WHAT DRIVES FINANCIAL SUCCESS ON A DAIRY?
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1 1 WHAT DRIVES FINANCIAL SUCCESS ON A DAIRY?
2 2 MONEYBALL comes to the Dairy Industry
3 DAIRY AT A GLANCE 45, MM B $17.15/cwt Commercial Producers (Dec 2014) Cows (Jan 2016) Pounds of milk in 2015 worth $35.6 billion -$12 billion YOY 2015 all-milk price -$7.00 YOY 2016 Prices Look Decidedly Lower, But Feed Costs, Energy Also Dramatically Lower Margins Looking Like Back to Reality Building World Stocks and Lower Demand Could Drag Prices Down Further Through 2016 US Dairy Prices Chasing World Prices Down to Convergence 3
4 AGENDA 1 THE EVOLUTION OF THE DAIRY INDUSTRY 2 WHAT WE DID 3 KEY TAKEAWAYS 4
5 SUMMARY Herd demographics dominated by consolidation and expansion US DAIRY INDUSTRY HAS EVOLVED SIGNIFICANTLY OVER LAST DECADE Globalization of dairy markets dominates current and future growth opportunities Recognition that domestic consumption needs protection: Innovation required to meet needs of changing demographics and competition for position Significant price volatility will remain; Focus on margin, not price 5
6 HERD DEMOGRAPHICS: CONSOLIDATION AND EXPANSION 6.6% OF HERDS (N=~3400) PRODUCE 62.9% OF MILK >50% SOLD IN TOP 2 COHORTS UP FROM 40% IN 2007 IN 1999, <2400 HERDS PRODUCED 24.4% OF MILK Herds (*1K) % Cow Inventory % Milk Herd Size Cohort Source: USDA Census of Agriculture,
7 AGENDA 1 THE EVOLUTION OF THE DAIRY INDUSTRY 2 WHAT WE DID 3 KEY TAKEAWAYS 9
8 STUDY GOAL TO IDENTIFY SPECIFIC DAIRY PRODUCTION MEASURES THAT ARE CORRELATED WITH THE FINANCIAL HEALTH OF A DAIRY 10
9 DATA SOURCE AND PROCESS SOURCE PROCESS Data was provided by AgStar, a major provider of agricultural lending and financial consulting services in the upper Midwest. The majority of the herds are based in MN, WI, SD, MI & OH Data collection began in 2006 Once the source was identified, we then performed a regression analysis to determine which metrics have the highest correlation to profitability. 11
10 WHAT IS A CORRELATION COEFFICIENT (R)? A MEASURE OF THE RELATIONSHIP BETWEEN TWO VARIABLES; CAN RANGE FROM -1 TO 1. CORRELATION DOES NOT NECESSARILY EQUATE TO CAUSATION Can be positive: NFI (Y) increases as milk yield increases (X) Can be negative: NFI (Y) decreases as SCC increases (X) Can be at or near zero: Little relationship between X and Y 12
11 THE DATA clients from upper Midwest total variables, 54 numeric (not counting censored) 9 years year-end records per farm (avg.) average lactating cows per farm (range from 95 to 4700 ) 13
12 STATISTICAL ANALYSIS NFI, $/cwt ECM (BY ACCOUNTING YEAR) Net Farm Income was the profitability measure investigated AVG: $1.80; RANGE: ($5.07) - $ Can also be expressed on a herd or cow basis NFI is computed as: $ RECEIPTS - (EXPENSES + DEPRECIATION) Farm and year accounted for 75% of variation in profit SOME GOOD, SOME BAD YEARS; 2014 WAS OUTSTANDING! 15
13 VARIABLE RELATIONSHIP BETWEEN NFI AND KEY MEASURES CORRELATION w/nfi KEY LEARNINGS Herd size, lactating Herd size not related to profit Number heifers 0.03 Heifer inventory not related to profitability supports culling strategy Milk shipped, herd total, cwt 0.00 Profitability not related to total lb shipped ECM shipped, lb/cow/day 0.17 More milk per cow is profitable effect of marginal milk Death loss (%) Death losses negatively impact profitability Heifer survival rate, % 0.18 Keeping calves healthy is beneficial Somatic cell count Investing to produce high quality milk is profitable 21 day pregnancy risk 0.29 Increased days open is expensive (small sample) Labor cost* Labor cost is unrelated to profitability Net herd replacement cost** Lowering replacement costs helps profitability, value of cull cows *Labor cost, $/cwt ECM (includes wages, benefits, SS, owner draw) **Net herd replacement cost, $/cwt ECM (difference between replacement cow value and book value of dead + sold cull cows [for dairy or beef]) 16
14 RELATIONSHIPS BETWEEN SCC AND OTHER MEASURES VARIABLE CORRELATION w/scc Profitability (NFI, $/cwt ECM/day) ECM/cow/day, lb/day Death loss, % day pregnancy risk* Days open* 0.35 DIFFERENCE IN PROFIT BETWEEN HIGHEST 1/3 AND LOWEST 1/3 (BASED ON SCC, $/cwt ECM) $1.14/cwt (~$115 K/year*) * Top third produced 355,587 cwt/year (91#/c/d); bottom third 254,333 cwt/year (72#/c/d) ** Small but growing sample size * Small but growing sample size 18
15 19 TEASER: ARE SCCs MORE COSTLY NOW?
