1. The Volatile Ag Economy Management Matters Kevin Bernhardt UW-Extension and Center for Dairy Profitability March 2009

2. Farm & Risk Management Team © 2008 Three Ways to Navigate 2009 1. Manage Your Profit Margin 2. Develop Your Team 3. Think Counter Cyclically 2

3. Farm & Risk Management Team © 2008 Agenda A look backwards at 10 months of market mayhem A look forward Management Implications 3

4. Farm & Risk Management Team © 2008 March 2009 Pricing Opportunities DateCornSBMMilk Feb 15.2632716.05 March 195.4929317.05 May 16.4129818.36 July 27.9743119.46 Aug 85.3832017.72 Oct 104.2526315.60 Dec 53.0923813.60 Feb 3, 093.623029.85 4 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 5 CornSB Meal Milk

6. Farm & Risk Management Team © 2008 March 2009 Futures Prices 6

7. Farm & Risk Management Team © 2008 March 2009 Pricing Opportunities DateCornSBMMilkRet/Cow100 Cows Feb 15.2632716.0515015,009 March 195.4929317.0543443,417 May 16.4129818.3664164,107 July 27.9743119.4647747,695 Aug 85.3832017.7254854,794 Oct 104.2526315.6027927,916 Dec 53.0923813.60-21-2,062 Feb 3, 093.623029.85-1,072-107,218 7 Return to Management and Labor

8. Farm & Risk Management Team © 2008 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 8

9. Farm & Risk Management Team © 2008 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. 9 I’m waiting!

10. Farm & Risk Management Team © 2008 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. 10

11. Farm & Risk Management Team © 2008 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) 11

12. Farm & Risk Management Team © 2008 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 12

13. 2008 A Year of Market Mayhem

14. Farm & Risk Management Team © 2008 Must be a New Era (Nominal Corn Prices, 1866-2008 14

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

16. Farm & Risk Management Team © 2008 How Did Prices Get to the July Highs? – A Perfect Storm

17. Farm & Risk Management Team © 2008 Economics of Supply & Demand 17 Price Quantity D S P0P0 P1P1 P2P2 Supply and Demand changes can be short-term shocks or long-term trends

18. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 World Wheat and Course Grain Ending Stocks Source: USDA: WASDE, June 10, 2008 Report

20. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 Supply 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? Impact on Price

22. Farm & Risk Management Team © 2008 Supply Higher Oil Prices – Direct Affect: Higher energy costs for transportation, drying, etc. – Indirect: Higher fertilizer costs and fuel surcharges on other inputs Impact on Price

23. Farm & Risk Management Team © 2008 Impact on Price

24. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 Where is Population Growth Source: World Bank Group:

26. Farm & Risk Management Team © 2008 Where’s the Population Pop. (bil)% of WorldRank World6.667 China1.33019.91 India1.14817.22 Indonesia.2383.66 Bangladesh.1542.39 Nigeria.1382.111 EU.4917.44 U.S..3034.55 45.1 Source: U.S. Bureau of Census

27. Farm & Risk Management Team © 2008 Demand Income – Growing at a faster rate – Growing especially in middle income countries and in Asia

28. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 Gross National Income per Capita (through 2007, current US dollars) Source: World Bank Group:

31. Farm & Risk Management Team © 2008 31 Demand, U.S. $ Index Impact on Price

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

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

34. Farm & Risk Management Team © 2008 Demand Hedge and Index Funds Impact on Price

35. Farm & Risk Management Team © 2008 Milk 35 Increased exports Increased domestic demand Increased input costs

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

37. Farm & Risk Management Team © 2008 A Perfect Storm In July Prices Were the Result of A Perfect Storm

38. 38 It’s Not July Anymore

39. Farm & Risk Management Team © 2008 World Wheat and Course Grain Ending Stocks Source: USDA, WASDE, March 11, 2009

40. Farm & Risk Management Team © 2008 Demand, U.S. $ Index

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

42. Farm & Risk Management Team © 2008

43. Farm & Risk Management Team © 2008 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. 43

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

46. Farm & Risk Management Team © 2008 Input Prices Pre Meltdown Before Thanksgiving Post Meltdown After Thanksgiving Anhydrous$1,000/ton$600 DAP1,000/ton$800 Potash$900/ton$600 Triple Stack$275/bag$210 Crude Oil$144/b$44/b 46 Source: University of Illinois Extension

