MITIGATING RISK IN THE DAIRY SECTOR2011 USDA OUTLOOK FORUMCHERI DE JONGFEBRUARY 25, 2011

MITIGATE RISKS – THE ISSUES…… Price of feed (corn and proteins) Dairy exports / dollar valuation Global economies / dairy exports Debt / leverage Liquidity / bank valuations Increasing costs (insurance / supplies / energy /

etc.) Regulations (environmental / regulatory / etc.)

What can we do to mitigate our risks…….

MITIGATE RISKS – OUR MISSION As a dairy farmer, we (our family) are…..

Engaged in the production of high quality milk Develop and maintain a sustainable model to

move forward in today’s agricultural climate Understanding challenges of today’s dairy industry Embrace technology Mitigate and minimize risks!!!!

We are proud to be dairy farmers.….share with you our farms….

AGRIVISION FARM MANAGEMENT

• Dairy Management• Farm Management

All are De Jong family owned / operated farms

AGRIVISION FARM MANAGEMENT

• Dairy Management• Farm Management

All are De Jong family owned / operated farms

DAIRY FARMS – OVERVIEW Northside Farms - Conventional

Milking Cows: 5400 Ship to Select Milk Producers Inc. Doubled in size in 2002 by moving Central

Texas operations to the Texas Panhandle. Strategic move – environmentally friendly area!

Mitigate Risks…..Diversify

DAIRY FARMS – OVERVIEWDiversify - Organic Milk Production Natural Prairie Dairy Farms – Organic

Milking Cows: Large Scale Build relationship with buyers “Contract Producer”

Only produce what is contracted Expansion – 1 year minimum lead time

MITIGATE RISKS - DIVERSIFICATION Organic Milk Production

Began in 2005 and has consistently grown Demand for product All milk is contracted Regulations / NOP Rules “tedious at best” Major financial investments

Have created a model that is sustainable!!

MITIGATE RISKS - SUPPLIERS

Producing a wholesome, fresh product for the consumer is critical

Cooperatives strategy Partner with suppliers to know what they want Keeping suppliers happy is key to success for

longer termNatural Prairie Dairy Farms - Supplier of the

Year Northside Farms 1st in Quality (3 years standing)

MITIGATE RISKS – VERTICAL INTEGRATION

Grow as much of your own feed as you can…..

Conventional Farms: Corn (silage), wheat, alfalfa, sorghum 5,042 Irrigated Acres

Organic Farm: Corn (silage and grain), wheat (silage and grain),

alfalfa, sorghum, oats, grazing acres (Bermuda/fescue/clover)

20,059 Irrigated Acres

MITIGATE RISKS – VERTICAL INTEGRATION

Grow your own heifers….. Better genetics

Lower cull rates Better milk production

Lower cost of replacements More control / better management Use of sexed semen - more heifers in the system

We grow our own heifers for both conventional and organic operations on two separate heifer raising operations. A total of 17,000 head for the two operations.

MITIGATE RISKS – MANAGEMENT IS KEY! Creation of a centralized management

company called: AgriVision Farm Management

Dairy Management Farm Management

Businesses are De Jong family owned/operated

MITIGATE RISKS – EFFECTIVE MANAGEMENT

Management is KEY to successful operations – Having the right people in the right positions.

CEO - Operations CFO – Finance Farm Managers (2) Risk Manager / Feed Purchasing (2) Accounts Payable Manager Office Manager Efficiency/Purchasing Manager Human Resource Director Interns during summer Dairy managers and supervisors – TEAM approach!

MITIGATE RISK – RISK MANAGEMENT Creation of risk

management company: Pedestal Commodity Group Seeks to manage margins for

a dairy entity Helps minimize some

volatility to bottom line Hedging via futures & options

on CME Farming (crops) Dairy (milk) Dairy (inputs)

Cash commodity purchasing and logistics

Hedging Line of Credit

MITIGATE RISKS – SUPPORTING ENTERPRISES

Business: Supplies and Parts…… Dairy / farm supplies – bulk ordering of ALL

dairy and farm supplies (semi-loads of teat dip…./sprinkler nozzles, etc.)

Two full time mechanics – loaders, tractors, irrigation pumps, etc.

Parts hunter/order for equipment parts Developed internal software / Equipment # /

tracking of all maintenance and repairs.Make better decisions regarding equipment

purchases and when to sell!

MITIGATE RISKS – MILK PRICES

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WTX vs. Class III

Class III West Texas

MITIGATE RISKS – VOLATILITYAverage annual mailbox price:

2007 $17.81/cwt2008 $16.63/cwt2009 $11.36/cwt2010 $15.10/cwt

MILK REVENUE MINUS FEED COST ($/CWT)

DAIRY ECONOMICS

Feed48%

Herd Re-

placement18%

Fixed Costs23%

Principal & Interest11%

Dairy Expenses

Milk93%

Beef & Calves7%

Dairy Income

DAIRY ECONOMICS

$15/cwt

Covered Uncovered$0.00

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00

$2,500,000.00

$901,458.00$1,100,000.00

$330,480.00

$330,480.00$438,576.00

$438,576.00$202,561.25

$202,561.25

Advantage of Feed Coverage in Volatile Markets

Feed Herd Replacement Fixed Costs Principal & InterestIncome $15/cwt Income $12/cwt Income $10/cwt

$10/cwt

$12/cwt

MITIGATE RISKS – OUR PHILOSOPHY

Strategies for long term viability Maintain cash Culling – milk per cow efficiency Interest only real estate notes Create tools to evaluate and project financial

expectations Continuously evaluate budget / actual Evaluate equipment repairs / purchasing Don’t ignore the inevitable

MITIGATE RISKS – MOVING FORWARD

Feed costs very high – continuing to rise / many not hedged or positioned adequately

More dairies are filing for bankruptcy Dairy lenders are “cutting loose” those that

have been in special assets for lengthy time period

Not a lot of lending options Some dairymen are not looking at long term

viability

MITIGATE RISKS – FUTURE CHALLENGES

Health care – increased costs Activist groups Immigration Increased regulation Taxes Banking/Liquidity in business

Will dictate spending/saving on farm Mandated revenue insurance or hedging??

MITIGATE RISKS – FUTURE Why do dairy farmers do what they do??

Way of life Great lifestyle to raise a family Values Rural life

Future Generation – We must be an operation that is sustainable in order to be here for the next generation!