Navigating Through Financials- Careful Where you … Through Financials-Careful Where you Step! ... Milk Sales $$$$$ ... Herd #7 Milk Plant Summary –Combined Fat & Protein Calculation

12/11/2015

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Stepping ForwardDecember 9 & 10 | Dairy Summit 2015 | Baraboo, Wis.

Navigating Through Financials-

Careful Where you Step!


Margin = Difference

Revenue $$$ less expenses $$$

Improving Margins↑ Revenue↓Expense↓↑ Both

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2014 Margins Improved2014 Margin ExampleImproved Margins

↑↑↑Revenues- ↑ Expenses = ↑↑ Margins

$ 24.06/cwt - $ 21.48/cwt = $ 3.84/cwt ∓$ .

2013 Margin = $1.85/cwt2012 Margin = $1.56/cwt2009 Margin = -$6.00/cwt


Metrics/Benchmarks

• $$$$• Per Cow• Per Cwt• % of Gross

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Revenue Sources

Milk Sales $$$$$$Cull Cows/Bull Calves/steers/breeding livestock sales $$$$Other revenues

• Dividends(Cash and Retained) $$$• Crops $$$• Insurance proceeds $$$• Government Payments $$• Custom Hire $


3.00%

7.59%0.98%

86.26%

0.07%

1.45%

0.03%

0.63%

Revenue Sources ‐2015 Ytd Thru Sept‐Typical Dairy

BULL CALVES/STEERS

CULL COW/BREEDING LIVESTOCK

CROP SALES

MILK SALES

COOP DIVIDENDS

CUSTOM WORK

OTHER

INSURANCE PROCEEDS

Milk and Livestock Sales = >90% Gross Rev

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Federal Milk Orders - Different Pay Structure

#30

#33

????


Milk Pricing

• Class III = milk used primarily for cheese(Fat & Prot)– Class I = beverage products– Class II = soft and frozen manufactured products– Class IV = butter and dry milk products

• Class I and II prices are differentials + Class III and IV

• Futures markets exist for Class III and IV

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Milk Check Building

• Class III Price is ‘built’ from weekly NDPSR (AMS) survey prices on products– Butter– Cheese– Dry Whey

• Class III Price is simply a benchmark, standardized price


Milk Pricing & Basis

• Federal Milk Marketing Orders (FMMO) establish monthly minimum prices that first handlers of Grade A milk must pay

• 10 FMMO’s originating in 1937 • Milk Class system is used by the FMMO

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Combined Fat & Protein

85%-90% of your milk check is derived from Fat & Prot Yield In Midwest Orders


October 2015 Milk Class III Price $15.46

89%

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2015

Ship Date

Pmt Date

C o w s

Milk per

cow

Lbs Prot

/Cow /Day

Lbs Fat

/Cow /Day

Lbs CFP /Cow /Day SCC % Prot %Fat

Other Solids

%

Dec Jan 870 92.1 2.74 3.40 6.13 115 2.97% 3.69% 5.72%Jan Feb 890 95.1 2.85 3.48 6.33 118 3.00% 3.66% 5.73%Feb Mar 915 97.5 2.94 3.56 6.50 111 3.01% 3.65% 5.76%Mar Apr 935 100.4 2.99 3.70 6.69 118 2.98% 3.68% 5.73%Apr May 950 103.3 3.07 3.72 6.79 106 2.97% 3.61% 5.74%May Jun 955 101.3 2.93 3.68 6.61 107 2.89% 3.63% 5.76%Jun Jul 955 104.9 3.04 3.80 6.84 119 2.90% 3.62% 5.75%Jul Aug 955 103.7 3.09 3.72 6.81 134 2.98% 3.59% 5.75%Aug Sep 975 104.6 3.11 3.71 6.81 136 2.97% 3.54% 5.75%Sep Oct 980 103.1 3.06 3.80 6.86 154 2.96% 3.69% 5.74%

Total/Aves 938 100.7 2.98 3.66 6.64 122 2.96% 3.63% 5.74%Previous yr 826 87.7 2.62 3.20 5.82 146 2.98% 3.65% 5.72%Difference 113 13.0 0.37 0.46 0.83 -23 -0.02% -0.01% 0.03%

