Dairy Industry Economics

Document Sample
Dairy Industry Economics Powered By Docstoc
					   Monsanto Northeast Dairy Financial Management Seminars
   -- Dairy producer groups




     Dairy Industry Economics:
                                                                    Business Analysis:
          -- Financial tools for decision-making
                                                                        Which financial tools should I use?
          -- Industry trends


    Kevin C. Dhuyvetter
    Department of Agricultural Economics
    Kansas State University, Manhattan, KS


Dec 13, 2005 – Albany, NY
Dec 14, 2005 – Middlebury, VT
                                                               1                                                            2
Dec 15, 2005 – St. Albans , VT




     What are we trying to learn…                                  Purpose of analysis…

     • The appropriate financial tools or methods                  • Taxes vs. cash flow vs. profitability
       of analysis to use will depend on the
       questions you are asking. For example,                      • Different types of analyses require different
        - What is my risk-bearing ability?                           information and thus you often need “two
                                                                     sets of books” (e.g., tax vs. market depreciation).
        - Was I profitable last year?
        - Should I invest $X in a cooling system?                  • While there is considerable overlap in
        - Is 2X or 3X (drylot or freestall) more profitable?         information required for the different types of
                                                                     analyses, differences do exist.
            It is important to use the right tool for
                                                                           Tax analyses are generally NOT interchangeable
         the question at hand (the wrong method of
         analysis can lead to incorrect conclusions).                      with profitability analyses.
                                                               3                                                            4




     Data used for analysis…                                       Analyzing your business…

    • Financial statements/tools can be used with                   • Financial statements/tools for business
      either actual data (ex-post analysis) or                        analysis (most commonly used)
      projected data (ex-ante analysis).                               -   Balance sheet
                                                                       -   Income statement
    • When data allow, analyses based upon actual
      data are often preferred to those based on                       -   Cash flow statement
      projections.                                                     -   Source and uses of funds statement
                                                                       -   Financial ratios
    • In many cases, actual data are insufficient to                   -   Partial budget
      answer the specific question at hand, thus                       -   Enterprise / whole-farm budget
      financial analyses based upon projected data                     -   Net present value (NPV)
      may be more appropriate.                                         -   Data queries/sorts
                                                               5                                                            6




                                                                                                                                1
 Balance sheet (net worth statement)                         Example balance sheets

                                                              $1,200,000 Assets, Liabilities, and Equity of Dairy Farms in KFM A
• Primary standard measure of the worth of a                  $1,200,000
  business at a point in time (e.g., Jan 1)                   $1,000,000
                                                                                    Equity
                                                                                    Equity
                                                                                    Liabilities
                                                              $1,000,000             Liabilities
• An accounting and valuation of all that is                   $800,000
  owned and owed in business (i.e., assets,                    $800,000

  liabilities, and owner equity)                               $600,000
                                                               $600,000

• Measures financial strength and risk-bearing                 $400,000
                                                               $400,000
  ability of business (keystone statement in credit
  decisions)                                                   $200,000




                                                                                    27.4%




                                                                                                                     23.9%




                                                                                                                                     24.3%




                                                                                                                                                             25.8%
                                                                            27.8%




                                                                                            26.3%



                                                                                                         24.4%




                                                                                                                             23.3%




                                                                                                                                             24.0%



                                                                                                                                                     26.3%




                                                                                                                                                                     22.9%
• Useful for trend analysis (i.e., analyzing balance                 $0
  sheets over multiple years)                                              1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
                                                       7                                                                                                                     8




Analyzing balance sheets over time                          Analyzing balance sheets over time

• Return on equity (ROE) – a measure of                     • Return on equity (ROE) – a measure of
  financial profitability                                     financial profitability

• Calculating one-year ROE from balance                     • Calculating multiple-year ROE from balance
  sheets                                                      sheets
                                                                                                     ⎛           1      ⎞
                                                                                                     ⎜                  ⎟
           ending NW − beginning NW                                     ⎛ NWend                     ⎞⎝ end-beg ⎠
     ROE =                                                        ROE = ⎜                           ⎟            -1
                                                                        ⎜ NW                        ⎟
                 beginning NW                                           ⎝   beg                     ⎠

                                                                                                                        ⎛             ⎞
               1,075,000 − 1,000,000
                                                                                                                               1
                                                                                                                        ⎜             ⎟
                                                                           ⎛ 1, 075, 000 ⎞⎝ 2005−1995 ⎠
      7.5% =                                                       6.74% = ⎜             ⎟              −1
                    1,000,000                                              ⎝ 560, 000 ⎠
                                                       9                                                                                                                     10




Uses of the balance sheet…                                  Income statement (P&L statement)

 • Acquiring debt                                           • Key financial statement for measuring the
                                                              success (profit) of a business over a period
 • Considering farm business risks                            of time (e.g., 2004, 3rd qtr of 2005)
 • Measuring financial progress                             • Important to recognize the difference between
                                                              cash- and accrual-based income statements
 • Calculating profitability
                                                               – Cash approach - net cash flow, taxable income. Easy,
 • Changing ownership                                            but does not show true net income.
                                                               – Accrual approach - needed to properly analyze
       Extremely important tool for business                     business performance.
   analysis, but cannot tell you why you were               • Accrual net income reflects profitability of
   (or were not) successful.
                                                       11
                                                              business, cash net income may or may not                                                                       12




                                                                                                                                                                                  2
Uses of the income statement…                               Cash flow statement (source and uses)

• Analyze profitability of operation                        • Record of the dollars coming in and going
                                                              out of a business over a time period (e.g.,
• Identify operation’s strengths & weaknesses                  2004, 3rd qtr 2005)
• Measuring financial progress (multiple years)                 – Cash inflows – money coming into the business
                                                                  (e.g., sales, loans, gifts)
                                                                – Cash outflows – money leaving the business (e.g.,
                                                                  expenses, P&I payments, cash withdrawals)
      Critical for determining the profitability of
  your business, but often lacks data necessary             • Cash flow based on actual data is used to
  to isolate the profitability associated with a              analyze the business. Cash flow based on
  specific management practice (i.e., additional              projected data is for business planning (e.g.,
  data often needed to account for “other” factors).           how and when borrowed money will be repaid).
                                                       13                                                                                  14




Uses of the cash flow statement…                            Three basic financial statements…

                                                            The income and cash flow statements link beginning
• Tracking receipts and expenditures                        and ending balance sheets together.
• Identifying the timing of cash flows
                                                                                           Income
• Identify the ability to meet cash commitments               Beginning                   Statement                       Ending
                                                                                                (2005)
• Important communication tool with lenders                    Balance                                                    Balance
                                                                Sheet                      Actual                          Sheet
                                                                (1/1/05)                 Cash Flow                        (1/1/06)
      Cash flow statements are most useful for                                                  (2005)
  communicating with lenders, but they are of
  limited value for making profit-based                     If you are profitable (income statement), then your net
  management decisions.                                     worth should increase (balance sheet) unless cash
                                                            was pulled out of the business (cash flow).
                                                       15                                                                                  16




Partial budget                                              Partial budget…

• Typically used to examine the expected
  economic returns associated with a                        Intervention Benefits                    Intervention Costs

  particular management intervention.                             Increased revenue       (1)              Decreased revenue         (3)
                                                                + Decreased costs         (2)            + Increased costs           (4)
• Only considers the income and expenses
                                                                = Total benefit          (B)             = Total costs             (C)
  impacted by the intervention (generally, fairly
  straightforward, but depending on question at
  hand, can become quite complex).                           Total benefit (B) -Total cost (C) = Profitability of Intervention

• Requires assumptions – faith you put into
                                                            Not all four factors will always be relevant.
  your results depends on accuracy of the
  assumptions.
                                                       17                                                                                  18




                                                                                                                                                3
    Example partial budget                                                                                                             Example partial budget
    Table 7. Partial Budget Analysis for Adding Fans and Sprinklers to a Dairy                                                         Table 7. Partial Budget Analysis for Adding Fans and Sprinklers to a Dairy

