Transcript Economics of Irrigation of Field Crops

Dairy Situation
and Outlook for 2009:
Weathering the Storm
Geoff Benson
Dept. of Agricultural & Resource
Economics
NC State University
March 10, 2009
Topics
 Situation & Outlook
Production
Sales
Prices
 Weathering the Storm
Financial Management
Herd Management
GEOFF BENSON, ARE, NCSU
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Situation & Outlook for 2009
GEOFF BENSON, ARE, NCSU
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Federal Dairy Support and Class III (Cheese) Milk
Prices, Monthly, 1975-2009
22.00
20.00
18.00
16.00
$/100 lb
14.00
12.00
10.00
8.00
6.00
Milk Support
4.00
Class III Milk
2.00
0.00
1/75
1/78
1/81 1984 1/87
1/90
1/93
1/96
1/99
1/02
1/05
1/08
GEOFF BENSON, ARE, NCSU
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Price Recovery
 How do you get the price up?
Sell more milk
Exports
At
home
Reduce milk production
Dairy Exports
 For 2007 and the first part of 2008
exports of dried milk powders, butter
and cheese showed strong growth
Low US prices for part of the period
Weak dollar
Reduced production & exports from NZ &
Australia
Reduced exports from the EU
Demand growth, especially in Asia
 Then came the global economic crisis
& exports slumped both in volume and
in value
GEOFF BENSON, ARE, NCSU
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Export Prospects
 Continued world economic crisis Weaker
world demand
Stronger US$
Supply-demand balance has weakened in the
EU27 since quota was expanded, and export
subsidies have increased
More normal supplies from New Zealand and
Australia
 More competition for export sales
 World market prices will soften
 US export opportunities will be greatly
reduced
GEOFF BENSON, ARE, NCSU
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Sales Outlook
 US Demand
 Continued population growth
 Continued producer & processor funded
advertising and promotion
 Lower consumer prices v. 2008
 US economic recession
 Projected commercial sales:
 Butterfat slightly lower than 2008, with small
government purchases
 Skim-solids lower than 2008, with significant
government purchases
GEOFF BENSON, ARE, NCSU
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“US Comm. Disappearance”, bil. lb.
2008
%
2009F
%
B’fat
188.4 192.7
+2.3
190.7
-1.0
Skim
188.2 189.9
+0.9
185.1
-2.5
Cheese
10.14 10.14
0
--
--
Butter
1.519 1.715 +12.6
--
--
Powder
1.216 1.364 +11.8
--
--
Fluid
55.09 55.14
--
--
2007
0
Supply Outlook
 Butter & Cheese inventories are edging up
 January 1, 2009 cow numbers were up 76,000
over Jan. 2008 (up 0.8%) and up 92,000 over
Jan ’07 (up 1.0%) – have been increasing
since 2004
 January 1, 2009 heifer inventory was down
5,000 head but is still adequate
 Cow cull rate up sharply in January 2009 v.
Jan 2008
 Milk/cow will be affected by less rBST use
 Feed costs have increased and income over
feed cost is unfavorable
 Higher fertilizer and energy related costs
GEOFF BENSON, ARE, NCSU
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.
Source: USDA, “World Agricultural Supply & Demand Situation
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Prices Paid Index for Selected Inputs
USDA Index
1990-92 = 100
Jan
2006
Jan
2007
Jan
2008
Jan
2009
%
(06/07)
to ‘09
Nitrogen fert.
236
202
283
380
+ 74%
P & K fert.
168
149
257
353
+ 126%
Diesel fuel
236
241
332
232
- 3%
Field Crop
Seeds
177
191
218
287
+ 56%
Source: Agricultural Prices, NASS, USDA, January 2009
GEOFF BENSON, ARE, NCSU
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Production
Cows,
mil.
Milk/
cow, lb
Milk
Prod.
bil. lb.
2007
2008
% 2009F
9.15
9.27
1.3%
9.17
%
-1.1%
20,279 20,462 0.9% 20,620 +0.8%
185.6
189.7 2.2% 189.1
Source: USDA, “Livestock, Dairy and Poultry Report”
-0.3%
Milk Prices, $ per 100 lb.
$
2009F
$
2007
2008
Class I
19.13
18.32 -0.81 11.30
-7.02
Class
III
18.04
17.44 -0.60 10.05
-7.39
Class
IV
18.36
14.65 -3.71
-4.90
9.75
Source: USDA, “Livestock, Dairy and Poultry Report”
Forecast is the mid-point of a range
Class III prices, $/100 lb.