Herd #7 Milk Plant Summary –Combined Fat & Protein Calculation

CFP = (2.96% + 3.63%) * 100.7 = 6.64 lbs


2015 Pricing

Ship Date

Pmt Date

C o w s

Lbs CFP /Cow /Day SCC

PPD or Other Comp

Prot Price

B.F Price

Other Solids Price

SCC-Qual

Prem/ cwt

Other Comp/

cwtVol

Prem Hauling Mkt'gHaul Per Cwt

Dec Jan 870 6.13 115 $0.60 $2.74 $2.10 $0.40 $0.67 -$0.30 $0.95 $9,438 $4,967 $0.38Jan Feb 890 6.33 118 $0.16 $2.67 $1.69 $0.40 $0.65 -$0.45 $0.90 $9,965 $5,245 $0.38Feb Mar 915 6.50 111 $0.13 $2.41 $1.83 $0.33 $0.66 -$0.53 $0.90 $9,496 $4,998 $0.38Mar Apr 935 6.69 118 $0.02 $2.49 $1.84 $0.29 $0.61 -$0.52 $0.90 $11,060 $5,821 $0.38Apr May 950 6.79 106 -$0.02 $2.56 $1.89 $0.27 $0.63 -$0.20 $0.90 $11,183 $5,886 $0.38May Jun 955 6.61 107 -$0.04 $2.52 $2.06 $0.25 $0.63 -$1.00 $0.89 $11,398 $5,999 $0.38Jun Jul 955 6.84 119 -$0.15 $2.69 $2.10 $0.23 $0.61 -$0.59 $0.99 $11,423 $6,012 $0.38Jul Aug 955 6.81 134 -$0.03 $2.61 $2.11 $0.20 $0.57 -$0.49 $1.00 $11,666 $6,140 $0.38Aug Sep 975 6.81 136 -$0.07 $2.57 $2.27 $0.12 $0.57 -$0.47 $0.99 $12,016 $6,324 $0.38Sep Oct 980 6.86 154 $0.33 $1.98 $2.75 $0.05 $0.46 -$0.37 $1.00 $11,521 $6,064 $0.38

Total/Aves 938 6.64 122 $0.08 $2.52 $2.08 $0.25 $0.60 -$0.50 $0.94 $109,166 $57,456 $0.38Previous yr 826 5.82 146 $0.25 $3.84 $2.35 $0.47 $0.58 $0.10 $0.94 $83,654 $44,029 $0.38Difference 113 0.83 -23 -$0.17 -$1.32 -$0.28 -$0.23 $0.02 -$0.60 $0.00 $25,512 $13,427

Herd #7 Milk Plant Summary

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Milk Price Variation

• Milk Basis– Difference between Average Component and Average

Quality Milk

• What’s Average or Base Milk (FMMO)?– 2.99 % Prot– 3.5% Fat– 350,000 SCC

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Variation in Basis

ComponentsQuality

• SCC• Plate Count

Milk PlantsBst


Gross Basis

What is it?(Gross Milk Income – Class III Announced Price)/Cwt = Gross Basis/Cwt

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Mailbox Basis

What is it?((Gross Milk Income $ – hauling $ - marketing $)/Cwt) - Class III Announced Price = Mailbox Basis

Better Comparison across dairies


Herd 1 October 2015 Milk Class III Price $15.46

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Herd 2 October 2015 Milk Class III Price $15.46


