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Dairy Situation and Outlook for 2009: Weathering the Storm. Geoff Benson Dept. of Agricultural & Resource Economics NC State University March 10, 2009. Topics. Situation & Outlook Production Sales Prices Weathering the Storm Financial Management Herd Management.
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Dairy Situation and Outlook for 2009: Weathering the Storm Geoff Benson Dept. of Agricultural & Resource Economics NC State University March 10, 2009
Topics • Situation & Outlook • Production • Sales • Prices • Weathering the Storm • Financial Management • Herd Management GEOFF BENSON, ARE, NCSU
Situation & Outlook for 2009 GEOFF BENSON, ARE, NCSU 3
Price Recovery How do you get the price up? Sell more milk Exports At home Reduce milk production
Dairy Exports • For 2007 and the first part of 2008 exports of dried milk powders, butter and cheese showed strong growth • Low US prices for part of the period • Weak dollar • Reduced production & exports from NZ & Australia • Reduced exports from the EU • Demand growth, especially in Asia • Then came the global economic crisis & exports slumped both in volume and in value GEOFF BENSON, ARE, NCSU 6
Export Prospects Continued world economic crisis Weaker world demand Stronger US$ Supply-demand balance has weakened in the EU27 since quota was expanded, and export subsidies have increased More normal supplies from New Zealand and Australia More competition for export sales World market prices will soften US export opportunities will be greatly reduced GEOFF BENSON, ARE, NCSU 7
Sales Outlook • US Demand Continued population growth Continued producer & processor funded advertising and promotion Lower consumer prices v. 2008 US economic recession • Projected commercial sales: • Butterfat slightly lower than 2008, with small government purchases • Skim-solids lower than 2008, with significant government purchases GEOFF BENSON, ARE, NCSU
Supply Outlook Butter & Cheese inventories are edging up January 1, 2009 cow numbers were up 76,000 over Jan. 2008 (up 0.8%) and up 92,000 over Jan ’07 (up 1.0%) – have been increasing since 2004 January 1, 2009 heifer inventory was down 5,000 head but is still adequate • Cow cull rate up sharply in January 2009 v. Jan 2008 • Milk/cow will be affected by less rBST use • Feed costs have increased and income over feed cost is unfavorable • Higher fertilizer and energy related costs GEOFF BENSON, ARE, NCSU
. Source: USDA, “World Agricultural Supply & Demand Situation GEOFF BENSON, ARE, NCSU
Prices Paid Index for Selected Inputs Source: Agricultural Prices, NASS, USDA, January 2009 GEOFF BENSON, ARE, NCSU
Production Source: USDA, “Livestock, Dairy and Poultry Report”
Milk Prices, $ per 100 lb. Source: USDA, “Livestock, Dairy and Poultry Report” Forecast is the mid-point of a range
Class III prices, $/100 lb. GEOFF BENSON, ARE, NCSU
Futures & Market Prices • The current futures prices suggest an average Class III price of around $12.10/100 lb. for 2009 v. USDA’s forecast of $10.05/100 lb. • FO 5 Class I prices for 2009 will be down a little less because of a higher January price plus the increases in Class I differentials in May, 2008 • VA Dairy Commission Class I prices remain above equivalent FO prices GEOFF BENSON, ARE, NCSU
US & FO5 Milk Prices, $/cwt. GEOFF BENSON, ARE, NCSU
Price Support Program • Government has made purchases of nonfat dry milk starting in October, 2008 and butter starting in early January, 2009 • No “milk” support price under the 2008 Farm Bill – Product prices are set directly: • Block Cheese = $1.13/lb. • Barrel Cheese = $1.10/lb. • Butter = $1.05/lb. • Nonfat Dry Milk Powder = $0.80/lb. • All unchanged from previous prices GEOFF BENSON, ARE, NCSU
MILC • Continues the current version through 9/30/08 and in Sept. 2012 • Maintains the current trigger price but • Adds a feed cost adjuster • Increases the payment % from 34% (back) to 45% from 10/1/08 through 8/31/12 • Increases the payment cap from 2.4 mil. lb to 2.985 mil. lb from 10/1/08 through 8/31/12 – 150 cows approx. • Has an income qualification test GEOFF BENSON, ARE, NCSU
CWT • CWT – Cooperatives Working Together – Program • Voluntary, funded at 10¢/100 lb. • Herd retirements by bid – 6 so far • Export subsidies • Current initiative • Two year commitment by contributors • Borrow against future income • Fund a new herd retirement program with a 12-month commitment GEOFF BENSON, ARE, NCSU
Outlook Summary • Higher net incomes in 2007 & 2008 because higher milk prices more than offset increases in production costs • Outlook for 2009 • The global financial crisis will affect demand for dairy products • Higher world production & subsidies • Stronger dollar • Reduced exports & sluggish domestic sales Lower milk prices until production is reduced • Higher production costs Net income will be low in 2009 and cash flow management will be very important GEOFF BENSON, ARE, NCSU
Financial Trends • A 20-year history of large and unpredictable price swings causing cash flow problems • Historically, periods of really low and really high prices are short • Length of time from peak to peak or trough to peak varies widely • Price fluctuations are getting more extreme • Milk prices must cover cost of production on average -- and will be higher GEOFF BENSON, ARE, NCSU
Conclusions and Implications • The future will look a lot like the past • Profit margins per cow and per cwt of milk are slim, on average, and getting slimmer • Nothing in the farm bill or the economic environment suggests past trends will change – continued “structural change” • Regional competitiveness determines the market share of the national milk production “pie” • Dairy diversity means at least some farms in a state and region are profitable (on average) and competitive GEOFF BENSON, ARE, NCSU