    Intervention Benefits:                                                                                                             Profitability of Intervention
    (1)     Increased Revenue                                                                                                          Benefits minus Costs                $102.00 - $56.25                                        $ 45.75 per cow
            - Increased milk            10 lb/day x 85 days x $12/cwt                          $102.00 per cow                         Benefit-Cost (B/C) ratio            $102.00 / $56.25                                           1.81
    (2)     Decreased Costs
            - None                                                                             $ 0.00
    Total Benefits (B)                                                                         $102.00                                 Breakeven Analysis:
                                                                                                                                                            2
                                                                                                                                       Breakeven milk price                $56.25 / (10 lb x 85 days) x 100                        $   6.62 per cwt
    Intervention Costs:
    (3)     Decreased Revenue                                                                                                          Sensitivity Analysis:
            - None                                                                             $   0.00                                B/C ratio @ $9/cwt milk             $76.50 / $56.25                                             1.36
    (4)     Increased Costs                                                                                                            B/C ratio @ 8# milk response        $81.60 / $56.25                                             1.45
            - Fans/sprinklers
                              1
                                        $85/cow x 0.2505                                       $ 21.29                                 B/C ratio @ $0.09/lb feed           $102.00 / (21.29 + 8.98 + 2.18 + 30.60)                     1.62
                                                                                                                                       B/C ratio @ +20% utilities          $102.00 / (21.29 + 10.78 + 2.62 + 23.80)                    1.74
            - Electricity               $10.65/kW (demand) $0.06/kWh (energy)                  $ 8.98
            - Water                     1,360 gallons x $1.60/1000 gallons                     $ 2.18
            - Feed                      4 lb/day x 85 days x $0.07/lb                          $ 23.80                                 2
                                                                                                                                         This is the breakeven milk price to cover the costs associated with the cooling system (i.e., breakeven price on the
    Total Costs (C)                                                                            $ 56.25 per cow                         incremental milk production). Thus, so long as milk prices are at this level or greater it is economically advantageous
                                                                                                                                       to install the cooling system even though the dairy may not be covering total costs.

    Profitability of Intervention                                                                                                   B/C ratio reflects the dollars of returns per dollar of cost.
    Benefits minus Costs                $102.00 - $56.25                                       $ 45.75 per cow
    Benefit-Cost (B/C) ratio            $102.00 / $56.25                                          1.81

    1
     The $85/cow represents the amount required to purchase and install fans and sprinklers and the 0.2505 is an
    amortization factor to reflect the annual depreciation and interest cost (based on 5-year life and 8% interest).
                                                                                                                              19                                                                                                                                 20




    Analyzing feed costs…                                                                                                              Analyzing feed costs…
 Economic Comparison of Alternative Feed Rations                                                                                    Economic Comparison of Alternative Feed Rations

                                                              Ration A                                                 Ration B                                                                  Ration A                                                Ration B
 Feed cost, $/lb                                                $0.065                                                   $0.070     Feed cost, $/lb                                                $0.065                                                  $0.070
 Maintenance, lbs/day                                               15                                                       15     Maintenance, lbs/day                                               15                                                      15
 Productive feed, milk/lb of feed                                   2.3                                                     2.3     Productive feed, milk/lb of feed                                   2.3                                                    2.3
 Milk price                                                     $13.50                                                   $13.50     Milk price                                                     $13.50                                                  $13.50
 Non-feed costs, $/cow/day                                       $6.50                                                    $6.50     Non-feed costs, $/cow/day                                       $6.50                                                   $6.50

 Daily milk                               Ration A                                                Ration B                          Daily milk                                Ration A                                               Ration B
 production, lbs          $/day        $/cwt       IOFC         TC/cwt            $/day        $/cwt       IOFC         TC/cwt      production, lbs          $/day         $/cwt       IOFC        TC/cwt            $/day        $/cwt       IOFC         TC/cwt
        60.0              $2.67        $4.45        $5.43       $15.28            $2.88        $4.79        $5.22        $15.63            60.0              $2.67         $4.45        $5.43       $15.28           $2.88        $4.79        $5.22       $15.63
        62.5              $2.74        $4.39        $5.70       $14.79            $2.95        $4.72        $5.49        $15.12            62.5              $2.74         $4.39        $5.70       $14.79           $2.95        $4.72        $5.49       $15.12
        65.0              $2.81        $4.33        $5.96       $14.33
                                                                           There are a lot of ways to
                                                                              $3.03   $4.66   $5.75 $14.66                                 65.0              $2.81         $4.33        $5.96       $14.33           $3.03        $4.66        $5.75       $14.66
        67.5              $2.88        $4.27        $6.23       $13.90     look at feed costs…
                                                                              $3.10   $4.60   $6.01 $14.23                                 67.5              $2.88         $4.27        $6.23       $13.90           $3.10        $4.60        $6.01       $14.23
        70.0              $2.95        $4.22        $6.50       $13.50            $3.18        $4.54        $6.27        $13.83            70.0              $2.95         $4.22        $6.50       $13.50           $3.18        $4.54        $6.27       $13.83
        72.5              $3.02        $4.17        $6.76       $13.14            $3.26        $4.49        $6.53        $13.46            72.5              $3.02         $4.17        $6.76       $13.14           $3.26        $4.49        $6.53       $13.46
        75.0              $3.09        $4.13        $7.03       $12.79
                                                                           Which measure ($/lb, $/day,
                                                                              $3.33  $4.44  $6.79   $13.11                                 75.0              $3.09         $4.13        $7.03       $12.79           $3.33        $4.44        $6.79       $13.11
        77.5              $3.17        $4.08        $7.30       $12.47     $/cwt, IOFC, TC/cwt) is most
                                                                              $3.41  $4.40  $7.05   $12.79                                 77.5              $3.17         $4.08        $7.30       $12.47           $3.41        $4.40        $7.05       $12.79
                                                                                                                                           80.0              $3.24         $4.04        $7.56       $12.17           $3.48        $4.36        $7.32       $12.48
        80.0              $3.24        $4.04        $7.56       $12.17
                                                                           appropriate?
                                                                              $3.48  $4.36  $7.32   $12.48
        82.5              $3.31        $4.01        $7.83       $11.89            $3.56        $4.32        $7.58        $12.19            82.5              $3.31         $4.01        $7.83       $11.89           $3.56        $4.32        $7.58       $12.19
        85.0              $3.38        $3.97        $8.10       $11.62            $3.64        $4.28        $7.84        $11.93            85.0              $3.38         $3.97        $8.10       $11.62           $3.64        $4.28        $7.84       $11.93


                                                                                                                              21   What is the question we are asking?                                                                                           22




    Analyzing feed costs…                                                                                                              Uses of partial budgets…
 Economic Comparison of Alternative Feed Rations
                                                                                                                                      • Estimate the profitability associated with a
                                                              Ration A                                                 Ration B
 Feed cost, $/lb
 Maintenance, lbs/day
                                                                $0.065
                                                                    15
                                                                                                                         $0.070
                                                                                                                             15
                                                                                                                                        particular production practice (confounding
 Productive feed, milk/lb of feed
 Milk price
                                                                    2.3
                                                                $13.50
                                                                                                                            2.3
                                                                                                                         $13.50
                                                                                                                                        effects are kept out of the analysis).
 Non-feed costs, $/cow/day                                       $6.50                                                    $6.50

 Daily milk
 production, lbs          $/day
                                          Ration A
                                       $/cwt       IOFC         TC/cwt            $/day
                                                                                                  Ration B
                                                                                               $/cwt       IOFC         TC/cwt
                                                                                                                                      • Easy to conduct sensitivity analyses around
        60.0
        62.5
                          $2.67
                          $2.74
                                       $4.45
                                       $4.39
                                                    $5.43
                                                    $5.70
                                                                $15.28
                                                                $14.79
                                                                                  $2.88
                                                                                  $2.95
                                                                                               $4.79
                                                                                               $4.72
                                                                                                            $5.22
                                                                                                            $5.49
                                                                                                                         $15.63
                                                                                                                         $15.12
                                                                                                                                        key factors.
        65.0              $2.81        $4.33        $5.96       $14.33            $3.03        $4.66        $5.75        $14.66
        67.5              $2.88        $4.27        $6.23       $13.90            $3.10        $4.60        $6.01        $14.23
        70.0              $2.95        $4.22        $6.50       $13.50            $3.18        $4.54        $6.27        $13.83                Very useful for business analysis and
        72.5              $3.02        $4.17        $6.76       $13.14            $3.26        $4.49        $6.53        $13.46
        75.0              $3.09        $4.13        $7.03       $12.79            $3.33        $4.44        $6.79        $13.11            often the tool of choice for making profit-
        77.5
        80.0
                          $3.17
                          $3.24
                                       $4.08
                                       $4.04
                                                    $7.30
                                                    $7.56
                                                                $12.47
                                                                $12.17
                                                                                  $3.41
                                                                                  $3.48
                                                                                               $4.40
                                                                                               $4.36
                                                                                                            $7.05
                                                                                                            $7.32
                                                                                                                         $12.79
                                                                                                                         $12.48
                                                                                                                                           based management decisions (they do not
        82.5              $3.31        $4.01        $7.83       $11.89            $3.56        $4.32        $7.58        $12.19            identify total profitability of operation which is both
        85.0              $3.38        $3.97        $8.10       $11.62            $3.64        $4.28        $7.84        $11.93
                                                                                                                                           good and bad).
IOFC is a partial budget that accounts for income & costs                                                                     23                                                                                                                                 24




                                                                                                                                                                                                                                                                      4
Enterprise budget (whole-farm budget)                                       Example enterprise budgets…
                                                                         Projected budgets developed at K-State
   • Used to examine the expected economic
     returns of the entire enterprise (operation).