16 RELATIONSHIPS BETWEEN ECM AND OTHER MEASURES VARIABLE CORRELATION w/ecm Profitability (NFI, $/cwt ECM/day) 0.18 SCC x Death loss, % Breeding costs, $/cow 0.37 Feed cost, $/cwt ECM day pregnancy rate, % 0.13 Days open DIFFERENCE IN PROFIT BETWEEN HIGHEST 1/3 AND LOWEST 1/3 (BASED ON ECM, $/cwt ECM) $1.44/cwt (~$86 K/year*) * Top third produced 316,418 cwt/year; bottom third produced 256,843 cwt/year 20
17 RELATIONSHIPS BETWEEN 21d PR* AND OTHER MEASURES VARIABLE CORRELATION w/21-d PR Profitability (NFI, $/cwt ECM/day) 0.29 SCC x ECM, lb/cow/day 0.13 Days open DIFFERENCE IN PROFIT BETWEEN HIGHEST 1/3 AND LOWEST 1/3 (BASED ON 21-d PR, $/cwt ECM) $0.78/cwt (~$50 K/year**) * Very small data set at this point ** Top third produced 388,246 cwt/year; bottom third produced 323,629 cwt/year 21
18 RELATIONSHIPS BETWEEN DEATH RATES AND OTHER MEASURES VARIABLE CORRELATION w/death Rate Profitability (NFI, $/cwt ECM/day) ECM/cow/day, lb/day SCC x Cost of production, $/cwt ECM 0.13 Net herd replacement cost, $ 0.29 Days open 0.19 DIFFERENCE IN PROFIT BETWEEN HIGHEST 1/3 AND LOWEST 1/3 (BASED ON DEATH RATE, $/cwt ECM) $0.86/cwt (~$70 K/year*) * Top third produced 388,246 cwt/year; bottom third produced 323,629 cwt/year 22
19 RELATIONSHIPS BETWEEN NET HERD REPLACMENT COSTS AND OTHER MEASURES VARIABLE CORRELATION w/ NHRC Profitability (NFI, $/cwt ECM/day) ECM/cow/day, lb/day Cull + death rate, % 0.42 SCC x DIFFERENCE IN PROFIT BETWEEN HIGHEST 1/3 AND LOWEST 1/3 (BASED ON NHRC, $/cwt ECM) $2.04/cwt (~$61 K/year*) * Top third produced 315,189 cwt/year; bottom third produced 285,098 cwt/year * Small but growing sample size 23
20 THE FOUR QUADRANTS OF HERD HEALTH TENDENCIES BETWEEN NFI & HEALTHCARE EXPENSES Low Expenses & High NFI GOOD FACILITIES, WELL-TRAINED PEOPLE High Expenses & High NFI STRATEGIC PREVENTION Low Expenses & Low NFI YOU GET OUT WHAT YOU PUT IN High Expenses & Low NFI FIRE ENGINE HEALTH CARE 24
21 AGENDA 1 THE EVOLUTION OF THE DAIRY INDUSTRY 2 WHAT WE DID 3 KEY TAKEAWAYS 25
22 MAJOR MESSAGES Milk production per cow is the single most important variable in determining farm profitability SCCs are highly correlated to all major profit drivers Reproductive efficiency measured as 21-d pregnancy rates is highly correlated to farm profitability Replacement costs have a significant correlation with farm profitability. Heifer management and survival impacts profitability from many angles and successful heifer management substantially supports successful ongoing operations Excellent animal husbandry skills, as assessed by herd health parameters and death rates, have tremendous impact on herd profitability: (a) animal replacement costs, (b) Mastitis 26
23 QUESTIONS MOVING FORWARD Better characterization of reproductive performance, particularly around 21-day pregnancy rates and age at first calving (Data on 21 day pregnancy rates was limited; There was very limited variation in age at first calving among these herds) Better characterization of the use of veterinarians and other external farm professionals Improved understanding of labor metrics and their association with profitability. Labor is often the #2 or #3 expense on dairies behind feed (#1) and often replacements Enhance understanding of technology application and its relation to profitability (monitoring devices, robotics, data management systems, genomics, other) 27
24 GOT QUESTIONS? Photo courtesy of Dairy Management, Inc 28
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