November 1998
Volume 1, Issue 11

Inside this Issue
There are Still a Few Good Seats Left....
Ohio's Dairy Industry is Turning it Around
15 Measures of Competitiveness
The Slump!
What are Futures and Options?
Milk Price Outlook
Who's Who
Sources of Information About BFP Futures and Options

There are Still a Few Good Seats Left…

Without specialization, the old saying “jack of all trades, but master of none” holds true in the dairy industry, said Tom Noyes, dairy agent at the Wayne County office of Ohio State University Extension.

Dairy producers who try to harvest forage, raise heifers, be a mechanic and do other  things while also milking cows never get all those things done to their fullest potential, Noyes said.  They’re just fragmenting their management efforts without doing the best job they can at any one of those things.

“That’s why we’re talking about specialization.  You improve your skills as  you specialize,” he said.  “In western states, dairy producers who milk cows, just milk cows.”

Noyes is one of three speakers who will discuss dairy specialization at the inaugural “Ohio Dairy Conference, Restructuring Ohio’s Dairy Industry,” to be held Dec. 8-9 at the Ramada University Hotel and Conference Center on Olentangy River Road just north of Ohio State University’s main campus in Columbus.

With specialization, producers who like the dairy industry but don’t really enjoy milking cows can find other ways to be involved, Noyes said.  For example, they can grow forage or feed, raise replacement heifers or provide another contracted service or product for producers who specialize in milking.

“Dan Undersander of the University of Wisconsin, who will speak during the specializing session, has done research that shows that dairy producers who buy forage from someone who specializes in forage production save money and get better quality forage than if they try to produce it themselves,” he said.

Specializing is one of five themes to be covered during the conference.  The others are farm finances, labor, records, and facilities and the environment.

“There hasn’t been a statewide activity for dairy producers in Ohio for a long time, and everyone in the industry has had a concern that the dairy industry in Ohio is falling behind,” he said.  “This conference will draw producers together on a statewide level to talk about the restructuring of Ohio’s dairy industry that is needed to keep it competitive.”

The conference will feature two nationally known dairy speakers, Don Rogers and Bernie Erven.  Rogers, farm financial management consultant for the Farm Credit System in New York and the northeast, will discuss “Farm Finances for the Rest of Us” on Dec. 8.  In addition to working with Farm Credit, Rogers also does private farm management work for producers and lenders.

Erven, Ohio State University Extension human resource management specialist, will talk about “Managing Labor on Dairy Farms” on December 9.

Other topics discussed at the conference will include dairy expansion, how to use farm records, and bedding, designing efficient dairy facilities and environmental regulations.  There will be topics of interest to all dairy producers, regardless of the size and type of their operation, Noyes said.  Many sessions will include farmer panels sharing their experiences.

The conference is co-sponsored by Ohio State University Extension and the newly formed Progressive Dairy Producers of Ohio.  A reception is planned during  the conference at 5:30 p.m. on Dec. 8 to introduce the new organization.

“We don’t have an Ohio dairy association that represents all Ohio dairy producers, and most other major dairy states do,” Noyes said.  “The Progressive Dairy Producers of Ohio will serve as one voice for dairy producers in the state that can say, ‘This will hurt the industry’, or ‘This is what should be done to improve it.”

Registration for the event is $89 for both days if registration is postmarked by Nov. 22.  Two-day registration is $109 after that date.  Participants also can register for only one day at $55 before Nov. 22 or $69 after.  The registration fee includes a copy of the conference proceedings, three breaks, one breakfast, one lunch and the reception.

For registration material and more information about the Ohio Dairy Conference, people interested should contact Normand St-Pierre at (614) 292-6507 or Jennifer Winkler at (614) 688-3143, both at Ohio State in Columbus, or their county office of Ohio State University Extension.

Ohio’s Dairy Industry is Turning it Around

Out of forty producers who attended a mini conference on the future of the dairy industry in Ohio, forty stood-up to show their commitment to establishing a new association of progressive dairy producers in Ohio.