GEOFF BENSON, ARE, NCSU
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Futures & Market Prices
 The current futures prices suggest
an average Class III price of around
$12.10/100 lb. for 2009 v. USDA’s
forecast of $10.05/100 lb.
 FO 5 Class I prices for 2009 will be
down a little less because of a higher
January price plus the increases in
Class I differentials in May, 2008
 VA Dairy Commission Class I prices
remain above equivalent FO prices
GEOFF BENSON, ARE, NCSU
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US & FO5 Milk Prices, $/cwt.
Item
2004
2005
2006
2007
2008
2009F
US All
Milk
16.04
15.15
12.90
19.15
18.34
~14.00
US Class
III Milk
15.39
14.05
11.89
18.04
17.44
~12.50
FO 5
Blend
17.01
16.23
13.99
20.49
19.90
~16.00
MILC
0.22
0.04
0.60
0.01
0.00
0.75
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Price Support Program
 Government has made purchases of
nonfat dry milk starting in October, 2008
and butter starting in early January, 2009
 No “milk” support price under the 2008
Farm Bill – Product prices are set directly:
 Block Cheese = $1.13/lb.
 Barrel Cheese = $1.10/lb.
 Butter = $1.05/lb.
 Nonfat Dry Milk Powder = $0.80/lb.
 All unchanged from previous prices
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MILC
 Continues the current version through
9/30/08 and in Sept. 2012
 Maintains the current trigger price but
Adds a feed cost adjuster
Increases the payment % from 34% (back)
to 45% from 10/1/08 through 8/31/12
 Increases the payment cap from 2.4
mil. lb to 2.985 mil. lb from 10/1/08
through 8/31/12 – 150 cows approx.
 Has an income qualification test
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CWT
 CWT – Cooperatives Working
Together – Program
Voluntary, funded at 10¢/100 lb.
Herd retirements by bid – 6 so far
Export subsidies
 Current initiative
Two year commitment by
contributors
Borrow against future income
Fund a new herd retirement program
with a 12-month commitment
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Outlook Summary
 Higher net incomes in 2007 & 2008 because
higher milk prices more than offset increases in
production costs
 Outlook for 2009
 The global financial crisis will affect demand for
dairy products
 Higher world production & subsidies
 Stronger dollar
 Reduced exports & sluggish domestic sales
Lower milk prices until production is reduced
 Higher production costs
Net income will be low in 2009 and cash flow
management will be very important
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US All Milk Price, 1989-2009
24.00
22.00
20.00
$/100 lb
18.00
16.00
14.00
12.00
10.00
8.00
1/89
1/91
1/93
1/95
1/97
1/99
1/01
1/03
1/05
1/07
GEOFF BENSON, ARE, NCSU
1/09
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Financial Trends
 A 20-year history of large and




unpredictable price swings causing cash
flow problems
Historically, periods of really low and
really high prices are short
Length of time from peak to peak or
trough to peak varies widely
Price fluctuations are getting more
extreme
Milk prices must cover cost of production
on average -- and will be higher
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Conclusions and Implications
 The future will look a lot like the past
 Profit margins per cow and per cwt of milk
are slim, on average, and getting slimmer
 Nothing in the farm bill or the economic
environment suggests past trends will
change – continued “structural change”
 Regional competitiveness determines the
market share of the national milk production
“pie”
 Dairy diversity means at least some farms in
a state and region are profitable (on average)
and competitive
GEOFF BENSON, ARE, NCSU
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Financial Performance for Selected New
York Dairies, 2006 & 2007
2006
Item
Total Cost,
$/cwt
Net Farm
Income,
$/cow
Return on
Assets, %
(+ apprec.)
2007
Bottom
10%
Average
Top
10%
Bottom
10%
$24.96
$15.30
$12.93
$28.29
$17.46 $14.86
-$653
$118
$811
$67
$1,146 $1,985
-11%
4.0%
12%
-2%
18.2%
Average
Top
10%
29%
Items in each column are ranked independently
Source: 2006 & 2007 Dairy Farm Business Summary, Cornell University
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Key Questions
 Long-term
Can I make it through this
downturn?
If I can, do I want to?
 If I can and want to, what can I
do in the near-term until prices
recover?
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“What financial shape are you in?”
 Is the farm profitable most years based on
returns on assets & to management?
 Do you normally have adequate cash flow to
meet operating expenses, debt service, family
living needs in a timely manner?
 Is the business solvent – is debt load low and
equity high as collateral for loans and as a
reserve?