   • Considers all income and expenses and
     thus breakeven prices and overall
     profitability measures can be calculated.

   • Requires assumptions – faith you put into
     your results depends on accuracy of the
     assumptions.


                                                                    25                                                                                                  26




2,400 lactating cow
freestall budget at                                                        Returns –         Production vs. investment
two production levels

                                                                             Freestall Dairy (2400 lactating cows)

                                                                                Sensitivity of Return on Assets to Production and Investment

                                                                                Production                                  Investment per cow*

                                                                                level (lbs/cow)              $3,000      $3,500      $4,000       $4,500      $5,000

                                                                                  22,000                      9.2%         7.5%        6.1%        4.9%         3.8%

                                                                                  23,000                     11.3%         9.5%        7.9%        6.6%         5.4%

                                                                                  24,000                     13.5%       11.4%         9.7%        8.2%         7.0%

                                                                                  25,000                     15.6%       13.4%        11.5%        9.9%         8.5%

                                                                                  26,000                     17.7%       15.3%        13.3%       11.6%        10.1%

                                                                                * Investment per cow in herd equals investment per lactating cow divided by 1.18.

                                                                                ** Costs vary by production level due to varying feed and hauling and promotion costs

                                                                             Source: 2005 KSU Dairy Budgets
                                                                    27                                                                                                  28




  Comparison of facility type                                             Comparison of facility type

           Breakeven Milk Price for Drylot and Freestall Dairies                    Net Return on Assets for Drylot and Freestall Dairies
                         (2400 lactating cows)                                                     (2400 lactating cows)

                              Production Level (lbs/cow/year)                                               Production Level (lbs/cow/year)
     Dairy Type         18,000       19,000    22,500      24,000            Dairy Type              18,000           19,000            22,500             24,000

     Drylot             $14.16                 $12.52                        Drylot                   4.97%                             13.32%

     Freestall                       $14.52                $12.69            Freestall                                 3.47%                               11.42%
    Source: 2005 KSU Dairy Budgets                                           Source: 2005 KSU Dairy Budgets




                                                                    29                                                                                                  30




                                                                                                                                                                             5
Sensitivity analysis…                                                                                                   Economics of 2X vs 3X…

                                Return on Assets vs. Production Level
                                         Source: 2005 KSU Dairy Budgets
         24%


         20%                   Freestall             Drylot

         16%


         12%
   ROA




          8%


          4%

          0%
                                                         21,933                    24,295
         -4%
                    18,000               20,000           22,000                24,000             26,000              “Starting point” for analysis is 2,400 head budgets.
                                               Milk Production, lbs/cow/yr
                                                                                                                  31                                                                                                                                                                   32




 Key assumptions…                                                                                                       Breakeven prices are similar…

                                                                                                                                                                                                       Breakeven M ilk Price vs Dairy Size and Type
                                  Freestall (2X)              Freestall (3X)                     Drylot (2X)                                                                      16


Lactating cows                              3,350                       2,400                      2,400                                                                          14            $13.33                           $13.35                      $13.21
                                                                                                                                                                                                           $12.71                         $12.78                      $12.57
                                                                                                                                                   Breakeven milk price, $/cwt




                                                                                                                                                                                  12
Investment*                               $3,500                    $3,500                         $2,500
                                                                                                                                                                                  10

Milk production                           68 / 73                   73 / 78                        65 / 70                                                                         8

                                                                                                                                                                                   6
Labor, cows/man                              125                         95                            140
                                                                                                                                                                                   4
Fuel, utilities, professional fees, miscellaneous are roughly the same for
dairy across 2X and 3X (i.e., they are not function of milking frequency)                                                                                                          2                       Avg prod            High prod
* Excludes land and cows
                                                                                                                                                                                   0
                                                                                                                                                                                             2X Milking (freestall)           3X Milking (freestall)        2X Milking (drylot)
                                                                                                                                                                                                                      Lactating cows and facility type
                                                                                                                  33                                                                                                                                                                   34




 Importance of production…                                                                                              Importance of production…

                    Sensitivity Analysis of Return on Investment (Line G) to Milk Production                                                                                                Sensitivity Analysis of Return over Total Cost (Line D) to Milk Production

         20%                                                                                                                                                                     500

         18%                  Freestall (2X)                                                                                                                                                            Freestall (2X)
                                                                                                                                                                                 400
                                                                                                                                                                                                        Freestall (3X)
                                                                                                                          Return over Total Costs, $/head




         16%                  Freestall (3X)
                                                                                                                                                                                 300
                              Drylot (2X)                                                                                                                                                               Drylot (2X)
         14%
                                                                                                                                                                                 200
         12%
   ROI




         10%                                                                                                                                                                     100

         8%                                                                                                                                                                        0
         6%
                                                                                                                                                                      -100
         4%
                                                                                                                                                                      -200
         2%
                                   66.25                      71.56                      76.42                                                                                                                  66.72                     71.83
         0%                                                                                                                                                           -300
               62        64         66          68      70         72         74         76       78         80                                                                        62         64          66         68        70       72         74       76      78        80
                                            Daily Bulk Tank Average, pounds/cow                                                                                                                                       Daily Bulk Tank Average, pounds/cow
                                                                                                                  35                                                                                                                                                                   36




                                                                                                                                                                                                                                                                                            6
Production vs. price – which is better?                                                                        Importance of production…

                    Sensitivity Analysis of Return on Investment (Line G) to Milk Price                                                               Sensitivity Analysis of Returns over Total Costs to Heifer Prices ($13.50 milk)
       18%
                                                                                                                                                  $500
       16%
                           3X (73 lbs)            3X (78 lbs)
                                                                                                                                                  $400
       14%




                                                                                                                 Return over Total Costs, $/cow
       12%                                                                                                                                        $300

       10%                                                                                                                                        $200
 ROI




        8%
                                                                                                                                                  $100
        6%
                                                                                                                                                    $0
        4%
                                                                Which is easier to achieve,                                                       -$100              3X (73 lbs)
        2%                                                       5 lbs/day or $0.64/cwt?
                                                                                                                                                                     3X (78 lbs)
        0%                                                                                                                                        -$200
                                                                                                                                                                                             2088                         2432
       -2%                                                                                                                                        -$300
          11.00        11.50      12.00       12.50       13.00      13.50    14.00       14.50   15.00                                               1600    1700    1800     1900   2000     2100    2200    2300     2400     2500   2600
                                                                                                                                                                                       Heifer Price, $/head
                                                     Milk Price, $/cwt
                                                                                                          37                                                                                                                                   38




Impact of culling percent…                                                                                     Uses of enterprise budget…

                  Sensitivity Analysis of Return on Investment (Line G) to Culling Percent
                                                                                                               • Estimate the overall profitability associated
       12.0%
                                                                                                                 with the operation (also conduct sensitivity
       11.5%
                                                                                                                 analysis to examine relevant risks).
       11.0%

       10.5%                                                                                                   • Tool of choice when many factors are
                                                                                                                 impacted by a management intervention
 ROI




       10.0%

        9.5%                    2X (73 lbs)
                                                                                                                 being considered (e.g., facility type).
        9.0%                    3X (78 lbs)


        8.5%
                                                                                                                       Powerful tool for looking at profitability of
                                                                                                                   alternative management practices assuming
        8.0%
               30         31         32         33          34           35    36          37      38              assumptions can be made accurately.
                                              Annual Culling Rate, percent
                                                                                                          39                                                                                                                                   40