The problem of a declining dairy industry is not new to Ohio.  To address the issue, the industry, under the leadership of Ohio Senator Grace Drake, formed the Ohio Dairy Strategic Planning Task Force in December 1993.  An extensive report, “Ohio Dairy Industry Strategic Plan” was issued in June 1995.  One of the recommendations was “To form an Ohio Professional Dairy Producers” organization.  Ohio State University Extension, in partnership with Monsanto, organized a mini conference where forty dairy producers were asked to reflect on the status of their industry.  Late that evening, Dr. Bernie Erven, a well known OSU Agricultural Economist addressed the crowd and asked “Those of you willing to commit and support a professional dairy producers association, please stand up”.  Not one person remained seated.

An interim Board was elected and consists of: Dale Arbaugh (Jewett), Debbie Ayars (Perrysville), Doug Billman (Burbank), John Douglass (Marshallville), Michael Fullenkamp, (Fort Recovery), Ron Hatfield (Centerburg), John Mast (Millersburg), Ed Pfeifer (Bucyrus), Robin Steiner (Creston), and Randy Winner (Yorkshire).  John Douglass was elected interim President of the Progressive Dairy Producers of Ohio (PDPO).  “We want this association to set the agenda for the dairy industry in Ohio, as opposed to being told what the agenda is” said Douglass.  “We are currently defining the issues that affect all class of dairy producers in the state.  We want to form an extensive network of producers to determine research needs, education opportunities, and share our management experiences.   We want to insure a next generation  of  dairymen  in Ohio”  he added.

Ron Hatfield, a Centerburg dairy producer,  pointed out that “In 1996, Ohio produced only 380 lbs of the 582 lbs/year of milk and dairy products consumed by the average Ohio resident.  Over one-third of our milk is imported from out of state.  The processing of milk amounts to 3.7 billion dollars of economic output and more than 10,000 jobs in the State of Ohio.  And the average Ohio dairyman is over 58 years old.  We must change our industry if we want a next generation of dairy producers in this state.”

 The association will be officially launched during the Ohio Dairy Conference to be held in Columbus on December 8 and 9 at the Ramada University Hotel and Conference Center.  The PDPO is sponsoring a reception the evening of the 8th, from 5:30 until 7:30, and will use the opportunity to present the organization to those attending.  Membership enrollment will be available on site.

15 Measures of Competitiveness
Dianne Shoemaker, Agriculture Agent

This month: Mission Statement
Competitive level: The management team agrees on why they are in business

Example:  "Our mission is to produce and market high-quality milk in sufficient quantity to provide a good standard of living for our family and our employees.  The business should be profitable enough to provide above average compensation for employees and long-term financial security for our families."

You see mission statements everywhere these days.  Is it just the current "thing" to do or is it an important tool for your business.  Of course, I'm going to say it is an important tool! But why?  It is critical for the long-term success of your business that your management team agrees about why they are in business.  Sounds simple, but lack of common goals has caused the breakup of more than one family business.  In some of the worst cases, it has also irreparably damaged family relationships as well.

A well thought out mission statement will give the business focus:
- for setting goals
- for making decisions
- for resolving conflicts
- for revisiting and revising the mission statement over time

How do you get started?  Sounds simple, but the first step is to commit to doing it!  Then decide whom to involve in the process.  It might be the owners, husband and wife, brothers and spouses, parent, child and spouses or it might be the whole management team and employees.  Ask questions:
- Why are we in this business?
- What are we trying to achieve?
- What values are important to us?
- How do we want this business to impact our employees, families, customers and the industry?
- How would we like the business to look in 7-10 years?

Mission statement quick start:
- List 6 things that are important to you
- List 6 reasons why you farm
- Rank them most to least important
- Have each person involved do this
- Use as a basis for developing your mission statement

The Slump!

Mike Allen
Department of Animal Science
Michigan State University

Milk production often drops when cows are switched to “new” corn silage; that has been harvested recently and has completed fermentation.

The drop seems greater for herds feeding high levels of corn silage, and high producing cows may be affected the most.  The drop corresponds with the appearance of undigested kernels in the manure and may not be related to a decrease in dry matter intake.  This phenomenon is more prevalent some years than others, but most of the time it clears up as time passes and is not noticeable by mid-winter.

