1. Winning The Game-The Dairy Edition A Simulation Game for Dairy Risk Management Dr. Margot Rudstrom Regional Extension Educator University of Minnesota Extension Service

2. Program Development Center for Farm Financial Management University of Minnesota University of Minnesota Extension Service Program Delivery University of Minnesota Extension Service University of Wisconsin Extension Service

3. Program Financial Support North Central Risk Management Education Center The College of Agricultural, Food and Environmental Sciences Your Local Sponsor University of Minnesota Extension Service Center for Farm Financial Management, University of Minnesota

4. Motivation for “The Game” Price variability is a relatively new phenomenon in dairy compared to other commodities. Futures contracts for Class III milk been trading on CME in their present form in 1998.

5. Motivation for “The Game” Teach price risk management tools  Forward contracts  Hedging  Options  Combinations

6. Taking a Step Back Starting point for milk marketing Don’t overwhelm participants Wet the appetite for milk marketing  Don’t try and make expert marketers in one session Pricing tool that is not size-dependent

7. Winning the Game – The Dairy Edition Agenda Introduction Game Seasonality in Prices Price Variability and Risk Target Prices Pricing Tools Results of the Game Writing Your Marketing Plan

8. Workshop Theme “Selectively using processor contracts can help smooth out the bumps in your milk check!”

9. Marketing is Important! Good marketing is not about finding the highest price A good marketing plan helps you more consistently get a good average price

10. What is a Marketing Plan? A marketing plan is a proactive strategy to price your milk that considers your financial goals, cash flow needs, price objectives, anticipated production, and appetite for risk Proactive, not reactive, not overactive, not inactive

11. Why do I need a Marketing Plan? Fear and greed are powerful emotions - they will affect your decisions. A solid plan is the only effective weapon against these emotions “Plan your trades, trade your plan”

12. Emotions Play a Major Role in Marketing…

13. The Game Set-up Farm information Forward contract specifications Other rules of the game

14. Your Farm for the Game 100 cow dairy operation Rolling herd average of 22,000 pounds Fat 3.4% Protein 3.2% SCC 361,000

15. Playing the Game There is one type of forward-pricing tool available  processor contracts on Class III milk You have already signed a participation agreement with your processor Contract price is 5 cents under the Class III futures price

16. Playing the Game Processor contracts start at 20,000 lbs, then go up in 5,000 lb increments  20, 25, 30, 35, etc. Cannot contract more than 120,000 lbs per delivery month There is a penalty ($$$$$$) if you cannot deliver

17. 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 and contract for delivery in future months Any milk not contracted in a month will be sold at the announced Class III price

18. Playing the Game Find your decision input sheet (perforated sheet) Use the pricing log (big fold-out sheet) to record your ID number and pricing decisions Sales need to be made in thousands of pounds (25,000=25). The processor only types with 2 fingers.

19. Playing the Game Please print your name at the top!

20. Playing the Game

21. You must turn in an input each time even if you are not selling anything You will have a limited amount of time to make your decisions. The milk processor doesn’t take calls at home We will provide a brief market update before each marketing decision

23. Ready to start the game???

24. Summary to this point Marketing is important Rules of the game No background information in terms of cost of production or historical price data Play!

25. The Game

26. November

27. 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

28. November 18 Class III Futures Quotes Feb13.65 June12.10 Oct 12.80 Last Month Announced Class III  16.04 Mailbox Price  18.44

29. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Example 2012.10 99 2012.80 13.65- 16.04 18.44

30. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Example Grandma 20

31. 3:002:502:402:302:202:102:001:501:401:301:201:101:000:500:400:300:200:100:00 November 18 Class III Futures Quotes Feb13.65 June12.10 Oct 12.80 Last Month Announced Class III  16.04 Mailbox Price  18.44

32. Copyright © 2004 Center for Farm Financial Management, University of Minnesota..\WTG-TDE 2005\WTG Dairy 2005 update.xls

33. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Margot’s Observations Lack of background information simulates the feeling of “Am I doing the right thing?” Getting participants attention with the game creates a receptive audience for more information about milk marketing The rest of the agenda

34. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Seasonality Typical milk price patterns Milk supply and demand Focus on Class III milk Basis Class III futures contracts

35. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Price Variability and Risk Define price risk Visual

36. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Distribution of Announced Class III Prices, 1998-2005

37. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Price Variability and Risk Define price risk Intuitive approach to price risk

38. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Price Variability for One Month Which price curve would you rather sell on?

39. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Price Variability and Risk Define price risk Intuitive approach to price risk Announced versus futures Class III price variability

40. Copyright © 2004 Center for Farm Financial Management, University of Minnesota November Class III 1998-2005

41. Copyright © 2004 Center for Farm Financial Management, University of Minnesota November Class III 1998-2005

42. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Price Risk Reducing risk through increased opportunities More opportunities to meet the target price Class III futures gives you a greater chance of reaching a particular price

43. Copyright © 2004 Center for Farm Financial Management, University of Minnesota How Many Times??? Comparison of futures and announced price in any given month. In the past 8 years, how many times was the announced price above ____? In the past 8 years, how many times was the futures price above ____?

44. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Quiz Time May Milk, 1998-2005 Announced Price $9.50? 7 / 8 yrs $10.00 6 / 8 yrs $11.50 3 / 8 yrs $12.00 3 / 8 yrs Futures Price $9.50? 8 / 8 yrs $10.00 8 / 8 yrs $11.50 8 / 8 yrs $12.00 7 / 8 yrs

45. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Summary of Price Risk Class III futures gives you pricing opportunities in any given month Are you looking for them? Proactive marketers are!!!

46. 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?

47. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Class III Announced Prices 1988-2005 AverageTop third January$12.02$12.73 February$11.51$12.07 March$11.61$12.22 April$11.99$12.97 May$12.02$13.09 June$12.10$12.99 July$12.42$13.19 August$12.75$13.53 September$13.16$13.93 October$12.83$13.51 November$12.31$13.16 December$12.31$13.22 Source: www.aae.wisc.edu/future

48. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Target Prices What is a good price for me? Cost of production What do you expect the milk check to pay for? What is a good price for your operation? Helps you act on your plan

49. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Target Prices Target prices are a balance… What might be available in the market in any given month (what’s a good price from the market) AND Some idea of cost of production (what’s a good price for me) AND Your risk preference

50. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Summary of Target Prices What’s a good price from the market? What’s a good price for me? Don’t be upset for making good marketing decisions You are not trying to hit the highest price You are looking for a good average price more consistently

51. 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

52. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Example of a Put Strike price $11.00 Premium $0.35 Brokerage fee $0.03 My minimum price is $10.62 $11.00 - 0.35 - 0.03 = 10.62

53. Copyright © 2004 Center for Farm Financial Management, University of Minnesota September ‘06 Class III Put DateFutures / Options 3/20/06Sept 2006 futures @ $12.03 $12.00 put costs 63 cents Worst case scenario (minimum price)? $12.00 strike price - 0.63 option cost – 0.03 fee = $11.34 Best case scenario? Poised for profits should September futures go higher than $12.66 ($12.00 + 0.63+ 0.03) No limit to your upside potential!

54. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Participation Agreements Agreement you sign with a processor in order to contract with that processor Not all participation agreements are created equal R-E-A-D Ask questions!

55. Copyright © 2004 Center for Farm Financial Management, University of Minnesota The Game Recap Let’s meet the celebrity players…

56. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl has no time to watch the markets. His mailbox price is the announced Class III, plus his basis (PPD, etc.) Carl Cashseller Meet Our Players…

57. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Grandma Meet Our Players… Goal: Minimize price swings Target Prices? None Contracted Amount? 120,000 lbs total for a month, in 20,000 lb increments beginning 11 months prior

58. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Grandma Meet Our Players… Contracts for December 06 Amount January 0620,000 February 0620,000 March 0620,000 April 0620,000 May 0620,000 June 0620,000 Total120,000

59. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Al Averageprice Meet Our Players… Goal: Get at least the average price on half of my production Target Prices? Monthly average announced Class III price, from 1988-2005 Contracted Amount? 85,000 lbs total for a month Only watching from 11 to 4 months prior

60. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Terry Topthird Meet Our Players… Goal: Lock in the price when it moves into the historical top third range Target Prices? Monthly top third announced Class III price, from 1988-2005 Contracted Amount? 120,000 lbs total for a month Only watching from 11 to 4 months prior

61. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Harriet Halfandhalf Meet Our Players… Goal: Reduce price swings, but keep some upside potential for the fall Follow Grandma’s plan for contract months January – June Follow Al’s plan for contract months July – December

62. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Ollie Options Meet Our Players… Goal: Price protection without giving up any of the upside Buys one put six months prior Strike price January to June  $11.00 Strike price July to December  $12.00

63. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Your Game Results

64. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Game Results

65. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Game Results

66. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Game Results

67. Copyright © 2004 Center for Farm Financial Management, University of Minnesota And the winner is…

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

69. Celebrity Results, 1998-2005 Carl Weighted Average 14.22 Highest Price * 4 80% of Prices 12.10 … 15.90 Let’s compare to Carl Cashseller! * Out of 8 years

70. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl’s Mailbox Prices 1998-2005

71. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandma Weighted Average 14.2213.82 Highest Price * 42 80% of Prices 12.10 … 15.90 13.10 … 14.68 Carl vs. Grandma * Out of 8 years 28 cents less total revenue (all from 2004) Smallest price range difference (1.58) 90% of prices above $13.10

72. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. Grandma 1998-2005

73. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAl Weighted Average 14.2213.8214.08 Highest Price * 42- 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 Carl vs. Al * Out of 8 years $0.14 less revenue than Carl over the 8 years Reduced his price range Still has upside potential, but never had the highest price

74. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. Al 1998-2005

75. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAlTerry Weighted Average 14.2213.8214.0814.23 Highest Price * 42-1 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 12.50 … 15.47 Carl vs. Terry * Out of 8 years Fewest contracts 2 nd widest price range after Carl Slightly more revenue

76. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. Terry 1998-2005

77. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAlTerryHarriet Weighted Average 14.2213.8214.0814.2314.00 Highest Price * 42-11 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 12.50 … 15.47 13.05 … 15.03 Carl vs. Harriet * Out of 8 years 22 cents less revenue over 8 years 2 nd smallest price range (1.98) 90% of prices above $13.05

78. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. Harriet 1998-2005

79. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAlTerryHarrietOllie Weighted Average 14.2213.8214.0814.2314.0014.37 Highest Price * 42-11- 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 12.50 … 15.47 13.05 … 15.03 12.77 … 15.62 Carl vs. Ollie * Out of 8 years Most revenue Worse than Carl 4 out of 8 years Reduced price range, mostly on the lower end Options can work

80. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAlTerryHarrietOllie Weighted Average 14.2213.8214.0814.2314.0014.37 Highest Price * 42-11- 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 12.50 … 15.47 13.05 … 15.03 12.77 … 15.62 Carl vs. Ollie * Out of 8 years “Takes money to make money” Average monthly cost: $926 Last month his put made money: June 2003

81. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Carl vs. Ollie 1998-2005

82. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Celebrity Results, 1998-2005 CarlGrandmaAlTerryHarrietOllie Weighted Average 14.2213.8214.0814.2314.0014.37 Highest Price * 42-11- 80% of Prices 12.10 … 15.90 13.10 … 14.68 12.50 … 15.47 12.50 … 15.47 13.05 … 15.03 12.77 … 15.62 * Out of 8 years

83. 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!”

84. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Smoothing Out the Bumps

85. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Smoothing Out the Bumps

86. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Smoothing Out the Bumps

87. Sizing Up the Market What are the celebrities doing today?

88. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Contract Month Futures As of 3/23/06 Target Prices Amount Contracted July 06$11.37 Aug 06$12.02 Sep 06$12.07 Oct 06$12.10 Nov 06$12.10 Dec 06$12.00 Jan 07$11.80 Feb 07$11.77

89. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Carl Cashseller Still giddy from prices in 2004-05 Contract Month Futures As of 3/23/06 Target Prices Amount Contracted July 06$11.37??0 Aug 06$12.02??0 Sep 06$12.07??0 Oct 06$12.10??0 Nov 06$12.10??0 Dec 06$12.00??0 Jan 07$11.80??0 Feb 07$11.77??0

90. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Grandma Writing one 20,000 lb contract for July - February Next month, August-March Contract Month Futures As of 3/23/06 Target Prices Amount Contracted July 06$11.3720,000 Aug 06$12.0220,000 Sep 06$12.0720,000 Oct 06$12.1020,000 Nov 06$12.1020,000 Dec 06$12.0020,000 Jan 07$11.8020,000 Feb 07$11.7720,000

91. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Al Averageprice Above target price for February 2007 One 85,000 lb contract Contract Month Futures As of 3/23/06 Target Prices (Average Announced) Amount Contracted July 06$11.37$12.42 Aug 06$12.02$12.75 Sep 06$12.07$13.16 Oct 06$12.10$12.83 Nov 06$12.10$12.31 Dec 06$12.00$12.31 Jan 07$11.80$12.02 Feb 07$11.77$11.5185,000

92. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Terry Topthird No targets are met No contracts Contract Month Futures As of 3/23/06 Target Prices (Top third Announced) Amount Contracted July 06$11.37$13.19 Aug 06$12.02$13.53 Sep 06$12.07$13.93 Oct 06$12.10$13.51 Nov 06$12.10$13.16 Dec 06$12.00$13.22 Jan 07$11.80$12.73 Feb 07$11.77$12.07

93. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Harriet Halfandhalf 20,000 lbs in January and February 2007 No targets are met in July-December 2006 Contract Month Futures As of 3/23/06 Target Prices Amount Contracted July 06$11.37$12.42 Aug 06$12.02$12.75 Sep 06$12.07$13.16 Oct 06$12.10$12.83 Nov 06$12.10$12.31 Dec 06$12.00$12.31 Jan 07$11.8020,000 Feb 07$11.7720,000

94. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Sizing Up the Market Ollie Options Buying a September2006 put @ $12.00 strike price Premium is 58 cents Total premium is $1,160 Contract Month Futures As of 3/23/06 Target Prices Amount Contracted July 06$11.37 Aug 06$12.02 Sep 06$12.07 Oct 06$12.10 Nov 06$12.10 Dec 06$12.00 Jan 07$11.80 Feb 07$11.77

95. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Writing Your Plan What tools will you use? How much of your production will you market? What are your target prices? Maybe more than one target price What contract months are your focus? How far ahead will you look? How much time / effort / money do you want to dedicate to marketing?

96. 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 Nothing you can do to get a better price yesterday Woulda…Coulda…Shoulda

97. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Summary Have target prices in mind What is a good price and when? Good marketing is not about getting the highest price, it’s about getting a good average price more consistently Forget last month (or yesterday)

98. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Some Final Thoughts There is no one “right” answer in dairy marketing, and some degree of risk is unavoidable K.I.S.S. theory A complex plan is harder to maintain

99. 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

100. 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 husband could do it”

101. 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 !”

102. 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.”

103. 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: 21263 cwt. Median: 21900 cwt. Cash forward contracts most frequently used marketing tool(97% of those fwd pricing use this tool).

104. 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).

105. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Evaluation Results As a result of the WTG-TDE workshop: Planned 8.2% 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.

106. 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

107. 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

108. 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

109. 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

110. Copyright © 2004 Center for Farm Financial Management, University of Minnesota Contacts Bret Oelke oelke002@umn.edu Margot Rudstrom rudstrmv@umn.edu Wynn Richardson wynn@umn.edu