Answering the questions at hand…                                                                               Summary

• The appropriate financial tools or methods                                                                   • It is important that producers understand the
  of analysis to use will depend on the                                                                          differences between the various financial
  questions you are asking. For example,                                                                         statements/tools available when making
                                                                                                                 business management decisions.
   - What is my risk-bearing ability?
                                                                                                               • An analysis done for tax purposes generally
   - Was I profitable last year?
                                                                                                                 should not be considered a profitability
   - Should I invest $X in a cooling system?                                                                     analysis and vice versa.
   - Is 2X or 3X (drylot or freestall) more profitable?
                                                                                                               • Question(s) being asked, data availability, and
                                                                                                                 analysis capabilities will often dictate the
                                                                                                                 appropriate tool that should be used.
                                                                                                          41                                                                                                                                   42




                                                                                                                                                                                                                                                    7
 Summary

 • Using financial statements based on actual
   data to identify why a business is or is not                                                                                     Industry Trends:
   successful can be difficult because of many                                                                                                                          Survive or Thrive –
   confounding factors.
                                                                                                                                                                        What factors lead to success?
 • When confounding effects exist…
      - A uni-variate analysis is inappropriate
      - When using actual data, multi-variate analysis is
        required (i.e., a more complex analysis method)
      - Partial/enterprise budget that controls for
        confounding effects can be used
                                                                                                                            43                                                                                                                                              44




                                                   Outline                                                                       National Trends (the big picture) – Operations

                                                                                                                                                                              U.S. Dairy Industry -- Number of Dairy Farms
 • National trends / U.S. dairy statistics
                                                                                                                                                                 1200
                                                                                                                                                                 1200
 • Regional / state trends                                                                                                                                                            1.11M in 1965
                                                                                                                                                                 1000
                                                                                                                                                                 1000
                                                                                                                                                                                                                 Decrease from
 • Prices                                                                                                                                                                                                         Decrease from
                                                                                                                                                                                                                 1965 to 2004 = 92.6%
                                                                                                                                     Farms (thousands)
                                                                                                                                     Farms (thousands)




                                                                                                                                                                                                                  1965 to 2004 = 92.6%
                                                                                                                                                                  800
                                                                                                                                                                  800                                            (6.5% annually)
 • Costs of production                                                                                                                                                                                            (6.5% annually)

                                                                                                                                                                  600
 • Factors impacting profitability
                                                                                                                                                                  400
 • Miscellaneous thoughts
                                                                                                                                                                                                                               81.4K in 2004
                                                                                                                                                                  200


                                                                                                                                                                       0
                                                                                                                                                                       1960    1965    1970    1975   1980    1985   1990      1995   2000     2005

                                                                                                                            45                                                                                                                                              46




National Trends –                                  Operations and cows                                                           National Trends –                                            Cows & production


                                                       U.S. Dairy Industry                                                                                              Dairy Cow Inventory and Annual Milk Production
                                1200                                                             16                                                              16                                                                      180
                                                                       Farms (-6.5%)                                                                             15
                                                                                                 14                                                                                                                                      170
                                1000                                                                                                                                                                         Milk production
   Number of farms, thousands




                                                                       Milk Cows (-1.3%)                                                                         14
                                                                                                                                                                                                                                               Production, billion pounds
                                                                                                                                     Cow numbers, million head




                                                                                                 12                                                                                                                                      160
                                                                                                      Milk cows, millions




                                800                                                                                                                              13
                                                                                                 10                                                                                                                                      150
                                                                                                                                                                 12
                                600                                                              8                                                               11                                                                      140

                                                                                                 6                                                               10
                                                                                                                                                                                                                                         130
                                400
                                                                                                                                                                 9
                                                                                                 4                                                                                                                                       120
                                200                                                                                                                              8
                                                                                                 2                                                                             Dairy cow inventory                                       110
                                                                                                                                                                 7
                                  0                                                              0                                                               6                                                                       100
                                  1965   1970   1975     1980   1985   1990   1995     2000   2005                                                                    1965    1970    1975     1980   1985    1990   1995      2000
                                                                                                                            47                                                                                                                                              48
                                                                                                                                   Cows ↓ and milk ↑                                  Better genetics and/or management




                                                                                                                                                                                                                                                                                 8
National Trends – Productivity & farm size                                                                                                             National Trends – Productivity vs. farm size…

                                                       U.S. Dairy Industry
                                                                                                                                                         • Production/cow and cows/farm are
                           120                                                                              20
                                                                                                                                                           positively related, but which is causing
                                         Cows/farm (5.5%)                                                   18




                                                                                                                 Milk per cow (thousand pounds)
                           100
                                         Milk/cow (2.1%)                                                    16
                                                                                                                                                           which (if either)?
                                                                                                            14
                           80                                                                                                                            • Are highly productive (profitable) farms
   Cows per farm




                                                                                                            12
                           60                                                                               10                                             increasing their size?
                                                                                                            8
                           40
                                                                                                            6
                                                                                                                                                         • Are large farms adopting technologies
                                                                         Linear trend implies
                                                                          Linear trend implies              4                                              that allow them to be more productive?
                           20                                            milk production/cow
                                                                          milk production/cow
                                                                         increases 277 lbs/year.
                                                                          increases 277 lbs/year.           2
                            0                                                                            0
                            1965     1970     1975      1980     1985      1990     1995     2000     2005                                                Both, but likely technology driven (EOS).
                                                                                                                                                  49                                                                                                          50




Average numbers…                                                                                                                                       National Trends – Operations by farm size

                                                                                                                                                                                              Number of U.S. Dairy Operations by Size of Operation
  • Averages can be deceiving, or at the very                                                                                                                                           140
    least, not tell the whole picture.                                                                                                                                                         117,145
                                                                                                                                                                                        120
                                                                                                                                                           Number of farms, thousands




                                                                                                                                                                                                                  -5.9% per year
                                                                                                                                                                                        100                                          > 2000 hd (14.5%)
  • Often it is useful to look at distributions to                                                                                                                                                                          81,440
                                                                                                                                                                                                                                     1000-1999 hd (3.3%)
    see what might be driving averages.                                                                                                                                                  80                                          500-999 hd (2.1%)
                                                                                                                                                                                                                                     200-499 hd (-1.6%)
                                                                                                                                                                                         60                                          100-199 hd (-4.6%)
                                                                                                                                                                                                                                     < 100 hd (-6.7%)
                                                                                                                                                                                         40

                                                                                                                                                                                         20                                            Percent of Farms

                                                                                                                                                                                                                                     Head     1998    2004
                                                                                                                                                                                          0
                                                                                                                                                                                                                                     < 200     93.6    90.6
                                                                                                                                                                                               1998 1999 2000 2001 2002 2003 2004    > 1000     0.8     1.6
                                                                                                                                                  51                                                                                                          52




National Trends – Production by farm size                                                                                                              Farms, cows, and production summary…

                                       U.S. Milk Production by Size of Operation
                                 117,145 --------------- Farms --------------- 81,440      -5.9% per year                                                • Fewer herds
                                 157,262 ---------- Milk (mil lbs) ---------- 170,805      +1.4% per year
                           100
                            90
                                                                                                                                                         • Cow numbers declining to flat
                            80                                                                > 2000 hd

                            70
                                                                                              1000-1999 hd                                               • Larger herds
        Percent of total




                                                                                              500-999 hd
                            60
                                                                                              200-499 hd                                                 • More total milk
                            50
                                                                                              100-199 hd
                            40
                                                                                              < 100 hd                                                   • Higher milk production per cow
                            30
                            20
                                                                                             Percent of Milk
                            10
                             0                                                          Head        1998    2004
                                                                                        < 200        52.8    36.6
                                 1998 1999 2000 2001 2002 2003 2004
                                                                                        > 1000       19.3    33.3
                                                                                                                                                  53                                                                                                          54




                                                                                                                                                                                                                                                                   9
Regional Trends –                                                What’s happening where?                                      Regional Trends – Farms

 Definitions of regions:                                                                                                                                                                                               Dairy Operations
 • Northeast – ME, NH, VT, MA, RI, CT, NY, NJ, PA, DE, MD                                                                                                         80                                                                                              Appalachian (-7.8%)
 • Lake States – MI, WI, MN                                                                                                                                       70                                                                                              Corn Belt (-6.2%)

 • Corn Belt – OH, IN, IL, IA, MO                                                                                                                                 60                                                                                              Delta States (-9.4%)




