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 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 Introduction Game Seasonality in Prices Price Variability and Risk Target 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: 0.42 High: 2.78 Range from the lowest to highest year is 2.36/cwt *Source:

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 18 Class III Futures Quotes Feb13.65 June12.10 Oct Last Month Announced Class III  Mailbox Price  18.44

Copyright © 2004 Center for Farm Financial Management, University of Minnesota Example

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 bowl MN 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 III

Copyright © 2004 Center for Farm Financial Management, University of Minnesota Quiz Time May Milk, 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 Time May Milk, Announced Price $9.50? 6 / 7 yrs $ / 7 yrs $ / 7 yrs $ / 7 yrs Futures Price $9.50? 7 / 7 yrs $ / 7 yrs $ / 7 yrs $ / 7 yrs

Copyright © 2004 Center for Farm Financial Management, University of Minnesota Frequency that May Class III Milk Prices Exceeded Given Price Level,

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 processors Advantages 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

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, CarlGrandmaAlTerryHarrietOllie Weighted Average Highest Price * % of Prices … … … … … … * Out of 7 years

Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. 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 Market Your plan? Contract Month Futures As of 4/6/05 Target Prices Amount Contracted 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 Summary Seasonal pattern in milk prices By being proactive and taking action, you can reduce price variability Have target prices in mind Good 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 message Any 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: 100 Average RHA: lbs Median: lbs Cash 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 Results As 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 Results As 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 meetings Logistics 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 Margot Rudstrom Wynn Richardson