Mailbox Basis Calc Oct 2015 Class III = $15.46

Herd 1

$18.26 - $0.17 - $0.01 - $15.46 = $2.62/cwt

Herd 2

$19.15 - $0.15 – $0.01 - $15.46 = $ 3.53/cwt$0.91

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Margin = Difference

Revenue $$$ less expenses $$$

Improving Margins↑ Revenue

↓Expense↓↑ Both


Expenses- The Big Three

• Labor• Capital & Lease Expense

– Principal, interest & leases

• Feed

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Margins

2012‐2014 Proj 2015

% of Gross

Income

Per

Cwt

% of Gross

Income

Per

Cwt

INCOME TOTAL 100.0% $20.83 100.0% $19.92

EXPENSES

Labor 10.1% $2.10 11.5% $2.30

Unpaid Labor & Mgmt 3.1% $0.65 3.3% $0.65

Capital/Leases 11.3% $2.35 11.8% $2.35

Purchased Feed 29.0% $6.05 28.6% $5.70

PARTIAL EXPENSE 53.5% $11.15 55.2% $11.00

PARTIAL MARGIN 46.5% $9.68 44.8% $8.92


Margins

2012‐2014 Proj 2015 Proj 2016

% of Gross

Income

Per

Cwt

% of Gross

Income

Per

Cwt

% of Gross

Income Per Cwt

INCOME TOTAL 100.0% $20.83 100.0% $19.92 100.0% $18.70

EXPENSES

Labor 10.1% $2.10 11.5% $2.30 12.8% $2.40

Unpaid Labor & Mgmt 3.1% $0.65 3.3% $0.65 3.5% $0.65

Capital/Leases 11.3% $2.35 11.8% $2.35 13.1% $2.45

Purchased Feed 29.0% $6.05 28.6% $5.70 28.6% $5.35

PARTIAL EXPENSE 53.5% $11.15 55.2% $11.00 58.0% $10.85

PARTIAL MARGIN 46.5% $9.68 44.8% $8.92 42.0% $7.85

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Margins 2012‐2014 Proj 2015

% of Gross

Income

Per

Cwt

% of Gross

Income

Per

Cwt

INCOME

Milk Sales 90.9% $18.93 88.4% $17.60

Bull Calves/Steers 1.8% $0.38 3.0% $0.59

Cull Cows 5.7% $1.18 7.3% $1.46

Crop 1.4% $0.30 1.1% $0.22

Other 0.2% $0.04 0.3% $0.05

INCOME TOTAL 100.0% $20.83 100.0% $19.92

EXPENSES

Labor 10.1% $2.10 11.5% $2.30

Unpaid Labor & Mgmt 3.1% $0.65 3.3% $0.65

Capital/Leases 11.3% $2.35 11.8% $2.35

Purchased Feed 29.0% $6.05 28.6% $5.70

PARTIAL EXPENSE 53.5% $11.15 55.2% $11.00

PARTIAL MARGIN 46.5% $9.68 44.8% $8.92


Margins 2012‐2014 Proj 2015 Proj 2016

% of Gross

Income

Per

Cwt

% of Gross

Income

Per

Cwt

% of Gross

Income Per Cwt

INCOME

Milk Sales 90.9% $18.93 88.4% $17.60 91.7% $17.15

Bull Calves/Steers 1.8% $0.38 3.0% $0.59 1.9% $0.35

Cull Cows 5.7% $1.18 7.3% $1.46 5.6% $1.05

Crop 1.4% $0.30 1.1% $0.22 0.5% $0.10

Other 0.2% $0.04 0.3% $0.05 0.3% $0.05

INCOME TOTAL 100.0% $20.83 100.0% $19.92 100.0% $18.70

EXPENSES

Labor 10.1% $2.10 11.5% $2.30 12.8% $2.40

Unpaid Labor & Mgmt 3.1% $0.65 3.3% $0.65 3.5% $0.65

Capital/Leases 11.3% $2.35 11.8% $2.35 13.1% $2.45

Purchased Feed 29.0% $6.05 28.6% $5.70 28.6% $5.35 ↓

PARTIAL EXPENSE 53.5% $11.15 55.2% $11.00 58.0% $10.85

PARTIAL MARGIN 46.5% $9.68 44.8% $8.92 42.0% $7.85

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2012‐2014 Proj 2015 Proj 2016