Financial performance cannot be predicted
from farm performance
There are relatively few production practices
that can be recommended in all situations
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“Do you know your cost of production?”
 Long run competitiveness depends on
relative profitability
 There is wide variation among farms, for a
variety of reasons
 You cannot control your milk price
 You can only manage your cost of
production
 Cows
 Heifer raising
 Crop production
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“Do you know your cost of production?”
 Operating cost - out of pocket expenses,
e.g. bought feed, forage production, vet,
hired labor, fuel, repairs
 Fixed/Ownership/Investment costs
 Depreciation
 Interest
 Taxes & insurance
 Cost or charge for the value of your time (if
unpaid) and your investment (equity)
 How do you compare to other farms?
Specific benchmarks are needed
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“Do you know where the money went?”
 Four sources and uses of cash:
 Farm Operations
 New investments & asset sales
 Financing – new debt & debt repayments
 Non-farm income and family living
 Severe problems can have several causes
 Low profits
 High
cost of production
 Low milk price
 Recent large new investments
 Large debt repayments
 Large family living needs
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Cash Flow “Stretchers”
 Draw on financial reserves
 Sell non-farm assets, e.g., timber, lots
 Postpone non-essential maintenance




and new investments
Reschedule (extend) or refinance debt
payments
Borrow more (if you will be able to pay it
back)
Family members seek new off-farm
income
Cut family living expenditures
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Herd Management
 Re-evaluate the profitability of production
practices. Focus first on areas that have
the biggest potential impact on profitability
and cash flow
 Milk still pays the bills and feed is the
biggest cost
 Milking herd rations must still be nutritionally
sound – cows don’t care what the price of milk
is
 Feed prices have been volatile – shop around
 Some ration ingredients may not be profitable
at low milk prices
 Continue with recommended practices for
transition cows, cow comfort, cow health
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Herd Management
 Revisit other practices most affected by
lower milk prices and higher input prices,
particularly feed & fertilizers
Voluntary culling decisions
Herd health, including mastitis,
involuntary culling, death loss
Reproduction management programs
Genetic progress – focus on milk income
& productive life
Heifer raising is expensive!
Crop production is expensive!
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Financial Tools
 There are few practices and products that
work for everyone or that work in all farm and
financial situations
 Use budgeting to assess profitability
 Partial Budgeting – changes in specific costs and
income associated with small changes within an
enterprise, e.g., ration changes for the heifers
 Enterprise Budgeting – Evaluate the cost, revenue
and net income of an entire enterprise when other
parts of the farm are unaffected, e.g., heifer
raising, crop production
 Whole farm budgeting – For major changes would
affect the entire farm operation, e.g., expansion
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Financial Tools
 Budgeting (profitability) should include
 Operating (out-of-pocket) costs
 Fixed or ownership costs – depreciation,
interest on investment, taxes & insurance
 Opportunity costs of unpaid family time and
money invested
 Cash flow -- looks only at changes in cash
outflows and cash inflows
 Ideally, in a cash flow squeeze, you want
to make changes that are both profitable
and contribute to cash flow right away
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Summary
 The future will look a lot like the past
 Trends to fewer and larger farms, regional shifts
will continue
 Some farms in all regions will be profitable
 Price volatility and low average returns will
continue – but milk prices will average higher
 Carefully evaluate your production practices,
particularly those that might be sensitive to
changes on milk price or input prices
 However, you pretty much manage a well run
farming operation in low price periods the same
way you should be managing when prices are
more favorable
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Summary
 Measure, monitor and evaluate
financial, herd and farm performance to
identify problems promptly
 Financial information on cost of production,
profitability, cash flow and solvency is
essential
 Set farm and financial performance
benchmarks, e.g. Milk income over feed
costs, feed costs per cwt.
 Measure and evaluate performance
regularly
 Bring in outside advisors to help
evaluate financial and farm performance
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Summary
 Higher prices will come mostly from
a reduction in milk production –
fewer cows and fewer dairy farms
 Some cannot survive this downturn
and some who could will choose to
retire from dairy farming. For those
who will cease production, develop
and execute a timely exit plan that
considers tax consequences as well
as the preservation of equity.
GEOFF BENSON, ARE, NCSU
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Geoff Benson
 Phone: 919.515.5184
 Fax: 919.515.6268
 E-mail: [email protected]
 Web page:
http://www.ag-econ.ncsu.edu/
faculty/benson/benson.html
$
$
GEOFF BENSON, ARE, NCSU
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