August 2000
Volume 3, Issue 5

INSIDE THIS ISSUE
A Prescription for Volatile Dairy Markets: Be a Price-Maker, Not a Price Taker! - C.S. Thraen
Agricultural Reflections - B. Schmidt
Planning an Expansion - T.E. Noyes
 

Remember the good old days?  That time when the price you received for your milk did not vary much over the year?  The only real change in the milk price was due to seasonal weather, feed quality and demand factors.  I am thinking back to the 1970s and the early 1980’s as I write this column.  I recently had the opportunity to review some of this pricing history as I participated in the USDA’s Dairy Options Pilot Program held in Ashtabula, Wayne and Mercer counties, Ohio in mid July.

What struck me as I revisited those days of yesteryear is how quickly and dramatically the market for milk has changed for today’s dairy manager, and what a challenge this has brought to management.  Dairy managers of the 1970’s and early 1980’s did not experience anything by way of milk price variability like what we experience today.  Sure, they had other challenges to deal with but milk price volatility was not one of those factors!  Federal price support kept both a floor and ceiling on the farm milk price.

In today’s market environment we have substantial downside price risk to manage.  Unlike the past, today’s downside price risk also provides substantial upside price potential.  Today we have milk prices that can decline to the mid nine dollar range and soar to the seventeen dollar range as we experienced over the last two years.  In today’s market environment the dairy manager must be pro-active in marketing milk.  The dairy manager must be prepared to limit cash-flow exposure to low milk prices whenever possible and to take advantage of milk pricing opportunities when they develop.  Pro-active marketing turns the price-taker of yesteryear into a price-maker of tomorrow!

What is required to become a price-maker and not a price-taker?  What additional tools do you need in your management toolkit to become an effective pro-active marketer?  Like they say in real estate, the three most important elements of price are location, location, and location.  For the pro-active dairy marketer the three most important factors are attitude, attitude and attitude!  To quote a famous early twentieth century economist John Maynard Keynes “the hardest thing is not to get people to accept new ideas, it is to get them to forget old ones.”  If you cling to the old idea that your milk price just should not be this variable and someone ought to do something about it you will be at the mercy of the market and a price-taker.

So the first new tool in the toolkit is an attitude that accepts the new market environment and resolves to make it work as a benefit and not a detriment.  So what is next?  A pro-active marketing program cannot succeed without information.  You must know your cost of production for delivering a hundredweight of milk to the market.  The more detail you have on this the better you will be at taking advantage of market pricing opportunities.  You should know both your long-term total economic cost of production, which includes depreciation and interest on your equity, and your short-term “cash-flow” cost of production, which excludes these items.

In addition to your production cost information you or someone in your management team must begin to invest time each day and follow the cash and futures dairy markets and their prices.  These cash prices for cheese, butter, nonfat dry milk, and whey protein directly determine you milk price.  Futures prices tell you what is the consensus about where prices are going in the future.  To pro-actively market your milk you must have a good grasp on where these markets are likely to head in the coming weeks and months.  Do you have to invest so much time as to become a “predictor” of market trends and prices?  Absolutely NOT!  In fact, these markets are very difficulty to predict.  So what level of information do you need?  You must become familiar enough to know a good market price from an average price and be ready to act to lock in that price.

What other tools are necessary?  The pro-active dairy manager is constantly looking to get future milk production priced whenever possible.  Leaving planned milk production un-priced is speculation in the volatile cash market and makes you a price-taker not a price-maker.  To effectively price your milk ahead you must become knowledgeable about alternative types of marketing contracts available to you.  These include cash forward contracts, short futures hedges, and options on futures contracts.  Today you can receive cash forward contracts from you cooperative and proprietary milk buyer.  You can secure short hedge futures contracts and options on futures contracts on the Chicago Mercantile Exchange.  Not all contract arrangements will work for all dairy managers and not all will work at all times.  The pro-active marketing manager knows when to use one or more of these marketing tools.

