Margin = Difference. Navigating Through Financials- Careful Where you Step! Stepping Forward. Revenue $$$ less expenses $$$ Improving Margins

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1 Navigating Through Financials- Careful Where you Step! Margin = Difference Revenue $$$ less expenses $$$ Improving Margins Revenue Expense Both 1

2 2014 Margins Improved 2014 Margin Example Improved Margins Revenues- Expenses = Margins $ 24.06/cwt - $ 21.48/cwt = $ 3.84/cwt $ Margin = $1.85/cwt 2012 Margin = $1.56/cwt 2009 Margin = -$6.00/cwt Metrics/Benchmarks $$$$ Per Cow Per Cwt % of Gross 2

3 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 $ 0.03% 1.45% 0.07% 0.63% 3.00% 7.59% 0.98% Revenue Sources 2015 Ytd Thru Sept Typical Dairy 86.26% 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 3

4 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 4

5 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 5

6 Combined Fat & Protein 85%-90% of your milk check is derived from Fat & Prot Yield In Midwest Orders October 2015 Milk Class III Price $ % 6

7 Herd #7 Milk Plant Summary Combined Fat & Protein Calculation 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 % 3.69% 5.72% Jan Feb % 3.66% 5.73% Feb Mar % 3.65% 5.76% Mar Apr % 3.68% 5.73% Apr May % 3.61% 5.74% May Jun % 3.63% 5.76% Jun Jul % 3.62% 5.75% Jul Aug % 3.59% 5.75% Aug Sep % 3.54% 5.75% Sep Oct % 3.69% 5.74% Total/Aves % 3.63% 5.74% Previous yr % 3.65% 5.72% Difference % -0.01% 0.03% CFP = (2.96% %) * = 6.64 lbs Herd #7 Milk Plant Summary 2015 Pricing C o w s Lbs CFP /Cow /Day SCC PPD or Other Comp Other Solids Price SCC- Qual Prem/ cwt Other Comp/ cwt Ship Date Pmt Date Prot Price B.F Price Vol Prem Hauling Haul Mkt'g Per Cwt Dec Jan $0.60 $2.74 $2.10 $0.40 $0.67 -$0.30 $0.95 $9,438 $4,967 $0.38 Jan Feb $0.16 $2.67 $1.69 $0.40 $0.65 -$0.45 $0.90 $9,965 $5,245 $0.38 Feb Mar $0.13 $2.41 $1.83 $0.33 $0.66 -$0.53 $0.90 $9,496 $4,998 $0.38 Mar Apr $0.02 $2.49 $1.84 $0.29 $0.61 -$0.52 $0.90 $11,060 $5,821 $0.38 Apr May $0.02 $2.56 $1.89 $0.27 $0.63 -$0.20 $0.90 $11,183 $5,886 $0.38 May Jun $0.04 $2.52 $2.06 $0.25 $0.63 -$1.00 $0.89 $11,398 $5,999 $0.38 Jun Jul $0.15 $2.69 $2.10 $0.23 $0.61 -$0.59 $0.99 $11,423 $6,012 $0.38 Jul Aug $0.03 $2.61 $2.11 $0.20 $0.57 -$0.49 $1.00 $11,666 $6,140 $0.38 Aug Sep $0.07 $2.57 $2.27 $0.12 $0.57 -$0.47 $0.99 $12,016 $6,324 $0.38 Sep Oct $0.33 $1.98 $2.75 $0.05 $0.46 -$0.37 $1.00 $11,521 $6,064 $0.38 Total/Aves $0.08 $2.52 $2.08 $0.25 $0.60 -$0.50 $0.94 $109,166 $57,456 $0.38 Previous yr $0.25 $3.84 $2.35 $0.47 $0.58 $0.10 $0.94 $83,654 $44,029 $0.38 Difference $0.17 -$1.32 -$0.28 -$0.23 $0.02 -$0.60 $0.00 $25,512 $13,427 7

8 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 8

9 Variation in Basis Components Quality SCC Plate Count Milk Plants Bst Gross Basis What is it? (Gross Milk Income Class III Announced Price)/Cwt = Gross Basis/Cwt 9

10 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 $

11 Herd 2 October 2015 Milk Class III Price $15.46 Mailbox Basis Calc Oct 2015 Class III = $15.46 Herd 1 $ $ $ $15.46 = $2.62/cwt Herd 2 $ $0.15 $ $15.46 = $ 3.53/cwt $

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13 Margin = Difference Revenue $$$ less expenses $$$ Improving Margins Revenue Expense Both Expenses- The Big Three Labor Capital & Lease Expense Principal, interest & leases Feed 13

14 Margins Proj 2015 % of Gross Income Per Cwt % of Gross Income Per Cwt INCOME TOTAL 100.0% $ % $19.92 EXPENSES Labor 10.1% $ % $2.30 Unpaid Labor & Mgmt 3.1% $ % $0.65 Capital/Leases 11.3% $ % $2.35 Purchased Feed 29.0% $ % $5.70 PARTIAL EXPENSE 53.5% $ % $11.00 PARTIAL MARGIN 46.5% $ % $8.92 Margins Proj 2015 Proj 2016 % of Gross Income Per Cwt % of Gross Income Per Cwt % of Gross Income Per Cwt INCOME TOTAL 100.0% $ % $ % $18.70 EXPENSES Labor 10.1% $ % $ % $2.40 Unpaid Labor & Mgmt 3.1% $ % $ % $0.65 Capital/Leases 11.3% $ % $ % $2.45 Purchased Feed 29.0% $ % $ % $5.35 PARTIAL EXPENSE 53.5% $ % $ % $10.85 PARTIAL MARGIN 46.5% $ % $ % $

