Contracting Advantages: 1) Achieves a “specific” price or profit objective 2) Flexible in terms of quantities of milk to contract 3) Simple to use 4) No margin account or calls Disadvantages: 1) Locked into a milk buyer 2) Can’t get out of contract if markets change, must deliver! 3) Forgo higher prices • © 2008 Farm & Risk Management Team

42 Let’s Practice Selling Futures Always Ask and Answer – “What am I doing to myself? ” • May Futures are trading at $14. 75 – What price position have you secured for 200, 000 lbs of milk in May? ($14. 75) © 2008 Farm & Risk Management Team

43 May Milk Announced at $17. 00 Jan 21 Sold milk on futures market for: May Sell my milk to the milk plant for: May Cash settled (buy back) futures at: +14. 75 My base price before brokers fees +14. 75 +17. 00 -17. 00

44 May Milk Announced at $12. 00 Jan 21 Sold milk on futures market for: May Sell my milk to the milk plant for: May Cash settled (buy back) futures at: +14. 75 My base price before brokers fees +14. 75 +12. 00 -12. 00

Forward Contract May Milk Announced at $17. 00 Jan 21 Forward contract May milk for $14. 45 (14. 75 -. 30): May Sell my milk to the milk plant for: +14. 45 45

Forward Contract May Milk Announced at $12. 00 Jan 21 Forward contract May milk for $14. 45 (14. 75 -. 30): May Sell my milk to the milk plant for: +14. 45 46

Basic Strategy 2: Set a Floor Price 47 - Minimum Price contract with milk buyer, or - Buy a PUT Option at the CME (15. 25 strike price for $. 79) for a floor of $14. 46 © 2008 Farm & Risk Management Team

Let’s Practice: Setting a Floor Price via Buying a PUT Option 48 Always Ask and Answer – “What am I doing to myself? ” • Buy a $15. 50 July PUT Option for $. 62 – What price position have you secured for 200, 000 lbs of July milk? $14. 88 minimum (15. 50 -. 62) © 2008 Farm & Risk Management Team

49 May Milk Announced at $17. 00 Jan 21 Purchased right to sell milk for $15. 50, but I don’t have to (PUT). My cost for that right (premium): May Sell my milk to the milk plant for: May I have the right to sell milk for $15. 50 and buy back for $17. 00. Thanks, but no thanks (PUT expires worthless) My base price before brokers fees -. 62 +17. 00 0 +16. 38

50 May Milk Announced at $12. 00 Jan 21 Purchased right to sell milk for $15. 50, but I don’t have to (PUT). My cost for that right (premium): May Sell my milk to the milk plant for: May I have the right to sell milk for $15. 50 and buy back for $12. 00. Thanks, I’ll do it (exercise my PUT) My base price before brokers fees -. 62 +12. 00 +3. 50 +14. 88

51 Advanced Strategies • Want to increase your protection? Take advantage of market gains? Premiums to costly? – – – Roll up to futures Roll up to a higher PUT Forward contract and buy a CALL option Buy a PUT and sell a CALL Roll down futures to a PUT © 2008 Farm & Risk Management Team

Focus on Basics first, but a Taste of Advanced Strategies • 52 Forward Contract and Buy a Call Option – Why? You don’t want to risk getting a lower price in case markets fall, but you don’t want to miss out if there is a super rally! © 2008 Farm & Risk Management Team

53 Forward Contract and Buy a Call Option – Forward contract March 2010 milk for $14. 45 ($14. 70 futures price less $. 25 discount). – At the same time buy a $16. 00 CALL option for $. 32 § Remember, CALL option gives you the right to buy a futures contract for $16. 00 and sell it back at then prevailing price © 2008 Farm & Risk Management Team

54 Forward Contract and Buy a Call Option – What are you doing to yourself? – You will receive a minimum of $14. 13 class III price for your milk (14. 70 -. 25 -. 32). – However, if markets rally beyond $16. 00, then you will receive payment back from your CALL Option, which gives you the right to buy at $16. 00 and sell at the higher price. © 2008 Farm & Risk Management Team