Some nutritionists discount the energy content of the corn silage to account for the passage of undigested corn kernels, but they can rarely adjust rations enough; often, only time can restore the milk yield loss fully.  I have come to call this phenomenon the “new corn silage slump”.  The following is a description of the problem and a few possible solutions.

Why do kernels pass undigested? Even when corn silage is harvested at the recommended moisture content (65 to 70% for horizontal silos and 60 to 65% for vertical silos), kernels can become quite hard and resistant to breakage and digestion.  At harvest, kernels are much drier than stover; at 65% whole plant moisture, stover averages about 75% moisture, while kernels average only 40 to 50% moisture.  When silage is harvested drier, the kernels become even harder and more resistant to digestion.

Why does the slump go away? After kernels “stew” in the silage juices long enough, they absorb moisture and become softer and fracture more easily.  In addition, the protein endosperm that encases the starch granules might become more soluble over time.  In any case, kernel passage is usually much less problematic as time passes.

Why does milk production drop when intake does not? Typically kernels make up about 50% of corn silage, dry basis.  Milk production decreases because kernels pass through the cow undigested, decreasing the digestibility and energy available from the feed.  Often dry matter intake increases as the cow tries to consume enough feed to meet her energy requirements.  However, not all cows can increase feed intake enough to account for the lost energy from undigested kernel passage.

Why are the highest producing cows affected the most? Dry matter intake of high producing cows is often limited by the filling effects of the feed.  Thus, when these cows consume diets with decreased digestibility, such as with more undigested kernels, they have little ability to eat more.  In contrast, feed intake of lower producing cows is often limited by the energy content of the diet; as digestibility decreases, intake increases to compensate, at least until gut fill begins to limit intake.  Then, although milk production might not be affected, feed costs will increase because cows eat more feed to produce the same amount of milk.

Why isn’t there a slump every year?  The slump is usually avoided or reduced in cool years or years in which corn planting is delayed, because corn silage is usually harvested wetter than recommended or harvested at an immature stage after a killing frost.  Kernels that have greater moisture content usually are more easily fractured and digested.  The slump is more common in years when the corn silage is harvested at the recommended dry matter content.

Why don’t we change our recommendations for harvesting corn silage?  Harvesting corn silage wetter than recommended results in excessive seepage, higher fiber and lower energy content, and can result in an undesirable fermentation and dry matter intake.

What can be done to eliminate the slump?  One way to avoid or reduce the new corn silage slump is to wait several months to open the silo after filling.  Although this would require additional storage capacity and a one time cost of increasing forage inventory, the benefits might easily outweigh the costs.  The most obvious benefit is prevention of lost milk revenue.  Lost production could easily amount to 3 to 4 lb per cow per day over several months if corn silage is 50% of the forage in the diet.  A savings of several thousand dollars per 100 milking cows per year is realistic.

There are additional benefits of carrying the extra forage inventory.  Dramatic shifts in diets commonly occur when corn silage inventories run out before the new corn silage is harvested.  Often diets are switched to all alfalfa silage or green-chopped corn is substituted for corn silage.  These abrupt shifts are undesirable and are often the cause of acidosis and laminitis.  Alternatively, corn silage might be purchased to fill the gap.  However, in years when there has been a forage shortage, this might be a costly alternative because of elevated corn silage prices.  Excess corn silage inventory nearly eliminates risk of corn silage shortages allowing more consistent diets to be fed.

Increasing inventory might be done in a year with a bumper crop of corn or in a cool year in which corn planted for grain will not reach physiological maturity.  The cost of storing the excess corn silage might be low if packing density can be increased.  Studies have shown that packing density and therefore silo capacity can be increased dramatically by increasing the time of packing during filling or increasing the weight of the tractor used to pack.  Last year’s corn would have to be accessible while the new corn silage is “stewing”, requiring more than one silo or the ability to remove silage from both ends of a bunker silo.