                                                                                                                               Farms (thousands)
 • Northern Plains – ND, SD, NE, KS                                                                                                                               50                                                                                              Lake States (-5.5%)

                                                                                                                                                                                                                                                                  Mountain (-7.0%)
 • Appalachian – VA, WV, NC, KY, TN                                                                                                                               40
                                                                                                                                                                                                                                                                  Northeast (-4.6%)
 • Southeast – SC, GA, FL, AL                                                                                                                                     30
                                                                                                                                                                                                                                                                  Northern Plains (-8.2%)
 • Delta States – MS, AR, LA                                                                                                                                      20
                                                                                                                                                                                                                                                                  Pacific (-5.9%)

 • Southern Plains – OK, TX                                                                                                                                       10                                                                                              Southeast (-7.7%)

                                                                                                                                                                            0
 • Mountain – MT, ID, WY, CO, NM, AZ, UT, NV                                                                                                                                                                                                                      Southern Plains (-7.2%)




                                                                                                                                                                            85

                                                                                                                                                                                     87

                                                                                                                                                                                              89

                                                                                                                                                                                                    91

                                                                                                                                                                                                             93

                                                                                                                                                                                                                   95

                                                                                                                                                                                                                            97

                                                                                                                                                                                                                                  99

                                                                                                                                                                                                                                           01

                                                                                                                                                                                                                                                 03
 • Pacific – WA, OR, CA, AK, HI




                                                                                                                                                             19

                                                                                                                                                                                    19

                                                                                                                                                                                          19

                                                                                                                                                                                                   19

                                                                                                                                                                                                         19

                                                                                                                                                                                                                  19

                                                                                                                                                                                                                        19

                                                                                                                                                                                                                                 19

                                                                                                                                                                                                                                       20

                                                                                                                                                                                                                                                20
                                                                                                                         55                                                                                                                                                                 56




Regional Trends – Cows                                                                                                        Regional Trends –                                                                    Farm size


                                                                    Total Milk Cows                                                                                                                                Average Farm Size

                                 3.5                                                          Appalachian (-3.9%)                                                           600
                                                                                                                                                                                                                                                                  Appalachian (4.2%)
                                                                                              Corn Belt (-2.6%)
                                 3.0                                                                                                                                        500                                                                                   Corn Belt (3.9%)
  Milk Cows (thousands)




                                                                                              Delta States (-5.5%)
                                                                                                                                         Cows per farm




                                                                                                                                                                                                                                                                  Delta States (4.3%)
                                 2.5
                                                                                              Lake States (-2.4%)                                                           400                                                                                   Lake States (3.2%)
                                 2.0                                                          Mountain (4.0%)                                                                                                                                                     Mountain (11.9%)
                                                                                                                                                                            300
                                 1.5                                                          Northeast (-1.8%)                                                                                                                                                   Northeast (3.0%)
                                                                                              Northern Plains (-2.7%)                                                       200                                                                                   Northern Plains (6.0%)
                                 1.0
                                                                                              Pacific (2.2%)                                                                                                                                                      Pacific (8.6%)
                                 0.5                                                                                                                                        100
                                                                                              Southeast (-2.1%)                                                                                                                                                   Southeast (6.1%)

                                 0.0                                                          Southern Plains (-0.4%)                                                           0                                                                                 Southern Plains (7.4%)
                                  85

                                        87

                                              89

                                                    91

                                                          93

                                                                95

                                                                      97

                                                                            99

                                                                                  01

                                                                                        03




                                                                                                                                                                                85

                                                                                                                                                                                         87

                                                                                                                                                                                               89

                                                                                                                                                                                                        91

                                                                                                                                                                                                              93

                                                                                                                                                                                                                       95

                                                                                                                                                                                                                             97

                                                                                                                                                                                                                                      99

                                                                                                                                                                                                                                            01

                                                                                                                                                                                                                                                     03
                                 19

                                       19

                                             19

                                                   19

                                                         19

                                                               19

                                                                     19

                                                                           19

                                                                                 20

                                                                                       20




                                                                                                                                                                            19

                                                                                                                                                                                     19

                                                                                                                                                                                              19

                                                                                                                                                                                                    19

                                                                                                                                                                                                             19

                                                                                                                                                                                                                   19

                                                                                                                                                                                                                            19

                                                                                                                                                                                                                                  19

                                                                                                                                                                                                                                           20

                                                                                                                                                                                                                                                 20

                                                                                                                         57                                                                                                                                                                 58




Regional Trends – Production                                                                                                   Productivity vs. Farm Size …

                                                               Total Milk Production                                                                                                      2004 State Averages: Productivity vs. Herd Size
                                 45                                                                                                                                          25
                                                                                               Appalachian (-2.4%)
                                                                                                                                              Production/Cow, 1000 pounds




                                 40
                                                                                                                                              Production/Cow, 1000 pounds
   Production (million pounds)




                                                                                               Corn Belt (-0.6%)
                                                                                                                                                                             20
                                 35                                                            Delta States (-4.2%)
                                                                                                                                                                                                                                            KS ––19,611 / /110.6
                                                                                                                                                                                                                                             KS 19,611 110.6
                                 30                                                            Lake States (-0.6%)
                                                                                                                                                                             15
                                 25                                                            Mountain (6.1%)
                                                                                                                                                                                                                                      US ––18,749 / /105.2
                                                                                                                                                                                                                                       US 18,749 105.2
                                 20                                                            Northeast (-0.2%)
                                                                                                                                                                             10
                                 15                                                            Northern Plains (-0.3%)                                                                                                       VT ––17,821 / /111.5
                                                                                                                                                                                                                              VT 17,821 111.5
                                 10                                                            Pacific (3.7%)                                                                   5
                                                                                                                                                                                5                                       NY ––17,786 / /94.9
                                                                                                                                                                                                                         NY 17,786 94.9
                                  5                                                            Southeast (-0.3%)

                                  0                                                            Southern Plains (1.8%)                                                           0
                                                                                                                                                                                0
                                                                                                                                                                                    0
                                                                                                                                                                                    0         75
                                                                                                                                                                                              75        150
                                                                                                                                                                                                        150       225
                                                                                                                                                                                                                  225       300
                                                                                                                                                                                                                            300       375
                                                                                                                                                                                                                                      375       450
                                                                                                                                                                                                                                                450       525
                                                                                                                                                                                                                                                          525   600
                                                                                                                                                                                                                                                                600   675
                                                                                                                                                                                                                                                                      675      750
                                                                                                                                                                                                                                                                               750
                                  85

                                        87

                                              89

                                                    91

                                                          93

                                                                95

                                                                       97

                                                                             99

                                                                                   01

                                                                                         03
                                 19

                                       19

                                             19

                                                   19

                                                         19

                                                               19

                                                                     19

                                                                            19

                                                                                  20

                                                                                        20




                                                                                                                                                                                                                       Herd Size, cows/farm
                                                                                                                         59                                                                                                                                                                 60




                                                                                                                                                                                                                                                                                                 10
Regional Trends – Production                                                                                Regional Trends – Production

 Top 10 Milk Production, 2004 (million lbs)                                                                                January - June Milk Production: 2005 vs 2000
  State Rankings of Milk Production                                                                                                       U.S. Average = +3.56%
  Rank              2004                                              1994                 1984
     1        CA       36,465    CA                                     25,234      WI       23,501
     2        WI       22,085    WI                                     22,412      CA       15,292
     3        NY       11,650    NY                                     11,400      NY       11,443
     4        PA       10,062    PA                                     10,230      MN       10,331
     5        ID        9,093    MN                                      9,342      PA        9,423
     6        MN        8,102    TX                                      6,225      MI        5,350
     7        NM        6,710    MI                                      5,545      OH        4,650
     8        MI        6,315    WA                                      5,203      TX        3,848
     9        TX        6,009    OH                                      4,513      IA        3,805
     10       WA        5,416    IA                                      3,960      WA        3,468        Source: Milk Market Administrator – Central Order, Market Service Bulletin, July, 2005.