This brings me to my last point.  Are these price-making tools for everyone?  They are available to everyone, but should everyone use them?  Each dairy manager must decide this based on his or her own business and family goals.  And while this is an individual management decision, there are a couple of guidelines that can be followed.  You must evaluate your capacity, both personally and from a business point, to accept financial risk.  You need to evaluate your own personal “risk vs. reward” tradeoff.  If you are a well established dairy producer with equally well established production and marketing plans, have little debt, retirement saving in place, and do not have all of your cash money tied up in the farming operation, your best plan may be to sell on the cash market.  You will always get the highest price and you are in a position not to be hurt much from a sustained period of low prices.

If you do not fit this profile, but instead are a manager with little tolerance for risk, are adopting new technology, have taken on substantial amounts of debt that requires servicing, and have most of your cash resources tied up in the farming operation, you better plan to be a pro-active price-maker.  For you, one or two years of bad returns may well create a financially insolvent operation.  Your pro-active marketing plan will be to accept small positive returns over time so as to avoid large negative returns.

If you would like to learn more about becoming a pro-active price-maker contact your local Ohio State University Extension Service or me at Thraen.1@osu.edu.  The National Program for Integrated Dairy Risk Management Education and Research has produced a complete up-to-date set of materials designed to assist you in adding pro-active marketing to your management toolkit.

Agricultural Reflections
Ben Schmidt
OSU Extension Agent, Paulding Co.

Every once in a while we should stop and reflect on life and the world around us.  It is really important to have time to reflect so that one can put things in perspective.  It just so happens that I have been doing a lot of reflection on agriculture lately.

The reason that I have been spending some time thinking about agriculture should come as no surprise to most people.  Agriculture is changing.  You know what, it has been changing for the past 50 years or even longer.  Parts of agriculture are undertaking changes that any rational business would do in a capitalistic system; they are becoming more efficient in order to maintain profitability while producing a commodity product.
Large farms (or “factory” farms as some like to call them) have been forming as early as the 1950’s, 60’s, and 70’s.  Actually, farms have been consolidating.  Do you know who created some of the first large farms? Grain producers.  Think about vegetable producers; they have some rather large farms!  But, do we consider grain and vegetable farms “factory” farms?  We should if we are to label medium-large sized livestock farms as “factory farms”.  Grain producers are efficient and, after all, that is what a factory is all about.

Ohio livestock farms began to consolidate in the 1980’s because consumers demanded low-cost, high-quality products.  First to consolidate in the livestock sector were the chicken farms, followed by turkey farms, then beef and pork.  Currently, dairy farms are catching up with the rest of the agricultural community.  Why are dairy farms consolidating?  For the same reasons that grain and other livestock farms consolidated:  efficiency.  Do you know who is contributing to farm consolidation?  Take a look in the mirror and you’ll  find the answer.

Consumers are one of the most powerful forces in our economy.  Consumers can make or break a business by choosing to buy or not to buy a product.  From choices that they make, consumers are casting a vote for or against a certain business.  Consumers are, in effect, creating large farms from the choices that they make and the products they demand.  That’s a huge responsibility that was given to every consumer by the founders of this country we call the United States of America.  Do YOU know where the milk that you buy comes from?  The grocery store is not a valid answer!  Do you know where the chicken that you buy comes from?  Do you know the origin of the cotton that was used to make your shirts?  Do you get the idea?  When you buy a product, you support how it was produced.

Lately, it seems that consumers are refusing to take responsibility for their actions.  Consumers are increasingly relying on their governments to protect them.  On the other hand, consumers are also saying “we don’t want government involvement in our lives.”  But we can’t have it both ways.  In this country, we have freedoms that most of the people in this world do not have.  What do we do with them? We take them for granted.  Shame on us!

Like consumers, producers need to take on more responsibility or else there will be massive government intervention.  Producers need to step up to the plate and take control of their nutrient management and other potential environmental issues.  It makes sound economic and environmental sense to deal with these responsibilities.  There is some concern by some, however, that producers are not being responsible managers, especially those managing medium-large sized livestock farms.  Some claim that additional regulation is needed.  If that’s the case then we would have to regulate all segments, including grain producers, vegetable producers, all livestock producers regardless of size or species, and all home septic and waste systems.  Why?  Because they all produce waste and nutrients that can be contributors to environmental and health problems. Are we willing to accept and pay for that much regulation?  Many people are not even willing to pay for a properly functioning septic system although human manure is far more dangerous to us than cow, pig or turkey  manure.

