WHAT DRIVES FINANCIAL SUCCESS ON A DAIRY? financial drivers...SCCs are highly correlated to all...

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WHAT DRIVES FINANCIAL SUCCESSON A DAIRY?

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MONEYBALL comes to the Dairy Industry

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DAIRY AT A GLANCE

45,344Commercial Producers

(Dec 2014)

9.315 MM

Cows(Jan 2016)

207.7 BPounds of milk in 2015

worth $35.6 billion-$12 billion YOY

$17.15/cwt

2015 all-milk price-$7.00 YOY

2016

Prices Look Decidedly Lower,

But Feed Costs, Energy Also

Dramatically Lower

MarginsLooking Like

“Back to Reality”

Building World Stocks and Lower Demand Could Drag Prices

Down FurtherThrough 2016

US Dairy Prices Chasing

World PricesDown to Convergence

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AGENDA

THE EVOLUTION OF THE DAIRY INDUSTRY

WHAT WE DID

KEY TAKEAWAYS

1

2

3

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SUMMARY

Herd demographics dominated by consolidation and expansion

Globalization of dairy markets dominates current and future growth opportunities

Recognition that domestic consumption needs protection:

Innovation required to meet needsof changing demographics andcompetition for position

Significant price volatility will remain; Focus on margin,not price

US DAIRY INDUSTRY HAS EVOLVED SIGNIFICANTLY OVER LAST DECADE

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Source: USDA Census of Agriculture, 2012

HERD DEMOGRAPHICS: CONSOLIDATION AND EXPANSION

0

5

10

15

20

25

30

35

1-29 30-49 50-99 100-199 200-499 500-999 1000-1999 2000+

Herds (*1K) % Cow Inventory % Milk

Herd Size Cohort

6.6%OF HERDS(N=~3400)

>50% SOLD IN TOP 2 COHORTS

IN 1999,

<2400 HERDS

PRODUCE

62.9%OF MILK

UP FROM

40%IN 2007

PRODUCED

24.4%OF MILK

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AGENDA


WHAT WE DID

KEY TAKEAWAYS

1

2

3

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STUDY GOAL

TO IDENTIFY SPECIFIC

DAIRY PRODUCTION MEASURESTHAT ARE CORRELATEDWITH THE

FINANCIAL HEALTHOF A DAIRY

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DATA SOURCE AND PROCESS

SOURCE

Data was provided by AgStar, a major provider of agricultural lending and financial consulting services in the upper Midwest.

– The majority of the herds are based in MN, WI, SD, MI & OH

– Data collection began in 2006

PROCESS

Once the source was identified, we then performed a regression analysis to determine which metrics have the highest correlation to profitability.

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WHAT IS A CORRELATION COEFFICIENT (R)?

A MEASURE OF THE RELATIONSHIP BETWEEN TWO VARIABLES;CAN RANGE FROM -1 TO 1.

CORRELATION DOES NOT NECESSARILY EQUATE TO CAUSATION

Can be positive:NFI (Y) increases as milk yield increases (X)

Can be negative:NFI (Y) decreases as SCC increases (X)

Can be at or near zero:Little relationship between X and Y

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THE DATA

367 clients from upper Midwest

90 total variables, 54 numeric

81 (not counting censored)

9 years

4.5 year-end records per farm (avg.)

1045 average lactating cows per farm (range from 95 to 4700 )

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STATISTICAL ANALYSIS

Net Farm Income was the profitability measure investigated

Can also be expressed on a herd or cow basis

NFI is computed as:

Farm and year accounted for 75% of variation in profit

SOME GOOD, SOME BAD YEARS; 2014 WAS OUTSTANDING!

-0.3

2.58

1.31

-1.4

1.31

3.54

1.68

1.25

3.66

NFI, $/cwt ECM(BY ACCOUNTING YEAR)

’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14

AVG: $1.80; RANGE: ($5.07) - $12.29

$ RECEIPTS - (EXPENSES + DEPRECIATION)

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*Labor cost, $/cwt ECM (includes wages, benefits, SS, owner draw)

**Net herd replacement cost, $/cwt ECM (difference between replacement cow value and book value of dead + sold cull cows [for dairy or beef])

RELATIONSHIP BETWEEN NFI AND KEY MEASURES

VARIABLECORRELATION

w/NFI KEY LEARNINGS

Herd size, lactating -0.02 Herd size not related to profit

Number heifers 0.03Heifer inventory not related to profitability –supports culling strategy

Milk shipped, herd total, cwt 0.00 Profitability not related to total lb shipped

ECM shipped, lb/cow/day 0.17More milk per cow is profitable – effect of marginal milk

Death loss (%) -0.13 Death losses negatively impact profitability

Heifer survival rate, % 0.18 Keeping calves healthy is beneficial

Somatic cell count -0.16 Investing to produce high quality milk is profitable

21 day pregnancy risk 0.29 Increased days open is expensive (small sample)