% of Gross

Income

Per

Cwt

% of Gross

Income

Per

Cwt

% of Gross

Income Per Cwt

INCOME TOTAL 100.0% $20.83 100.0% $19.92 100.0% $18.70

EXPENSES

PARTIAL EXPENSE 53.5% $11.15 55.2% $11.00 58.0% $10.85

PARTIAL MARGIN 46.5% $9.68 44.8% $8.92 42.0% $7.85

Cropping Expenses 7.9% $1.65 8.5% $1.70 8.6% $1.60 ↓

Rent 1.0% $0.20 1.0% $0.20 1.1% $0.20

Fuel 3.8% $0.80 3.5% $0.70 3.2% $0.60 ↓

Custom Hire 4.3% $0.90 4.5% $0.90 4.8% $0.90

Hauling & Trucking 0.8% $0.17 0.9% $0.17 0.9% $0.17

Repairs 5.0% $1.05 5.3% $1.05 5.6% $1.05

Supplies 3.6% $0.75 3.8% $0.75 4.0% $0.75

Breeding 1.3% $0.28 1.4% $0.28 1.5% $0.28

Farm Insurance 0.8% $0.16 0.8% $0.16 0.9% $0.16

Taxes 0.6% $0.13 0.7% $0.13 0.7% $0.13

Utilities 1.7% $0.35 1.8% $0.35 1.9% $0.35

Vet and Medicine 2.9% $0.60 3.3% $0.65 3.7% $0.70

Other 1.7% $0.35 1.8% $0.35 1.9% $0.35

TOTAL EXPENSE 89.0% $18.54 92.3% $18.39 96.7% $18.09

FINAL MARGIN 11.0% $2.29 7.7% $1.53 3.3% $0.61

Margins


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Feed Costs

• What are your feed costs?– Source of data?

• TMR software (FW, TMR Tracker, etc.)• Nutritionist report• Financials

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Feed Costs

• What are your feed costs?– TMR software (FW, TMR Tracker, etc.)

• Could include actual intakes, shrink• Still depends on entered cost accuracy


Feed Costs

• What are your feed costs?– Nutritionist report

• Only an estimate on intake• Likely accurate purchased feed cost

– Market?– Actual?– Shrink?

• Homegrown feed costs– Market?– Actual?

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Feed Costs

• Feed Costs via nutritionist– Homegrown feed values?

• Actual or market?• Are they driving ingredient decisions?

– Usually allocating forage by inventory and quality– Feed less forage if low quality; more if high – regardless of

cost


Feed Costs

• Homegrown corn silage– What is its value?– What is its cost?– Which number should you/your nutritionist use when

reporting your feed cost?– Which number should he/she use when making ingredient

decisions?

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$250/acre rent7.4 tons DM/acre corn silage4.0 tons DM/acre haylage


Feed Costs

Cost Value

• Corn Silage $32 $40

• Haylage $71 $85

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Feed Costs

• Market vs. Cost• Can have the same question about commodities

– Should use current contract price– Or ‘new’ price when off contract– Last load or next load?

• Work with your nutritionist!!


Feed Costs


• Your Financials

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Feed Costs


• Financials– The best measure, but never current– What to include?

» Land rent, Fertilizer, Chemicals, Seed, Equipment/depreciation, Repairs, Labor, Custom Hire, Manure Application, Fuel, Crop Insurance, Taxes

– Enterprise accounting likely the best approach» ‘Farm’ sells feed to ‘Dairy’» Can evaluate profit of each enterprise

independently» A lot of work!

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Feed Costs

• What are your feed costs?– Often to compare it to…

• Last month• An article I read• Neighbor at the coffee shop

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Feed Costs

• Feed costs are very difficult to compare across herds– Forage types– Forage quality– Cost or Market Value?– All diets included (calves, heifers, dry cows)?– Feed Markets/Contracts– Overage/Shrink– Production value


Feed Costs

• Total Feed Costs– Per head; Per cwt

• Purchased Feed Costs• Milk to Feed Ratio• Income Over Feed Costs

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Feed Costs

• Simple measure of feed costs per head (total or purchased)– No production information– A constantly moving target

• Feed costs per cwt are better– No value of production

(components)


Feed Costs

• Income Over Feed Cost– Probably the best measure

we have– Need to use accurate feed

costs– Need to use a relatively

stable milk price• 12-mo average price built

with components?