47. 47

48. Farm & Risk Management Team © 2008 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. Farm & Risk Management Team © 2008 Price Outlook 2008/092009/2010 Corn3.90-4.30 4.15 3.50 3.85-4.70 3.40-4.40 USDA-WASDE, 3/11/09 AgMRC, US weight Avg Central IA harvest price SB8.85-9.85 9.35 7.35 7.50-9.40 7.00-8.75 USDA-WASDE, 3/11/09 AgMRC, US weight Avg “ Central IA harvest price Milk11.25-11.85USDA-WASDE Live Cattle.84-.89USDA-WASDE Hogs.45-.48USDA-WASDE 49

50. Farm & Risk Management Team © 2008 Nominal Corn Prices (Future Range Based on Average of Prior Periods) 5.24 4.13 3.14

51. Farm & Risk Management Team © 2008 Nominal Corn Prices Ranges based on all data recent and all periods and no outliers all periods and recent 2.25 4.86 4.42 6.32 6.70 4.60 3.00 4.63 5.26 3.31 4.21 4.01 5.24 4.13 3.14

52. Farm & Risk Management Team © 2008 Class III Prices – 1988-Jan 2009

54. Farm & Risk Management Team © 2008 54 Futures Prices in Context (Comparison of Feb 7 to Sept. 14, 2007) 1996-2006 data

55. Farm & Risk Management Team © 2008 55 Source: Market Harmonics: http://www.market- harmonics.com/free-charts/sentiment/consumer_confidence.htm

56. Farm & Risk Management Team © 2008 Quote by Lynn Franco, Director of the Conference Board’s Consumer Research Center “All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions for the next six months” 56 Source of Quote: March 2009 Iowa Farm Outlook, Iowa State University

57. Farm & Risk Management Team © 2008 Darrel Good, March 23 rd Weekly Outlook, Univ. of Il Extension Much of last week’s rally in prices was associated with higher energy prices, a rally in financial markets, and a weaker U.S. dollar. These markets, in turn, were influenced by U.S. monetary policy that ignited expectations of an upcoming period of rapid inflation in the U.S. economy. 57

58. Farm & Risk Management Team © 2008 When everything is going swell, what is often the next thing that happens? When everything is rotten, what is often the next thing that happens? Think Counter Cyclically 58

59. 59 Greater Volatility of output prices Greater Volatility of input prices Greater Volatility of profit margins Why?

60. Continued Globalization 60

61. We’ve Hitched Ourselves to the Oil Train 61 Oil’s Volatility As Well

62. Farm & Risk Management Team © 2008 Ethanol, A Fundamental Change 62

63. 63 Implications? ManagementMatters

64. 19,00021,00023,00025,000 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)11,02341,023 16(29,977)2,02334,02366,023 17(10,977)23,02357,02391,023 188,02344,02380,023116,023 64 Production Matters Price Matters $137 hay, $4.00 corn, $300 SBM Return to Management and Labor

65. 65 Cost Increase For Inputs 2003 - 2007 (USDA-NASS) INPUT TYPE % Increase for Period % Increase per Year % Increase 2/07 to 2/08 % Increase 9/07 to 9/08 Fertilizer67%13.40%39%131% Chemicals8%1.60%8%19% Fuels99%19.80%35%37% Seed33%6.62%13%30% Supplies and Repairs15%3.08% Autos and Trucks0%0.00% Farm Machinery25%5.03% Building Materials25%5.00% Farm Services17%3.36% Rent23%4.55% Wage Rates20%4.00% Family Living13%2.65%

66. -15%-10%-5% 23,000 Avg5%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 29,06221,79413,8345,077(4,117)(13,311)(22,505) 16 52,06244,79436,83428,07718,8839,689495 17 75,06267,79459,83451,07741,88332,68923,495 18 98,06290,79482,83474,07764,88355,68946,495 66 Input Costs Matter Increase in Feed Costs Decrease in Feed Costs

67. Corn Enterprise Budget 67 -15%At Budget15% 160 2.50-91,991-116,645-141,300 3.00-59,991-84,645-109,300 3.25-43,991-68,645-93,300 3.50-27,991-52,645-77,300 3.75-11,991-36,645-61,300 4.004,009-20,645-45,300 4.2520,009-4,645-29,300 4.5036,00911,355-13,300 4.7552,00927,3552,700 5.0068,00943,35518,700 5.50100,00975,35550,700 6.00132,009107,35582,700 160 bu/ac yield 400 acres $162/ac fertilizer $205 cash rent $4.32/bu cost $691/ac cost

68. Farm & Risk Management Team © 2008 Management Matters 110 MN and WI farms, 500-1,500 acres Average of 2006 and 2007 68 Bottom 20% 20-40%40-60%60-80%Top 20% Net Ret. 7,73722,23252,42739,856110,988 Acres 340308407237416 Yield 164165178174183 Direct Exp. 385387392376372

69. Farm & Risk Management Team © 2008 Dairy Enterprise ($/cow) 1996-2007 (101-200 cows, no org. or RG, MN&WI) Source: Center For Farm Financial Mgt.