Processing corn silage with a roller to crush the kernels might also eliminate the slump.  Rolling can be done at harvest with several different commercially available self-propelled or pull-behind choppers or upon removal from the silo with roller mills developed for rolling corn silage.  There is some evidence that rolling at harvest might be more advantageous than rolling right before feeding.

Some corn hybrids might be less prone to cause the slump.  Hybrids vary in the ratio of kernel dry matter to stover dry matter.  Hybrids planted for silage production should have kernels that stay moist and soft while the stover dries down.  However, most commercial hybrids have been developed for grain production for which the reverse is desirable: kernels should dry down quickly while the stover retains its moisture.  These grain hybrids are most likely to show the new corn silage slump.  There is some evidence that other traits of corn silage hybrids affect kernel hardness, and this research will be available in the next few years.

In summary, the new corn silage slump can cause a substantial loss in milk production, but it can be beaten.  It is worth investigating the use of one or more of the methods described to increase profitability in your farm. 

                                                                                        The Michigan Dairy Review

What are Futures and Options?

Dianne Shoemaker
Extension Agent

Futures and options are tools for managing the risk that prices will go higher or lower when buying or selling a commodity.  If you are selling, you want to minimize the risk that the price you receive will drop below your cost of production.  If you are buying a commodity, you want to minimize the risk that the price will go higher than the level at which you can economically purchase that item (i.e., blow the budget).  Milk futures contracts and options are a new tool for dairymen.  In the past, the two most extensively used tools were hoping and praying.

What is a futures contract?

A futures contract is a standardized agreement to make or take delivery of a commodity.  These contracts are traded by brokers on an exchange which provides the rules and means for these transactions to take place in an orderly fashion.  The Coffee, Sugar and Cocoa Exchange (CSCE) and the Chicago Mercantile Exchange (CME) are the two exchanges that handle BFP milk contracts.  The difference between the two exchanges is the size of contracts that they trade. Contracts trade on the CSCE for 100,000 lbs. of milk.  Contracts on the CME trade for 200,000 lbs. of milk.

The BFP or Basic Formula Price contacts are for that portion of your milk check.  You may receive over order premiums, quality bonuses and so forth which are unaffected by a BFP contract.  A milk contract is bought or sold for a particular month.  Usually contracts are available for each month for the next 13 months.  However, the CSCE won't offer contracts past March 1999 until the federal order/BFP pricing formula issues are resolved later this year.  A producer can contract part of their milk production or all of it for one month or many months.  If you do not produce 100,000 pounds of milk in a month or do not want to contract all of a month's production, talk with your field man.  Some cooperatives and independent plants are offering opportunities to pool smaller amounts into contract-size groups.

Where do I show up with the milk?

A few years ago, some folks dabbled in milk futures and got a rude surprise when they had to deliver milk to fulfill the contract.  This is not something that you want to have to do!  To make milk contracts more practical, they are now "cash settled."  In other words, your milk will continue to go wherever it is going now.  You continue to receive your milk check as you do now.  However, if you lock in a price and the announced BFP for that month is lower, the extra dollars you realize because of your hedge will come through your brokerage account.  If you are hedging and the BFP settles higher than your hedge, then you will pay the difference between those two figures into your brokerage account (this is a margin call).

Locking in a price.

To lock in a specific price, a producer can initiate a hedge.  Through a broker, a co-op, or a processor who offers this service, you sell a BFP futures contract for a specific price.  If you are contracting milk that you are actually producing, you are guaranteeing yourself a profit if the contract you buy is based on your costs of production.  If you are contracting milk that you are not actually producing then you have moved from price protection into speculation - also known as gambling!   The cost of a hedge is the broker's fee.
Locking in a minimum price.

Purchasing a "put" option gives the dairyman the option to sell at a specific price.  Again, you must know your costs of production to be able to lock in the minimum BFP where you can be profitable.  If the BFP goes higher than your option, then you will receive the higher price.  This is essentially an insurance policy.  In addition to brokers' fees, there is a premium to pay for each contract.  Therefore, purchase a contract so that the contract BFP less the premium and brokers' fee equals your needed price.