Anyway, large farms and small farms can co-exist and even benefit from each other.  In fact, the total number of farms in Ohio is on the increase because of all the new small farms that are coming into operation.  Small farms have a distinct competitive advantage in niche markets, resulting in higher value products.  Large farms, on the other hand, have an economic advantage when it comes to producing low value-added products (commodities), but they need to handle a larger volume to achieve the economies of scale and be profitable. Remember, “It’s not the strongest that survive; It’s not the smartest that survive; It is those that are able (or willing) to change that will survive.”

As we end our reflecting session, I would like to reflect on one more historical occurrence.  Let’s go back 3-5 generations.  Were your ancestors farmers?  What country did they come from?  Why did your ancestors move to this country?  Think long and hard before you answer these questions.  Need I say more?

Planning an Expansion
Thomas E. Noyes
OSU Extension Agent, Dairy
Wayne County

Planning a major expansion is a huge undertaking.  Doing so to bring additional family members into the business provides some additional challenges.  The Jim and Anne Saal family of Sterling, Ohio did just that last year as they expanded their family dairy farm from 80 cows to the present 300 with all new milking and housing facilities for the herd.  Their sons, Matt and Mark, have joined the family business forming an L.L.C. in 1998.

The Dairy Excel Team hosted over 120 attendees at a field day  held at the Saal Farm on July 25th.  The Saal’s explained how they planned the expansion.  Dianne Shoemaker, District Dairy Specialist, discussed financial benchmarks for expansion; Jim Polson, District Farm Management Specialist took a look at bringing  the family into the operation; and Dr. Richard Stowell talked about laying out a major expansion.  The day did include a famous “John Steiner” barbecue and tours of the new facilities.

Jim and Anne Saal purchased the home farm from Jim’s dad in 1984.  Jim’s parents were dairying on a farm south of Rittman and purchased the home farm of 80 acres in 1957.  Later a 100 acre farm was added and then 40 acres in 1971.  When Jim took over the business they were milking 56 cows and expanded over time to 86 cows just before the major expansion.

The Saal’s built one of the first milking parlors in the county when, in 1967 a double-4 herringbone was installed.  Stanchions were removed from the barn and further renovations made to include free stalls as the herd grew to 80+ cows.  The old facilities are used today for heifer housing.

When sons Matt and Mark graduated from Norwayne High School, Matt had plans of coming home to the farm with Mark heading off to  Ohio State University in Columbus.  Both graduated from OSU-ATI in Wooster.  It was during Mark’s senior year at OSU, majoring in Animal Science and Ag Business, that he decided to come home and join the business.

Ground was broken for the new facilities in September of 1998 and cows were moved into the new barn and milked for the first time in the new parlor in February, 1999.  The new facilities include a 4 row drive through free stall barn with 248 stalls, a transition barn with 36 dry cow stalls, 12 ICU stalls, a bedded pack for pre-fresh cows and calving area and 4 box stalls.  The transition unit is attached to the double- 12, Boumatic Expressway parallel milking parlor.  Presently there are 290 cows being milked with a RHA of 23,500 pounds of milk.

The management and labor is a real team effort.  When it comes to cropping and milking, everyone helps.  However, the crop management is Jim’s responsibility.  Matt and Jim breed the cows and Matt handles the herd health and nutrition.  Mark handles all the calves and heifers.  Daughter Jennifer is also involved with the milking and various other chores.  She is a former Wayne County Dairy Princess and is currently attending ATI.

This was an exciting family to visit with. They have a very bright look for the future in the dairy business.

Those attending enjoyed the field day and the opportunity to tour the new facilities.  Everyone agreed that the event was a resounding success!

Stay tuned for future
Dairy Excel activities!