                                                                                                      61                                                                                             62




Regional Trends – Productivity                                                                              Regional Trends – Productivity

 Top 10 Milk per Cow, 2004 (lbs)
  State Rankings of Milk/Cow
  Rank              2004                                              1994                 1984
     1        WA      22,852                                   CA       20,203      WA       16,206
     2        AZ      22,788                                   NM       20,152      NM       15,719
     3        ID      21,446                                   WA       19,935      CA       15,636
     4        CO      21,412                                   AZ       19,578      AZ       14,723
     5        CA      21,139                                   CO       19,173      OR       13,653
     6        MI      20,842                                   NV       18,356      MI       13,579
     7        NM      20,583                                   ID       18,048      ID       13,273
     8        NV      20,360                                   AK       18,000      NV       13,202
     9        IA      19,912                                   OR       17,140      DE       13,150
     10       IN       19,747                                  MI       16,905      PA       12,926



                                                                                                      63                                                                                             64
                                                                                                           Source: Milk Market Administrator – Central Order, Market Service Bulletin, July, 2005.




Regional Trends – Production by farm size                                                                   Regional trends summary…

                                            Milk Production by Herd Size, 2000-2004
                                                                                                                • Number of operations are declining in all
                                    25
                                                                                                                  regions
                                    23     NY    VT      MI     WA
    Milk production/cow, 1000 lbs




                                    20
                                    18
                                                                                                                • Cow numbers and milk production are
                                    15
                                                                                                                  steady to down everywhere except the
                                    13
                                                                                                                  west
                                    10
                                     8
                                                                                                                • Production is moving to the west
                                     5
                                     3                                                                          • Western states appear to have a
                                     0                                                                            production per cow advantage
                                         1-29    30-49        50-99   100-199    200-499   500+
                                                              Herd size, cows
                                                                                                      65                                                                                             66




                                                                                                                                                                                                          11
What is behind these trends?                                     What is behind these trends?

 Climate, soil, land, water…                                      “Culture” of dairies – East vs. West…

    • Dry climates                                                 • East
          – Easier to manage manure                                                – Family life
          – Can build drylot dairies                                               – Grow own forage
          – Irrigated forage production                                            – Expansion ⇒ need crop land
    • Cow performance                                              • West
          – Easier to produce milk (heat, cold, humidity)                          – Larger operations to serve population ↑
    • Large tracts of land                                                         – Early adoption of bulk tanks
    • Water resources will determine how many                                      – Purchase forage
      cows we can locate in the west
                                                            67                                                                                      68




What is behind these trends?                                     Factors behind regional trends

 Changes required…                                               Summary…

   • Decline in milk production in traditional areas               • Complex!
      –   Facilities that need to be updated                       • Difference in management style
      –   Employee issues (availability, manage, etc.)
                                                                                   – Large dairies established in the West
      –   Better opportunities for young people
      –   Population density                                                       – Constraint on expansion in the East
      –   Social acceptance to change                              • Economies of scale
                                                                   • Environmental concerns and regulations



                                                            69                                                                                      70




Prices – Dairy industry is very “data rich”                      Prices –               Price levels constant for 25 years

                                                                                           Annual Prices Received by Farmers, All Milk
   • Many, many resources available …                                                         Source: USDA/NASS Agricultural Prices

      – http://www.ams.usda.gov/dairy/                                             20
                                                                                   18
      – http://www.dallasma.com/
                                                                                   16
      – http://fmmacentral.com/                                                    14
                                                                    Price, $/cwt




      – http://www.dfamilk.com/                                                    12
                                                                                   10
      – http://www.aae.wisc.edu/future/
                                                                                    8
      – http://dairyoutlook.aers.psu.edu/                                           6
      – http://agebb.missouri.edu/dairy/index.htm                                   4

      – Etc.                                                                        2
                                                                                    0
                                                                                    1970   1975     1980    1985     1990    1995     2000   2005

                                                            71     2005 is not a complete year (Jan through Oct).                                   72




                                                                                                                                                         12
Prices –                                      Variability increasing                                                                       Prices –                                   Seasonality

                                                                                                                                                                                                        Historical Milk Prices in Kansas
                                                                  Average Milk Price in Kansas*                                                                               110.0
                                       19                                                                                                                                     107.5
                                             Avg = $13.88     Avg = $12.80           Avg = $12.39     Avg = $13.41     Avg = $13.33




                                                                                                                                               Percent of annual average
                                       18                                                                                                                                                         00-04        95-04            85-04
                                              Rng = $2.40         Rng = $4.80        Rng = $3.10      Rng = $6.46      Rng = $8.32                                            105.0
                                       17
                                                                                                                                                                              102.5
                                       16
              Price, $/cwt.




                                       15                                                                                                                                     100.0
                                       14                                                                                                                                      97.5
                                       13
                                                                                                                                                                               95.0
                                       12
                                        11
                                                                                                                                                                               92.5

                                       10                                                                                                                                      90.0
                                        9                                                                                                                                              Jan          Mar          May             Jul          Sep          Nov
                                                                                                                                                                                             Feb           Apr            Jun           Aug          Oct         Dec
                                             1981




                                             1991




                                             2001
                                             1982
                                             1983
                                             1984
                                             1985
                                             1986
                                             1987
                                             1988
                                             1989
                                             1990

                                             1992
                                             1993
                                             1994
                                             1995
                                             1996
                                             1997
                                             1998
                                             1999
                                             2000

                                             2002
                                             2003
                                             2004
                                             2005
                                                                                                                                                      Source: KS Ag Statistics and Federal Order No. 32
            Source: KS Ag Stat (81-99, 05) and Stat Uniform Price Fed Order No. 32 (00-04)
                                                                                                                                      73                                                                                                                                                       74
                                                                                                                                              Milk prices appear to follow predictable seasonal pattern.




Prices –                                     Seasonality                                                                                   Prices –                                   Seasonality & futures market

            Historical Milk Prices in Kansas                                                                                                                                                  Historical Milk Prices in Kansas
                                       125                          1995         1997        1999         2001       2003       Avg                                           110                                                                              13.75
                                                                    1996         1998        2000         2002       2004

                                       120                                                                                                                                    108       Seasonal index (95-04)
                                                                                                                                                                                                                                                               13.50
                                                                                                                                                  Percent of annual average
           Percent of annual average




                                       115                                                                                                                                    106       2006 Futures, 11/25/05




                                                                                                                                                                                                                                                                       Futures price, $/cwt.
                                       110                                                                                                                                    104                                                                              13.25

                                       105                                                                                                                                    102
                                                                                                                                                                                                                                                               13.00
                                                                                                                                                                              100
                                       100
                                                                                                                                                                               98                                                                              12.75
                                        95
                                                                                                                                                                               96
                                        90
                                                                                                                                                                                                                                                               12.50
                                                                                                                                                                               94
                                        85
                                                                                                                                                                               92                                                                              12.25
                                        80
                                                                                                                                                                                      Jan         Mar         May         Jul          Sep         Nov
                                                                                                     ug
                                                                                        n




                                                                                                                  ct
                                                                                              l




                                                                                                                               ec
                                                n




                                                                                                            p
                                                                     pr




                                                                                                                         v
                                                      b

                                                             ar




                                                                            ay




                                                                                            Ju




                                                                                                                                                                                            Feb         Apr         Jun         Aug          Oct         Dec
                                                                                     Ju




                                                                                                          Se




                                                                                                                       No
                                             Ja

                                                    Fe




                                                                                                                 O
                                                            M


                                                                    A




                                                                                                    A




                                                                                                                              D
                                                                           M




                                                                                                                                      75                                                                                                                                                       76
  Or, do they?                                                                                                                                Futures market tends to capture seasonality.