Not a get rich quick scheme.

These are tools for managing price risk.  A futures hedge will lock in a price.  An option will lock in a minimum price.  Each has costs and benefits.  They will not be attractive to everyone and should not be viewed as ways to get rich quick.  It won't happen!  Contracts are available for different prices that hover around average costs of production.  It is unlikely that there are contracts trading for $14 or $15 BFPs.  For you to sell a contract, someone else has to want to buy the contract at a realistic price.

Study the opportunities.  Check out the information available in Bruce Brockett's article.  Talk to your fieldman and explore what you can do through your cooperative or processor.  Look at your cash flow.  Can you handle margin calls?  Then make the decision that is best for your farm.
 
Milk Price Outlook
Cameron Thraen, Dairy Economist
thraen.1@osu.edu

The announced Basic Formula Price (BFP) for the month is $16.04 per cwt. for milk testing 3.5 percent butterfat. This price is up $0.94 over the last month price and $3.21 higher than a year earlier. The current butterfat differential for is 27.3 cents. A year earlier the butterfat differential was 15.3 cents. Keep in mind that the BFP is equal to the base month M-W price of $15.18 plus a butter/powder/cheese price adjustment from August to September of $0.86. This adjustment is primarily a result of a strong cheese price increase from August to September.

The important news from the latest numbers is that milk production, milkfat and protein levels are up in most areas of the nation. Milk cow numbers continue strong. In the 20 reporting states there are only 3,000 fewer cows than one year earlier. Back in January there where 57,000 less milk cows than one year earlier. Record milk prices over the coming months, low feed costs and low cull cow prices will continue to contribute to seasonal increases in milk production.

The November 17th BFP contract on the CME closed at $16.73 and the December BFP contract closed at $16.55.  In the product markets, block cheese prices were steady at $1.8625 and the AA butter price was down at $1.75. Grade A nonfat dry milk was unchanged at $116.50. The good news is that strong cheese prices for November provide an indication that the November BFP to be announced December 4th will be another record milk price.

Who’s Who

Dianne Shoemaker
(330) 424-7291

Dianne is currently working 50% as Agriculture Extension Agent for Columbiana and Mahoning Counties and 50% as the leader of Dairy Excel?s Profitability and Expansion Initiative (P&EI) in northeast Ohio.  The P&EI began nearly two years ago.  Phase I helps farm businesses identify and prioritize the issues that need to be addressed as they look at how to improve the profitability of their business.  Phase 2, currently being developed by members of the Dairy Excel team, involves developing the dairy farm business plan.  Dianne welcomes the opportunity to talk to folks interested in learning more about the Profitability and Expansion Initiative.

In spite of being born in Columbus, Dianne has a strong interest in the dairy industry which began before attending the Ohio State University in 1978.  She worked at the OSU dairy barns which is where she met her husband Steve.  They moved to northeast Ohio in 1986 where Dianne began her Extension career and Steve began (what else?) dairy farming.  Before joining Extension, Dianne managed a dairy farm in Hillsboro, Ohio and worked as a testing supervisor for DHIA.

Sources of Information About BFP Futures and Options

Bruce Brockett, District Dairy Specialist

For those seeking more information about BFP Futures, there is good news.  In this "information age" information abounds! Each of the two exchanges has a Web site with loads of info. The addresses are www.cme.com and www.csce.com for the Chicago Mercantile Exchange (CME) and the Coffee, Sugar & Cocoa Exchange (CSCE).

If you have a FAX machine, call 1-800-HEDGE-IT (1-800-433-4348) and ask to receive the CSCE Daily Market Report. Each morning you will receive a FAX of the preceding day's transactions. While you have them on the telephone, ask them for free copies of the hedging BFP video and printed material that will help you understand BFP Futures or Options.  Then call 312-930-4597(CME) and ask them for printed material.

You can even take a class on Futures trading from the CME over the Internet (at a cost of $99) by calling 312-930-6937.  For those who decide to use a broker, there is an additional source of information. Most brokers have newsletters and/or will talk with you about questions you may have.