Forward Contract and Buy a Call Option • 55 March 2010 turns out to be $13. 50 – – – Sell milk to plant for $14. 13 (14. 70 -. 25 -. 32) Your CALL option expires worthless (don’t want to buy milk at $16. 00 and then sell it at $13. 50). C-III Base Price: $14. 13 If you had forward contracted only: $14. 45 If you had done nothing: $13. 50 © 2008 Farm & Risk Management Team

56 Forward Contract and Buy a Call Option • March 2010 turns out to be $17. 50 – – – Sell milk to plant for $14. 13 (14. 70 -. 25 -. 32) Exercise your CALL option (that is, buy milk at $16. 00 and sell at $17. 50 for a $1. 50 gain) C-III Base (14. 13) + Call Gain (1. 50): $15. 63 If you had forward contracted only: $14. 45 If you had done nothing: $17. 50 © 2008 Farm & Risk Management Team

57 Marketing Plan

58 MARKETING PLAN – WHY? 1. Instills discipline into a normally emotionally driven decision 2. Provides a means to evaluate, benchmark, and learn the science and art of marketing

59 YOU WILL BE WRONG You Can’t Outguess The Market!! Good producers hate to

Parts of a Marketing Plan 60 Getting ready ü 1. 2. 3. Take an Inventory: marketing resources, risk tolerance, and non-price marketing objectives Know the Playing Field: situation, outlook, & historical prices. Know Your Toolbox: Marketing Tools and Strategies Take Aim ü 1. 2. 3. 4. Costs of production and Financial objectives Personal Price Targets Basis and Triggers for Action Marketing Protocols (what do you do when your trigger’s tripped!) Fire ü 1. Evaluation, control, and record-keeping © 2008 Farm & Risk Management Team

Marketing Resources, Risk Tolerance, Non-Price Objectives • Marketing Resources – • 61 Skill level, computer power and savvy, marketing services, relationship with broker, banker, market advisors, skills of other partners/spouse Risk Tolerance – – What are your personal attitudes towards risk What is your operation’s capacity to absorb risk © 2008 Farm & Risk Management Team

Marketing Resources, Risk Tolerance, Non-Price Objectives • 62 Non-Price Objectives – – Develop relationships (banker, broker, advisors) Start/join a marketing club Subscribe to an advisory service Weekly/monthly farm marketing meetings What’s your non-price objective? What will you do after breakfast tomorrow to make it happen? © 2008 Farm & Risk Management Team

Know the Playing Field 63 Situation, Outlook, and Historical Prices © 2008 Farm &

64 Situation and Outlook • U. S. Production – – • • Cow numbers Production per cow Demand Value of the dollar (export demand) Corn, soybean, and forage supplies and quality “……. . ” © 2008 Farm & Risk Management Team

Historical Prices What is a Good Price Based on What the Market Provides • 65 History – – What is the average price for each month What is the top third price, top 16% price What is the seasonality of prices What is the average, top 1/3, etc. based on forward pricing opportunities Word of Caution History may have changed? © 2008 © Farm & Risk Management 2005 Team

66 Class III Prices 1980 -2004 Average: 11. 94 Median: 11. 89 Top 25%: 12. 54 Avg + SD: 13. 35 2004 -2009 Average: 14. 69 Median: 14. 24 Top 25%: 17. 04 Avg + SD: 17. 80 © 2008 Farm & Risk Management Team

67 Seasonality (Averages) © 2008 Farm & Risk Management Team

68 Know Your Marketing Toolbox Cash Market Forward Contract Minimum Price Contract Futures Market Futures Contract PUT Option CALL Option And all kinds of combinations of the above! LGM-Dairy © 2008 Farm & Risk Management Team

69 Costs of Production, Financial Objectives, and Personal Price Targets h 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 © 2008 © Farm & Risk Management 2005 Team

70 Financial Objectives - Example • • • 120 cows @22, 000 lbs = 26, 400 cwt per yr. Costs of Production = $14. 75 Financial Objectives beyond cost recovery: $40, 000 (family living contribution from cows) $40, 000 (retained earnings for business - future expansion plans, improvements, etc. ) $30, 000 (misc) $110, 000 (approx. 9 -12 % ROROA) © 2008 Farm & Risk Management Team