Regional prices…                                                                                                                           Regional prices…

                                                                        Mailbox Milk Prices
                                       18
                                                     NE FMO                     OH
                                       17            WI                         West TX
                                                     NW States                  CA
                                       16
   Milk Price, $/cwt




                                       15

                                       14

                                       13

                                       12

                                       11

                                       10
                                              2001           2002               2003           2004          2005       01-05 Avg
                                                                                                                                      77
                                                                                                                                             Source: Hoard’s Dairyman (http://www.hoards.com/market_news/priceBOX.htm)                                                                         78




                                                                                                                                                                                                                                                                                                    13
Prices summary…                                                                                                                                 Costs and Returns


  • Average prices have changed very little in                                                                                                    • Issues to think about…
    the last 25 years                                                                                                                                                               – Regional differences
                                                                                                                                                                                    – Actual vs. projected data
  • Price variability has increased significantly
                                                                                                                                                                                    – Factors affecting costs and returns
    – MILC support payment not very helpful
                                                                                                                                                                                            • Facility type
    for large dairies                                                                                                                                                                       • Farm size (economies of size)
                                                                                                                                                                                            • Production level
  • Prices tend to follow seasonal pattern, but
    not a lot can be done about it
  • Prices vary regionally – western states
    prices ~$1-$2/cwt lower than eastern states
                                                                                                                                           79                                                                                                                                  80




Costs –                            Are costs increasing over time?                                                                              Costs/cow –                                           Little to no relationship with returns

                                                       Dairy Cost of Production
                                                                                                                                                                                    4.00
                             160                                                                               17.00
                                                   Number of cows                                                                                                                   3.00
                                                                                                               16.50
                             140
                                                   Total costs
                                                                                                               16.00                                                                2.00
                                                                                                                                                    Return over total cost, $/cwt




                             120
   Average herd size, head




                                                                                                               15.50                                                                1.00
                                                                                                                       Total cost, $/cwt




                             100                                                                               15.00
                                                                                                                                                                                    0.00
                             80                                                                                14.50
                                                                                                                                                                                    -1.00
                             60                                                                                14.00
                                                                                                                                                                                    -2.00
                                                                                                               13.50
                             40                                                                                                                                                                                                                          High 1/3
                                                                                                               13.00                                                                -3.00
                                                                                                                                                                                                                                                         Mid 1/3
                             20
                                                                                                               12.50                                                                -4.00                                                                Low 1/3
                              0                                                                                12.00                                                                -5.00
                                                                                                                                                                                         2,000          2,500          3,000           3,500        4,000              4,500
                                 89
                                 90
                                 91
                                 92
                                 93
                                 94
                                 95
                                 96
                                 97
                                 98
                                 99
                                 00
                                 01
                                 02
                                 03
                                 04
                              19
                              19
                              19
                              19
                              19
                              19
                              19
                              19
                              19
                              19
                              19
                              20
                              20
                              20
                              20
                              20




                                                                                                                                                                                                                       Total cost, $/cow/year

  Source: Kansas Farm Management Enterprise Analysis                                                                                       81     Source: Kansas Farm Management Enterprise Analysis – 2000-2004 averages                                                      82




Costs –                            Regional differences                                                                                         Costs –                                     Regional differences

                                                          Quarterly Milk Cow Average Price                                                                                                  Total costs of production, Jan 03-Oct 05 (Source: ERS)
                                                                  Source: USDA/NASS                                                                                                 24
                             2,000
                                             NY/VT        MN/WI         CA/WA      NM/TX                                                                                                         Feed           Other op.        Labor          Overhead
                             1,900                                                                                                                                                                                                                                  $4.23
                                                                                                                                                                                    20
                             1,800                                                                                                                                                                                                                 $4.61
                                                                                                                                                                                                                                       $5.70
                             1,700
                                                                                                                                                                                    16
                                                                                                                                                                                                                                                                    $7.82
                             1,600
        Price, $/head




                                                                                                                                                                                                          $2.24         $3.55
                                                                                                                                                  $/cwt




                                                                                                                                                                                             $2.62                                                 $6.30
                             1,500                                                                                                                                                  12                    $2.40         $3.16          $6.14
                             1,400                                                                                                                                                           $2.19
                                                                                                                                                                                                          $2.86                                                     $3.69
                             1,300                                                                                                                                                   8       $2.19                      $2.62                      $3.48
                                                                                                                                                                                                                                       $2.74
                             1,200
                             1,100                                                                                                                                                   4       $7.30        $7.57         $6.88                                       $7.50
                                                                                                                                                                                                                                       $5.55       $6.23
                             1,000
                               900                                                                                                                                                   0
                                     1994          1996          1998           2000          2002          2004                                                                                 CA         TX              ID           WI         NY               VT
                                            1995          1997          1999           2001          2003          2005
  Replacements are less expensive in “traditional” dairy states.                                                                           83     “Traditional” dairy states are not competitive with labor and overhead.                                                      84




                                                                                                                                                                                                                                                                                    14
                                                                                                                                                                                   Every category is sorted
                                                                                                                                                                                    Every category is sorted
                                                                   Data useful for
                                                                    Data useful for
                                                                   benchmarking?
                                                                    benchmarking?




                                                                                       85                                                                                                                                                          86




                                                                                            Farm size effect…
What’s driving cost
 What’s driving cost
and profitability                                                                                                                                          Milk Production and Feed Costs versus Herd Size
 and profitability
differences?
 differences?                                                                                                                               24,000                                                                       8.0
                                                                                                                                                                                                                         7.5
                                                                                                                                            22,000
                                                                                                                                                                                                                         7.0
                                                                                               Production, lbs/cow/year




                                                                                                                                                                                                                         6.5




                                                                                                                                                                                                                               Feed costs, $/cwt
                                                                                                                                            20,000
                                                                                                                                                                                                                         6.0
                                                                                                                                            18,000                                                                       5.5
                                                                                                                                                                                                                         5.0
                                                                                                                                            16,000
                                                                                                                                                                                                                         4.5
                                                                                                                                                                                                   Production            4.0
                                                                                                                                            14,000
                                                                                                                                                                                                   Feed costs/cwt        3.5
                                                                                                                                            12,000                                                                       3.0
                                                                                                                                                           50           75             100           125              150
                                                                                                                                                                        Average Number of Cows in Herd
                                                                                       87                                                                                                                                                          88
                                                                                              Do you dare draw strong conclusions from these results?




Factors impacting costs ($/cow)…                                                            Costs vs. farm size

          Variable         Coef    Std Err    t Stat     P-value Low 95% Up 95%                                                                                     Total Costs versus Herd Size
 Intercept                -517.201 1043.162     -0.496      0.624 -2654.024 1619.622                                                                2400
 Milk production             0.016    0.024      0.665      0.511    -0.034    0.066
                                                                                                                 Total Direct & Overhead Expenses




 Number of cows             16.504    4.953      3.332      0.002     6.359   26.650                                                                2300
 Number of cows^2           -0.058    0.022     -2.572      0.016    -0.104   -0.012
 Feed cost/cwt             242.361   63.218      3.834      0.001 112.864 371.858                                                                   2200
 Culling percent             3.954    5.768      0.686      0.499    -7.861   15.770
                                                                                                                                                    2100
 Lbs milk/lb grain&conc     26.322   79.322      0.332      0.742 -136.161 188.805
 % of barn capacity         -2.476    2.502     -0.990      0.331    -7.600    2.649
                                                                                                                                                    2000
 Labor hours/cow             5.185    3.330      1.557      0.131    -1.638   12.007
 1996                     -334.271   71.048     -4.705      0.000 -479.807 -188.735                                                                 1900
 1997                     -292.376   71.306     -4.100      0.000 -438.438 -146.313
 1998                     -125.662   79.851     -1.574      0.127 -289.230    37.906                                                                1800
 1999                      -50.490   90.052     -0.561      0.579 -234.955 133.974
 2000                      -69.791   81.758     -0.854      0.401 -237.264    97.682                                                                1700
 2001                      -16.173   69.524     -0.233      0.818 -158.588 126.242
 2002                      -52.626   52.814     -0.996      0.328 -160.811    55.559                                                                1600
 2003                      -76.932   40.481     -1.900      0.068 -159.854     5.991                                                                       40      60         80         100       120          140       160
 Based on analysis of FINBIN data (University of Minnesota)                                                                                                              Average Number of Cows in Herd

                                                                                       89                                                                                                                                                          90
                                                                                              Based on analysis of FINBIN data (University of Minnesota)




                                                                                                                                                                                                                                                        15
Factors impacting profitability…                                                                                    Profitability vs. farm size

         Variable           Coef      Std Err    t Stat     P-value Lower 95% Upper 95%                                                                                                      Profitability versus Herd Size
Intercept                 -4745.824   2007.778     -2.364      0.025 -8858.58    -633.07                                                                        700
Milk production               0.143      0.030      4.692      0.000      0.08      0.21