Labor cost* -0.04 Labor cost is unrelated to profitability

Net herd replacement cost** -0.33Lowering replacement costs helps profitability, value of cull cows

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* Small but growing sample size

RELATIONSHIPS BETWEENSCC AND OTHER MEASURES

VARIABLE CORRELATION w/SCC

Profitability (NFI, $/cwt ECM/day) -0.16

ECM/cow/day, lb/day -0.41

Death loss, % 0.44

21-day pregnancy risk* -0.20

Days open* 0.35

DIFFERENCE IN PROFIT BETWEENHIGHEST 1/3 AND LOWEST 1/3(BASED ON SCC, $/cwt ECM)

$1.14/cwt(~$115 K/year*)

* Top third produced 355,587 cwt/year (91#/c/d); bottom third 254,333 cwt/year (72#/c/d)

** Small but growing sample size

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TEASER: ARE SCCs MORE COSTLY NOW?

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RELATIONSHIPS BETWEENECM AND OTHER MEASURES

VARIABLE CORRELATION w/ECM

Profitability (NFI, $/cwt ECM/day) 0.18

SCC x 1000 -0.41

Death loss, % -0.37

Breeding costs, $/cow 0.37

Feed cost, $/cwt ECM -0.30

21-day pregnancy rate, % 0.13

Days open -0.29

DIFFERENCE IN PROFIT BETWEENHIGHEST 1/3 AND LOWEST 1/3(BASED ON ECM, $/cwt ECM)

$1.44/cwt(~$86 K/year*)

* Top third produced 316,418 cwt/year; bottom third produced 256,843 cwt/year

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RELATIONSHIPS BETWEEN21d PR* AND OTHER MEASURES

VARIABLE CORRELATION w/21-d PR

Profitability (NFI, $/cwt ECM/day) 0.29

SCC x 1000 -0.20

ECM, lb/cow/day 0.13

Days open -0.21

DIFFERENCE IN PROFIT BETWEENHIGHEST 1/3 AND LOWEST 1/3(BASED ON 21-d PR, $/cwt ECM)

$0.78/cwt(~$50 K/year**)

* Very small data set at this point

** Top third produced 388,246 cwt/year; bottom third produced 323,629 cwt/year

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RELATIONSHIPS BETWEENDEATH RATES AND OTHER MEASURES

VARIABLE CORRELATION w/Death Rate



SCC x 1000 0.44

Cost of production, $/cwt ECM 0.13

Net herd replacement cost, $ 0.29

Days open 0.19

DIFFERENCE IN PROFIT BETWEENHIGHEST 1/3 AND LOWEST 1/3(BASED ON DEATH RATE, $/cwt ECM)

$0.86/cwt(~$70 K/year*)


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* Small but growing sample size

RELATIONSHIPS BETWEEN NET HERD REPLACMENT COSTS AND OTHER MEASURES

VARIABLE CORRELATION w/ NHRC



Cull + death rate, % 0.42

SCC x 1000 0.35

DIFFERENCE IN PROFIT BETWEENHIGHEST 1/3 AND LOWEST 1/3(BASED ON NHRC, $/cwt ECM)

$2.04/cwt(~$61 K/year*)


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THE FOUR QUADRANTS OF HERD HEALTH

TENDENCIES BETWEEN NFI & HEALTHCARE EXPENSES

High Expenses & High NFI

STRATEGIC PREVENTION

High Expenses & Low NFI

FIRE ENGINE HEALTH CARE

Low Expenses & High NFI

GOOD FACILITIES, WELL-TRAINED

PEOPLE

Low Expenses & Low NFI

YOU GET OUT WHAT YOU PUT IN

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AGENDA


WHAT WE DID

KEY TAKEAWAYS

1

2

3

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MAJOR MESSAGES

Milk production per cow is the single most important variable in determining farm profitability

SCCs are highly correlated to all major profit drivers

Reproductive efficiency measured as 21-d pregnancy rates is highly correlated to farm profitability

Replacement costs have a significant correlation with farm profitability.

Heifer management and survival impacts profitability from many angles and successful heifer management substantially supports successful ongoing operations

Excellent animal husbandry skills, as assessed by herd health parameters and death rates, have tremendous impact on herd profitability: (a) animal replacement costs, (b) Mastitis

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QUESTIONS MOVING FORWARD…

Better characterization of reproductive performance, particularly around 21-day pregnancy rates and age at first calving (Data on 21 day pregnancy rates was limited; There was very limited variation in age at first calving among these herds)

Better characterization of the use of veterinarians and other external farm professionals

Improved understanding of labor metrics and their association with profitability. Labor is often the #2 or #3 expense on dairies behind feed (#1) and often replacements

Enhance understanding of technology application and its relation to profitability (monitoring devices, robotics, data management systems, genomics, other)

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Photo courtesy of Dairy Management, Inc

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WHAT DRIVES FINANCIAL SUCCESS ON A DAIRY? financial drivers...SCCs are highly correlated to all...

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