71 Personal Price Targets Purple Ribbon: Blue Ribbon: Red Ribbon: White Ribbon: (cash costs)

72 Item Total Cost Basic cash costs Costs of Production Family Living 40, 000 Retained Earnings 40, 000 Misc 30, 000 Cost per Cumulative cwt 12. 73 14. 75 1. 52 1. 14 12. 73 14. 75 16. 27 17. 79 18. 93 -Based on 26, 400 cwt produced per year © 2008 Farm & Risk Management Team

73 Basis • Difference between announced price and mailbox price © 2008 © Farm

Marketing Price Triggers for Action Your Personal Expected Mailbox Price Basis Target 74 Marketing Price Triggers 18. 93 1. 25 17. 68 17. 79 1. 25 16. 54 16. 27 1. 25 15. 02 12. 73 1. 25 11. 48 Error on your basis estimate to the low side. Being wrong leaves more money in your pocket. © 2008 Farm & Risk Management Team

75 Price Triggers For Action - Gun is loaded - Duck is in my sights - It’s duck season - It’s a big duck A Pricing opportunity: - Exceeds my purple ribbon price target - Is top 15% historically PULL THE TRIGGER! © 2008 © Farm & Risk Management 2005 Team

76 Marketing Protocols Your Marketing Rules Tough, Tough © 2008 Farm & Risk Management

77 Months Away From Market Month How Does The Price Compare to Historical Prices What is the General Outlook for Prices Less than 3 Top 1/3 Marketing Action What is My Marketing Decision Trigger Price At What Price Will I Engage This Action Set floor with unlimited upside Hedge 80% 3 -6 Middle 1/3 Low 1/3 More than 6 © 2005

78 What is Your Marketing Philosophy?

79 Marketing Tools and Strategies What are they? When is it best to use them? t Call Do No thi ng rd wa Forale S Pu Hedge Short Fence Market Do Nothing Do Something Hedge, Put Outlook is up ? ? ?

80 Control Evaluate Records • • • 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

81 Following are some people we know who made their plans happen!!! © 2005

82 This child, at four years old, could not speak. Some thought he would

83 His music teacher once said of him, “As a composer he is hopeless.

84 This person’s teacher told him he was too stupid to learn anything. Who

85 He was cut from his high school basketball team. Who was it? Michael

86 This person was fired from his first job because he lacked imagination. Who

87 This person failed the 6 th grade. Who was it? Winston Churchill ©

88 Be Realistic • Are you reducing price risk or are you wanting a

FC 100% at $10. 00 Trigger

$11. 00 PUT for $. 15

FC 10%, 15% and 25% at 50 th, 70 th and 90 th %-tile

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

Which Type of Marketer Are You? Cool! I’m getting a great return on my investment 93 #@%$^& I lost $2. 07!!! Both Forward Contracted for $18. 00 Announced Price Was $20. 07

Let’s Practice Our Marketing Savvy!! A Game Based on Managing and Marketing the Margin

96 Case Farm • • • 100 lactating cows Parlor/Free Stall facilities Ration based on 23, 000 lb herd average $1. 30 of income beyond class III milk sales Budget based on current forecasts for 2010 Estimates based on the “Wisconsin Dairy Enterprise Planning Budget 2008” (Bruce Jones and Ken Barnett with modifications by Ken Bolton), Center for Dairy Profitability © 2008 Farm & Risk Management Team

97 Case Farm Price Targets Feed Costs Description $/cwt $7. 50 Total income and price needed to cover Red feed costs and minimum family living, Ribbon livestock, replacement, and labor costs. $14. 63 Total needed to cover feed, Red Ribbon, Blue and facility and equip (Cost of Ribbon Production). $16. 11 Purple 10% ROROA Ribbon Total needed above feed costs. $17. 17

98 First of Three Marketing Dates You can price protect feed costs and milk

99 Current Feed Cost Estimates Dice % Hay SBM & Corn Protein A 2 3 114 3. 00 200 350 5. 70 B 3, 4, 5 25 126 3. 50 275 450 6. 63 C 6, 7, 8 44 132 4. 25 340 550 7. 49 D 9, 10, 11 25 152 5. 00 380 650 8. 63 E 3 165 5. 50 420 750 9. 45 12 Min. Mix Feed Costs per CWT Decision: You can 1) lock these costs in or 2) let them ride What is Your Decision?