                                                                                                                                Return to Labor & Mgmt, $/cow
Number of cows              -13.240      6.328     -2.092      0.046    -26.20     -0.28                                                                        600
Number of cows2               0.037      0.029      1.273      0.213     -0.02      0.10
Feed cost/cwt              -255.277     82.806     -3.083      0.005   -424.90    -85.66                                                                        500
Culling percent              -9.380      6.639     -1.413      0.169    -22.98      4.22
Lbs milk/lb grain&conc       13.943     97.761      0.143      0.888   -186.31    214.20
                                                                                                                                                                400
Milk price                  349.396     87.113      4.011      0.000    170.95    527.84
Labor hours/cow             -14.071      4.355     -3.231      0.003    -22.99     -5.15
1996                         510.66    152.342      3.352      0.002    198.60    822.72                                                                        300
1997                         736.11    281.437      2.616      0.014    159.61  1312.61
1998                         154.34    133.431      1.157      0.257   -118.98    427.66                                                                        200
1999                         212.98    202.248      1.053      0.301   -201.31    627.27
2000                         658.25    393.995      1.671      0.106   -148.81  1465.32                                                                         100
2001                         113.83    154.488      0.737      0.467   -202.62    430.29
2002                         658.10    353.139      1.864      0.073    -65.27  1381.47                                                                             0
2003                         723.00    313.331      2.307      0.029     81.17  1364.83
                                                                                                                                                                        40              60                  80                  100                120             140              160
Based on analysis of FINBIN data (University of Minnesota)                                                                                                                                        Average Number of Cows in Herd

                                                                                           91                                                                                                                                                                                                     92
                                                                                                                              Based on analysis of FINBIN data (University of Minnesota)




                                                      Data useful for
                                                       Data useful for
                                                      benchmarking?
                                                       benchmarking?                                                                                                                                                                                               Data useful for
                                                                                                                                                                                                                                                                    Data useful for
                                                                                                                                                                                                                                                                   benchmarking?
                                                                                                                                                                                                                                                                    benchmarking?




                                                                                           93                                                                                                                                                                                                     94




Farm size effect…                                                                                                         Farm size effect…
                                                                                                                                                                Labor efficie ncy v ersus farm size                                      Operation of milking system per day v ersus farm size
                         Costs of production versus farm size
                                                                                                                    0.9                                                                                                         20

                                                                                                                    0.8                                                                                                         18
            20                                                                                                                                                                                                                  16
                                                                                                                    0.7
                                                                                                Hours/cwt of milk




                                                                                                                                                                                                                                14
                                                                                                                    0.6
                                                            Operating costs                                                                                                                                                     12
            18
                                                                                                                                                                                                                        Hours




                                                                                                                    0.5
                                                                                                                                                                                                                                10
                                                            Total costs                                             0.4
                                                                                                                                                                                                                                 8
                                                                                                                    0.3
                                                                                                                                                                                                                                 6
            16                                                                                                      0.2
                                                                                                                                                                                                                                 4
                                                                                                                    0.1                                                                                                          2
    $/cwt




                                                                                                                    0.0
            14                                                                                                                                                                                                                   0
                                                                                                                          0                               200                400       600            800        1000                0           200         400         600         800         1000
                                                                                                                                                                        Ave rage cows per farm                                                           Ave rage cows per farm
            12
                                                                                                Source: USDA ERS Statistical Bulletin Number 975-6, Feb 2004 (based on 2004 ARMS

            10

             8
                 0       200           400          600           800          1000
                                  Average cows per farm
                                                                                           95                                                                                                                                                                                                     96
   Source: USDA ERS Statistical Bulletin Number 975-6, Feb 2004 (based on 2004 ARMS




                                                                                                                                                                                                                                                                                                        16
Costs –                        Facility cost versus herd size                                                 Costs –                            Facility investment vs. herd size

                               Effect of Herd Size on Annual Ownership Costs Per
                                                                                                                                                      Investment in Dairy Buildings and Equipment
                                         Cow for a Double-8 Herringbone                                                                                         Source: 2005 KSU Dairy Budgets

                                     $691                                                                                                $7,000
                              700
    Annual Parlor Ownership




                                                                                                                                                       $5,820
                              600                                                                                                        $6,000
        Costs per Cow




                              500                                                                                                        $5,000
                                                    $401




                                                                                                                       $/Lactating cow
                                                                                                                                                                          $4,107
                              400                                                                                                        $4,000                                             $3,553
                                                                   $304
                              300                                                 $255          $226                                     $3,000                                                                $2,580
                              200
                                                                                                                                         $2,000
                              100
                                                                                                                                         $1,000
                                0
                                        100           200        300        400                500                                              $0
                                                        Herd Size (total cows)                                                                        100 cows         600 cows            2400 cows       2400 cows drylot
                                                                                                                                                      freestall        freestall            freestall
                                                                                                                                                                     Lactating cows and facility type
 Source: Craig Thomas, Michigan State University                                                        97                                                                                                                    98




 Larger dairies dilute fixed costs…                                                                           Costs summary…

                                            Feed Costs as Percent of Total Costs
                                                Source: 2005 KSU Dairy Budgets                                • “Western” states appear to have a cost
                       33%
                                                                                                                advantage over “traditional” states due
                       32%             Avg prod        High prod
                                                                                                                primarily to lower labor and overhead costs
                       31%
    Percent of Total




                       30%
                                                                                                              • While data are somewhat conflicting, hard to
                       29%
                                                                                                                argue that economies of size do not exist
                       28%

                       27%
                                                                                                              • As a general rule, minimizing fixed costs is
                       26%
                                                                                                                done by maximizing cows and production per
                       25%

                       24%
                                                                                                                cow (i.e., dilute fixed costs)
                                    100 cows         600 cows        2400 cows       2400 cows drylot
                                    freestall        freestall        freestall
                                                  Lactating cows and facility type
                                                                                                        99                                                                                                                    100




Management –                                                                                                  Management…

                                                                                                                                                       M anagement Style and Profitability -- Dairies
                                                                                                                                                            Source: Adapted from Dairy Today, 1994
  What should a dairy manager focus on?                                                                                                  $600

  • Production                                                                                                                           $500

  • Costs                                                                                                                                $400
                                                                                                                 Profit per cow




  • Marketing                                                                                                                            $300


                                                                                                                                         $200


                                                                                                                                         $100


                                                                                                                                          $0
                                                                                                                                                     Cows         Labor            Price        Low cost       Generalist
                                                                                                                                                                           Management Style
                                                                                                        101                                                                                                                   102




                                                                                                                                                                                                                                    17
Factors affecting profits of KS crop producers …                                                                    Important economic principles…

              (94-03) diff in profit (over avg farm) by being in best 1/3 of:
                              $25                                                                                       • Average profits equal zero
                                                                                                   $21.73*
                                                                                                                        • Very difficult to “beat the market”
                              $20 $19.02*                             $18.51*                                           • Risk-return trade-off
    change in $/acre profit




                              $15
                                                                                                                                What does this mean?
                                                                                         $11.94*
                                                                                                                                • Be a low cost ($/unit) producer
                              $10                            $9.13*
                                                                                                                                • Marketing efforts should focus on the things
                               $5
                                                                                                                                  you can control (quality, quantity, etc.)
                                            $3.67*                              $4.10*
                                                                                                                                • Early adopters of technology realize profits in
                                                     $0.77
                               $0                                                                                                 the short run
                                    Cost     Yield   Price    Tech     Plant     Govt      Size      Rent
    * statistically different from 0 at 90% confidence
                                                                                                             103




 Future…                                                                                                            Dairy in Kansas…

   • The dairy industry will change drastically                                                                                                                    Milk Production in Kansas by Region

                                                                                                                                                       100                                                          100
   • The trends will continue and may                                                                                                                  90                                                           90
                                                                                                                         Percent of State Production




     accelerate                                                                                                                                        80                                                           80

                              – Consolidation and structural change                                                                                    70                                                           70

                              – Shifts in regional milk production                                                                                     60                                                           60
                                                                                                                                                       50                                                           50
   • Change is always a challenge                                                                                                                      40                                                           40
                                                                                                                                                       30                                                           30
   • Change can occur very rapidly                                                                                                                     20                                                           20
                                                                                                                                                       10    NE   EC     SE   NC     C    SC    NW   WC   SW        10
                                                                                                                                                         0                                                          0
                                                                                                                                                         1980     1984        1988       1992    1996     2000   2004
                                                                                                             105                                                                                                          106
                                                                                                                       Things can change significantly quite rapidly!




Industry is changing…

    … these trends increase the need for dairy
    managers to better understand the relative
    strengths and weaknesses of their
    businesses if they are going to be
    economically competitive in the future.




                                                                                                                   Kevin C. Dhuyvetter
                                                                                                                   785-532-3527
                                                                                                                   kcd@ksu.edu
                                                                                                                                                                       Questions ?
                                                                                                             107                                                                                                          108




                                                                                                                                                                                                                                18