Financial Performance for Selected New York Dairies, 2006 & 2007 Items in each column are ranked independently Source: 2006 & 2007 Dairy Farm Business Summary, Cornell University GEOFF BENSON, ARE, NCSU
Key Questions • Long-term • Can I make it through this downturn? • If I can, do I want to? • If I can and want to, what can I do in the near-term until prices recover? GEOFF BENSON, ARE, NCSU
“What financial shape are you in?” • Is the farm profitable most years based on returns on assets & to management? • Do you normally have adequate cash flow to meet operating expenses, debt service, family living needs in a timely manner? • Is the business solvent – is debt load low and equity high as collateral for loans and as a reserve? Financial performance cannot be predicted from farm performance There are relatively few production practices that can be recommended in all situations GEOFF BENSON, ARE, NCSU
“Do you know your cost of production?” • Long run competitiveness depends on relative profitability • There is wide variation among farms, for a variety of reasons • You cannot control your milk price • You can only manage your cost of production • Cows • Heifer raising • Crop production GEOFF BENSON, ARE, NCSU
“Do you know your cost of production?” • Operating cost - out of pocket expenses, e.g. bought feed, forage production, vet, hired labor, fuel, repairs • Fixed/Ownership/Investment costs • Depreciation • Interest • Taxes & insurance • Cost or charge for the value of your time (if unpaid) and your investment (equity) • How do you compare to other farms? Specific benchmarks are needed GEOFF BENSON, ARE, NCSU
“Do you know where the money went?” • Four sources and uses of cash: • Farm Operations • New investments & asset sales • Financing – new debt & debt repayments • Non-farm income and family living • Severe problems can have several causes • Low profits • High cost of production • Low milk price • Recent large new investments • Large debt repayments • Large family living needs GEOFF BENSON, ARE, NCSU
Cash Flow “Stretchers” • Draw on financial reserves • Sell non-farm assets, e.g., timber, lots • Postpone non-essential maintenance and new investments • Reschedule (extend) or refinance debt payments • Borrow more (if you will be able to pay it back) • Family members seek new off-farm income • Cut family living expenditures GEOFF BENSON, ARE, NCSU
Herd Management • Re-evaluate the profitability of production practices. Focus first on areas that have the biggest potential impact on profitability and cash flow • Milk still pays the bills and feed is the biggest cost • Milking herd rations must still be nutritionally sound – cows don’t care what the price of milk is • Feed prices have been volatile – shop around • Some ration ingredients may not be profitable at low milk prices • Continue with recommended practices for transition cows, cow comfort, cow health GEOFF BENSON, ARE, NCSU
Herd Management • Revisit other practices most affected by lower milk prices and higher input prices, particularly feed & fertilizers • Voluntary culling decisions • Herd health, including mastitis, involuntary culling, death loss • Reproduction management programs • Genetic progress – focus on milk income & productive life • Heifer raising is expensive! • Crop production is expensive! GEOFF BENSON, ARE, NCSU
Financial Tools • There are few practices and products that work for everyone or that work in all farm and financial situations • Use budgeting to assess profitability • Partial Budgeting – changes in specific costs and income associated with small changes within an enterprise, e.g., ration changes for the heifers • Enterprise Budgeting – Evaluate the cost, revenue and net income of an entire enterprise when other parts of the farm are unaffected, e.g., heifer raising, crop production • Whole farm budgeting – For major changes would affect the entire farm operation, e.g., expansion GEOFF BENSON, ARE, NCSU
Financial Tools • Budgeting (profitability) should include • Operating (out-of-pocket) costs • Fixed or ownership costs – depreciation, interest on investment, taxes & insurance • Opportunity costs of unpaid family time and money invested • Cash flow -- looks only at changes in cash outflows and cash inflows • Ideally, in a cash flow squeeze, you want to make changes that are both profitable and contribute to cash flow right away GEOFF BENSON, ARE, NCSU
Summary The future will look a lot like the past Trends to fewer and larger farms, regional shifts will continue Some farms in all regions will be profitable Price volatility and low average returns will continue – but milk prices will average higher Carefully evaluate your production practices, particularly those that might be sensitive to changes on milk price or input prices However, you pretty much manage a well run farming operation in low price periods the same way you should be managing when prices are more favorable GEOFF BENSON, ARE, NCSU 36
Summary • Measure, monitor and evaluate financial, herd and farm performance to identify problems promptly • Financial information on cost of production, profitability, cash flow and solvency is essential • Set farm and financial performance benchmarks, e.g. Milk income over feed costs, feed costs per cwt. • Measure and evaluate performance regularly • Bring in outside advisors to help evaluate financial and farm performance GEOFF BENSON, ARE, NCSU
Summary Higher prices will come mostly from a reduction in milk production – fewer cows and fewer dairy farms Some cannot survive this downturn and some who could will choose to retire from dairy farming. For those who will cease production, develop and execute a timely exit plan that considers tax consequences as well as the preservation of equity. GEOFF BENSON, ARE, NCSU 38
Geoff Benson • Phone: 919.515.5184 • Fax: 919.515.6268 • E-mail: Geoff_Benson@ncsu.edu • Web page: http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html $ $ GEOFF BENSON, ARE, NCSU