100 Price Targets Given Feed Costs Red Blue Purple A B 5. 70 6. 63 12. 83 13. 76 14. 31 15. 24 15. 37 16. 30 C D E 7. 49 8. 63 9. 45 14. 62 15. 76 16. 58 16. 10 17. 24 18. 06 17. 16 18. 30 19. 12 Red Ribbon: minimum family living + livestock + replacement, + labor Blue Ribbon: Red + facility and equipment costs Purple: Red + Blue + 10% ROROA

1 st of 3 Pricing Opportunities Outlook: Futures: 14. 00 Put Prices $13. 75 @. 64: 13. 11 $13. 25 @. 50: 12. 75 7 months out

1 st of 3: Make a Decision and Record It What you can do 102 C-III Basis Your Price -- -- unknown Lock-in with Futures 14. 00 1. 30 15. 30 High Floor price 13. 11 1. 30 14. 41 or higher Put Prices Low Floor Price 12. 75 1. 30 14. 05 or higher $13. 75 @. 64: 13. 11 $13. 25 @. 50: 12. 75 Do Nothing Feed Costs Red Blue Purple A 5. 70 12. 83 14. 31 15. 37 B 6. 63 13. 76 15. 24 16. 30 C 7. 49 14. 62 16. 10 17. 16 D 8. 63 15. 76 17. 24 18. 30 E 9. 45 16. 58 18. 06 19. 12 Futures: 14. 00 Outlook:

Second of Three Marketing Dates Feed costs may have changed. The dice will be thrown with the following result: Dice Result 2, 3, 4, or 5 6, 7, or 8 9, 10, 11, or 12 Probability Result 28% Feed costs decrease one step 44% Feed Costs do not change from what they were 28% Feed costs increase one step 103

104 Current Feed Cost Estimates Dice % Hay SBM & Corn Protein A 2 3 114 3. 00 200 350 5. 70 B 3, 4, 5 25 126 3. 50 275 450 6. 63 C 6, 7, 8 44 132 4. 25 340 550 7. 49 D 9, 10, 11 25 152 5. 00 380 650 8. 63 E 3 165 5. 50 420 750 9. 45 12 Min. Mix Feed Costs per CWT Decision: If you have not already locked in costs, You can 1) lock these costs in or 2) let them ride What is Your Decision?

2 nd of 3 Pricing Opportunities Outlook: Futures: 13. 74 Put Prices $13. 50 @. 60: 12. 90 $13. 00 @. 35: 12. 65 7 months out 5 months out

2 nd Date: Make a Decision and Record It What you can do C-III Basis Do Nothing 106 Your Price -- -- unknown Lock-in with Futures 13. 74 1. 30 15. 04 High Floor price 12. 90 1. 30 14. 20 or higher Low Floor Price 12. 65 1. 30 13. 95 or higher Futures: 13. 74 Put Prices $13. 50 @. 60: 12. 90 $13. 00 @. 35: 12. 65 Outlook: Feed Costs Red Blue Purple A 5. 70 12. 83 14. 31 15. 37 B 6. 63 13. 76 15. 24 16. 30 C 7. 49 14. 62 16. 10 17. 16 D 8. 63 15. 76 17. 24 18. 30 E 9. 45 16. 58 18. 06 19. 12

Third and Last Marketing Date Feed costs may have changed. The dice will be thrown with the following result: Dice Result 2, 3, 4, or 5 6, 7, or 8 9, 10, 11, or 12 Probability Result 28% Feed costs decrease one step 44% Feed Costs do not change from what they were 28% Feed costs increase one step 107

108 Current Feed Cost Estimates Dice % Hay Corn SBM & Protein Min. Mix Feed Costs per CWT A 2 3 114 3. 00 200 350 5. 70 B 3, 4, 5 25 126 3. 50 275 450 6. 63 C 6, 7, 8 44 132 4. 25 340 550 7. 49 D 9, 10, 11 25 152 5. 00 380 650 8. 63 E 3 165 5. 50 420 750 9. 45 12 Decision: If you have not already locked in costs, You can 1) lock these costs in or 2) let them ride What is Your Decision?