70. Swings between high, low, and zero profit margins will be – Greater – More often – More dependent on timing Need for greater cash management Changing/tighter purchase policies 70

71. Increased lender requirements, documentation, and verification Heterogeneity Opportunities!!! Marketing Psychiatrist 71

72. 72 Which Type of Marketer Are You? Both Forward Contracted for $18.00 Top Price Was $21.25 Cool! I’m getting a great return on my investment #@%$^& I lost $3.25!!!

73. Farm & Risk Management Team © 2008 73 No Silver Bullet

74. Look Backwards - Meticulous Attention to Financials – Have a farm records system – Use the farm records system!  Know your costs of production, Know your margin – Know “at risk” versus “secured” costs – Sensitivity analysis – Prepare accurate financial statements AND Use them to evaluate your profit blueprint. 74

75. Look Forwards: – Business Planning: Plan, Execute, Set Metrics, and Control – Cash Flow/Enterprise Budgets  Plan your production, plan your cash flow, communicate your plan, work your plan  Evaluate sensitivity 75

76. Develop Your Team – Kitchen Cabinet of advisors  Lender, Extension agent, broker, agronomist, nutritionist – Be Interdependent vs Independent  Aligned/Cooperative Business Structures  Value-added vertical businesses – Good and well trained employees are an investment not a cost. – Good teams have Excellent and Transparent Communications 76

77. Diversification & Specialization – Diversify: Inputs, enterprises, market and risk management – Specialize: Be the best, most profitable Know what makes you money – Partial budgeting: production practices and inputs 77

78. Farm & Risk Management Team © 2008 Partial Budgeting Additional CostsAdditional Revenues Reduced or Lost Revenues Reduced or Eliminated Costs Dollars Lost =________Dollars Gained = _____ 78

79. Know and use marketing tools and strategies  Remember, It’s the Margin That Counts Farm Programs Insurance Instruments – LGM-Dairy, Crop insurance – Levels of coverage 79

80. Strategies for Down Times – Flexible Lease Arrangements – Defer Capital Expenditures – Defer Income Taxes – Refinance long-term obligations – Borrowing against Equity capital, but with planned repayment – Compare financing rates  Careful: one needs committed friends in down times 80 Source: Edwards, William. “Managing through a recession: options for farm operators. Ag Decision Maker, Iowa State Extension

81. Farm & Risk Management Team © 2008 Three Ways to Navigate 2009 1. Manage Your Profit Margin  Know your costs of production  Know your marketing  Know your financial metrics 2. Develop Your Team  Be interdependent not independent 3. Think Counter Cyclically  Discipline yourself to business decisions 81

82. Farm & Risk Management Team © 2008 Said Another Way Each morning you wake up, think what you can do that day to be a good steward of: 82 People Budget Vision

83. 83 TheEnd

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

85. Farm & Risk Management Team © 2008 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/WRS0801 /http://www.ers.usda.gov/Publications/WRS0801 / 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 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/templates/template.aspx?articleid=404&zoneid=26 http://www.farmfoundation.org/news/templates/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.

86. Farm & Risk Management Team © 2008 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. 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. 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

87. Farm & Risk Management Team © 2008 Sources: Other Extension Outlook Conference, Kansas City, Aug 18-19, 2008. Fortenbery, Randy. Presentation to WI Ag Consultants, March 2008.

88. Farm & Risk Management Team © 2008 Corn Enterprise ($/acre) 1996-2007 (cash rent,1,001-1,500 ac, MN&WI) Source: Center For Farm Financial Mgt.

89. Farm & Risk Management Team © 2008 Standard Deviation, 1996-2007 Source: Center For Farm Financial Mgt.

90. Farm & Risk Management Team © 2008 Direct Corn Expenses, 2007 Source: Center For Farm Financial Mgt.

91. Farm & Risk Management Team © 2008 Standard Deviation, 1996-2007 Source: Center For Farm Financial Mgt.

92. Farm & Risk Management Team © 2008 Direct Expenses, % by Type, 2007 Source: Center For Farm Financial Mgt.

93. Farm & Risk Management Team © 2008 Standard Deviation, 1996-2007 Source: Center For Farm Financial Mgt.