15 Margins Proj 2015 % of Gross Income Per Cwt % of Gross Income Per Cwt INCOME Milk Sales 90.9% $ % $17.60 Bull Calves/Steers 1.8% $ % $0.59 Cull Cows 5.7% $ % $1.46 Crop 1.4% $ % $0.22 Other 0.2% $ % $0.05 INCOME TOTAL 100.0% $ % $19.92 EXPENSES Labor 10.1% $ % $2.30 Unpaid Labor & Mgmt 3.1% $ % $0.65 Capital/Leases 11.3% $ % $2.35 Purchased Feed 29.0% $ % $5.70 PARTIAL EXPENSE 53.5% $ % $11.00 PARTIAL MARGIN 46.5% $ % $8.92 Margins Proj 2015 Proj 2016 % of Gross Income Per Cwt % of Gross Income Per Cwt % of Gross Income Per Cwt INCOME Milk Sales 90.9% $ % $ % $17.15 Bull Calves/Steers 1.8% $ % $ % $0.35 Cull Cows 5.7% $ % $ % $1.05 Crop 1.4% $ % $ % $0.10 Other 0.2% $ % $ % $0.05 INCOME TOTAL 100.0% $ % $ % $18.70 EXPENSES Labor 10.1% $ % $ % $2.40 Unpaid Labor & Mgmt 3.1% $ % $ % $0.65 Capital/Leases 11.3% $ % $ % $2.45 Purchased Feed 29.0% $ % $ % $5.35 PARTIAL EXPENSE 53.5% $ % $ % $10.85 PARTIAL MARGIN 46.5% $ % $ % $

16 Margins Proj 2015 Proj 2016 % of Gross Income Per Cwt % of Gross Income Per Cwt % of Gross Income Per Cwt INCOME TOTAL 100.0% $ % $ % $18.70 EXPENSES PARTIAL EXPENSE 53.5% $ % $ % $10.85 PARTIAL MARGIN 46.5% $ % $ % $7.85 Cropping Expenses 7.9% $ % $ % $1.60 Rent 1.0% $ % $ % $0.20 Fuel 3.8% $ % $ % $0.60 Custom Hire 4.3% $ % $ % $0.90 Hauling & Trucking 0.8% $ % $ % $0.17 Repairs 5.0% $ % $ % $1.05 Supplies 3.6% $ % $ % $0.75 Breeding 1.3% $ % $ % $0.28 Farm Insurance 0.8% $ % $ % $0.16 Taxes 0.6% $ % $ % $0.13 Utilities 1.7% $ % $ % $0.35 Vet and Medicine 2.9% $ % $ % $0.70 Other 1.7% $ % $ % $0.35 TOTAL EXPENSE 89.0% $ % $ % $18.09 FINAL MARGIN 11.0% $ % $ % $

17 What are your feed costs? Source of data? TMR software (FW, TMR Tracker, etc.) Nutritionist report Financials 17

18 What are your feed costs? TMR software (FW, TMR Tracker, etc.) Could include actual intakes, shrink Still depends on entered cost accuracy 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? 18

19 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 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? 19

20 $250/acre rent 7.4 tons DM/acre corn silage 4.0 tons DM/acre haylage Cost Value Corn Silage $32 $40 Haylage $71 $85 20

21 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!! What are your feed costs? Source of data? Your Financials 21

22 What are your feed costs? Source of data? 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! 22

23 What are your feed costs? Often to compare it to Last month An article I read Neighbor at the coffee shop 23

24 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 Total Per head; Per cwt Purchased Milk to Feed Ratio Income Over 24

25 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) 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? 25

26 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 B Lb Milk Fat% 3.80% 3.80% Prot% 3.20% 3.20% Feed Cost, $/hd $5.90 $6.28 Feed Cost, $/cwt $6.70 $6.98 IOFC, $/hd $10.77 $

27 Example 1 Look Ahead A B Lb Milk Fat% 3.80% 3.80% Prot% 3.20% 3.20% Feed Cost, $/hd $5.90 $6.28 Feed Cost, $/cwt $6.70 $6.98 IOFC, $/hd $10.42 $10.41 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? 27

28 Purchased Markets, local basis Contracts Volume, blending SHRINK QUALITY Ration formulation, additives Blood Meal,

29 Corn Board Prices/Futures 2014 Avg = $ Avg = $ Avg = $3.84 Canola Meal,

30 SBM Board Prices/Futures 2014 Avg = $ Avg = $ Avg = $282 Homegrown Land Rent Yield QUALITY (weather) Fuel, seed, fertilizer, labor, equipment, repairs Shrink 30

31 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 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 31

32 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 =corn 44.4 lb Hlg =soybeans 12.7 lb HM Corn =corn 10.0 lb permeate =corn 8.6 lb protein =soybean meal 8.0 lb WDG =soybean meal 32

33 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 33

34 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 34

35 Improving Efficiency Doesn t Stop Cycles but it separates the Winners From the Losers in a Down Cycle Ian Biggs, Consultant and CEO PIC 35

36 Questions??? 36