3 rd and Last Pricing Opportunity Outlook: Futures: 17. 40 Put Prices $17. 25 @. 83: 16. 42 $16. 25 @. 42: 15. 83 7 months out 5 months out 3 months out

3 rd Date: Make a Decision and Record It What you can do C-III Basis Do Nothing Your Price -- -- unknown Lock-in with Futures 17. 40 1. 30 18. 70 High Floor price 17. 25 1. 30 18. 55 or higher Low Floor Price 16. 25 1. 30 17. 55 or higher Futures: 17. 40 Put Prices $17. 25 @. 83: 16. 42 $16. 25 @. 42: 15. 83 Outlook: Feed Costs Red Blue Purple A 5. 70 12. 83 14. 31 15. 37 B 6. 63 13. 76 15. 24 16. 30 C 7. 49 14. 62 16. 10 17. 16 D 8. 63 15. 76 17. 24 18. 30 E 9. 45 16. 58 18. 06 19. 12 110

111 Final Feed Costs Dice % Hay Corn SBM & Protein Min. Mix Feed Costs per CWT A 2 3 114 3. 00 200 350 5. 70 B 3, 4, 5 25 126 3. 50 275 450 6. 63 C 6, 7, 8 44 132 4. 25 340 550 7. 49 D 9, 10, 11 25 152 5. 00 380 650 8. 63 E 3 165 5. 50 420 750 9. 45 12 Dice Result 2, 3, 4, or 5 6, 7, or 8 9, 10, 11, or 12 Probability Result 28% Feed costs decrease one step 44% Feed Costs do not change from what they were 28% Feed costs increase one step

Markets Are Closed and Class III Announced at: $10. 90/cwt Announced Class III =

What Was Your Price Compared to the Price Targets? Feed Costs Red Blue Purple A B 5. 70 6. 63 12. 83 13. 76 14. 31 15. 24 15. 37 16. 30 C D E 7. 49 8. 63 9. 45 14. 62 15. 76 16. 58 16. 10 17. 24 18. 06 113 17. 16 18. 30 19. 12 Red Ribbon: minimum family living + livestock + replacement, + labor Blue Ribbon: Red + facility and equipment costs Purple: Red + Blue + 10% ROROA

Summary of Locked-in Pricing Opportunities (Profit/Cow/Month) Announced COP 10. 90 base 2 nd Date 13. 74 base 1 st Date 14. 00 base Your Price: 12. 20 15. 04 15. 30 A B C D E 5. 70 6. 63 7. 49 8. 63 9. 45 (4, 050) (5, 842) (7, 475) (9, 667) (11, 233) 1, 393 (398) (2, 032) (4, 223) (5, 790) 1, 892 100 (1, 533) (3, 725) (5, 292) 114 3 rd Date 17. 40 base Your Price: 18. 70 8, 408 6, 617 4, 983 2, 792 1, 225

Summary of Locked-in Pricing Opportunities (Profit/Cow/Annualized) Announced COP 10. 90 base 2 nd Date 13. 74 base 1 st Date 14. 00 base Your Price: 12. 20 15. 04 15. 30 A B C D E 5. 70 6. 63 7. 49 8. 63 9. 45 (48, 600) (70, 100) (89, 700) (116, 000) (134, 800) 16, 720 (4, 780) (24, 380) (50, 680) (69, 480) 22, 700 1, 200 (18, 400) (44, 700) (63, 500) 115 3 rd Date 17. 40 base Your Price: 18. 70 100, 900 79, 400 59, 800 33, 500 14, 700