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Feed Costs

An example:• Looking Back (Class3 =$16.08):

– Fat = $2.228/lb– Prot = $2.354/lb– OS = 5.75%; $0.217/lb

• Looking Ahead (C3 =$15.63):– Fat = $2.323/lb– Prot = $2.327/lb– OS = 5.75%; $0.100/lb


Example 1 – Look Back

A BLb Milk 88 90Fat% 3.80% 3.80%Prot% 3.20% 3.20%Feed Cost, $/hd $5.90 $6.28Feed Cost, $/cwt $6.70 $6.98IOFC, $/hd $10.77 $10.77

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Example 1 – Look Ahead

A BLb Milk 88 90Fat% 3.80% 3.80%Prot% 3.20% 3.20%Feed Cost, $/hd $5.90 $6.28Feed Cost, $/cwt $6.70 $6.98IOFC, $/hd $10.42 $10.41


Feed Costs

• What can affect your actual feed costs?– Purchased

• Markets, local basis, contracts, volume, blending, shrink, ration formulation, additives

– Homegrown• Rent, yield, QUALITY, fuel, seed, fertilizer, labor, equipment,

repairs, shrink

– Of these, which can you control/influence?

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Feed Costs

• Purchased– Markets, local basis– Contracts– Volume, blending– SHRINK– QUALITY– Ration formulation, additives


Blood Meal, 2014-2015

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Corn Board Prices/Futures

2014 Avg = $4.19 2015 Avg = $3.82 2016 Avg = $3.84


Canola Meal, 2014-2015

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SBM Board Prices/Futures

2014 Avg = $430 2015 Avg = $324 2016 Avg = $282


Feed Costs

• Homegrown– Land Rent– Yield– QUALITY (weather)– Fuel, seed, fertilizer, labor, equipment, repairs– Shrink

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Feed Costs

• IOFC probably the best measure• Keep a history of your farm’s numbers• Difficult to compare across farms• Home-grown feeds are

difficult – cost vs. value• Control what you can

control


Feed Costs

• Make sure you are on the same page with your nutritionist– Which forages are you feeding and why?– Which additives are you feeding and why?

• Outlook: Lower purchased feed costs for 2016• Feed high-quality forage• Control what you can control

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Feed Costs

• Feed cost is still a Dairy’s single largest cost• What % of total costs?

– Old thumb rule = 50%– Still in the ballpark…– Have to include cropping costs

• Is it the biggest risk to your profits?


Dairy Hedging

• 250 milking cows• 85 lb milk• 44.0 lb CS• 44.4 lb Hlg• 12.7 lb HM Corn• 10.0 lb permeate• 8.6 lb protein• 8.0 lb WDG

=corn=soybeans=corn=corn=soybean meal=soybean meal

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Dairy Hedging

• 250-milk cows• Buying TMR based on market prices• 9-yr range on commodities

– 3,018 bu Corn = $2.25-$8.99/bu– 31 tons SBM = $175-$605/ton– 767 bu Soybeans = $5.23-$16.20/bu– 6,460 cwt Milk = $9.31-$24.60/cwt

• Risk = range in $/month


Dairy Risk, All Feed Purchased

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Dairy Risk, Only Protein Purchased


Summary• 2015 >>2016

• Feed- ↓↓• Reduced Energy Cropping Cost ↓↓• Basis(Components, quality, plants)

• Mailbox Basis versus Gross Basis• Breakevens- Class III

• 95% of Producers ($16.50 ±$1.50/cwt)

• Non milk revenues-Culls(Sold vrs Dead ?)• Strong Beef Prices—How Long? Gone !!!• Risk Management Strategies

• Milk Mkt, Basis, Crops, Interest, Land(Rent or Own), Labor

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“Improving Efficiency Doesn’t Stop Cycles but it separates the Winners From the Losers in a Down Cycle”

Ian Biggs, Consultant and CEO PIC

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Questions???

Documents

Navigating Through Financials- Careful Where you … Through Financials-Careful Where you Step! ... Milk Sales $$$$$ ... Herd #7 Milk Plant Summary –Combined Fat & Protein Calculation