116 Final Comment Advice and counsel from others is critical - Extension Agents - Lenders - Consultants - Marketing Specialist - Etc. BUT, in the end it is your call:

118 Futures Prices in Context (Comparison of Feb 7 to Sept. 14, 2007) 1996

119 The End

Sources: Websites • • • • The Oil Drum: http: //www. theoildrum. com/story/2006/10/5/215316/408 Association for the Study of Peak Oil: http: //aspo-usa. com/ Oil Market Report: http: //omrpublic. iea. org/ Now and Future: http: //www. nowandfutures. com/index. html WTRG Economics: http: //www. wtrg. com/ World Bank Group: http: //ddp-ext. worldbank. org/ext/DDPQQ/member. do? method=get. Members Farm Foundation: http: //www. farmfoundation. org/ USDA Economic Research Service: http: //www. ers. usda. gov/ Trading Charts, Inc: http: //futures. tradingcharts. com/ CHOICES: http: //www. choicesmagazine. org/magazine/issue. php Foreign Agricultural Service: http: //www. fas. usda. gov/default. asp University of Illinois Farmdoc website: http: //www. farmdoc. uiuc. edu// Iowa State University Ag Decision Maker: http: //www. extension. iastate. edu/agdm/ University of Wisconsin, Center for Dairy Profitability: http: //cdp. wisc. edu/ University of Minnesota Center for Farm Financial Management: http: //www. finbin. umn. edu/ © 2008 Farm & Risk Management Team

Sources: Written Articles • • Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices. USDA/ERS, July 2008. http: //www. ers. usda. gov/Publications/WRS 0801/ Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term Adjustments? ” Choices, AAEA, 2 nd qrt 2008 23(2). http: //www. choicesmagazine. org/magazine/issue. php • • • Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now? ” Choices, AAEA, 2 nd qrt 2008 23(2). Lawrence, John D. , James Mintert, John D. Anderson, and David P. Anderson. “Feed Grains and Livestock: Impacts on Meat Supplies and Prices. ” Choices, AAEA, 2 nd qrt 2008 23(2). Irwin, Scott H. , Philip Garcia, Darrel L. Good and Eugene L. Kunda. “Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts. ” Choices, AAEA, 2 nd qrt 2008 23(2). Mark, Darrell R. , B. Wade Brorsen, Kim B. Anderson, and Rebecca M. Small. “Price Risk Management Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants. ” Choices, AAEA, 2 nd qrt 2008 23(2). Abbott, Philip C. , Christopher Hurt, and Wallace E. Tyner. “What’s Driving Food Prices? ” Issue Report from the Farm Foundation, July 2008. http: //www. farmfoundation. org/news/template. aspx? articleid=404&zoneid=26 Fortenbery, T. Randall and Hwanil Park. “The Effect of Ethanol Production on the U. S. National Corn Price. ” Univ. of WI-Madison Dept. of Ag and Applied Econ: Staff Paper no. 523, April 2008. © 2008 Farm & Risk Management Team

Sources: Written Articles • • • Irwin, Scott. “Crop value and volatility in a new era” 2008 Illinois Farm Economics Summit, http: //www. farmdoc. uiuc. edu//presentations/index. asp. Schnitkey, Gary. “Prospects for Crop Production Costs” 2008 Illinois Farm Economics Summit, http: //www. farmdoc. uiuc. edu//presentations/index. asp. Schnitkey, Gary. “Farm Economics Facts & Opinions”, Department of Agricultural and Consumer Economics, College of Agricultural, Consumer, and Environmental Sciencds, university of Illinois at Urbana-Shampaign, FEFO 08 -13, July 11, 2008. Duffy, Michael, and Darnell Smith. “Estimated Costs of Crop Production in Iowa- 2009, ” Ag Decision Maker, Iowa State University, University Extension, FM-1712 Revised, December 2008. Duffy, Mike. “Estimating costs of crop production for 2009, ” Ag Decision Maker Newsletter, Iowa State University, University Extension, January 2009 © 2008 Farm & Risk Management Team

123 What Have I Done To Myself? Date Description of Transaction Cash Flow