The New World of Lending to the Livestock Industry

The New World of Lending to the Livestock Industry

Agenda A couple of thoughts on the dairy industry and how they compare to some other industry segments Benchmarking the industry Suggestions to help improve access to capital Q&A

Lenders View of the Dairy Industry Ø Dairy people have a great passion for the industry. Ø A lot of fragmentation yet small, large no real integration Ø High amount of capital to invest in dairy Ø Labor is an issue but it is an issue in all of Ag Ø Higher feed costs crippled the west coast dairies lower feed costs coming - will there be a bounce back? Ø Midwest dairies that raised their own feed the last couple of years have had the advantage this might change. Ø No real risk management has been used and this will need to change going forward. Ø Basis comparison is crazy and will this continue to stay? Ø Real estate values have been hit hard RE sales have not been good. This hurts existing facilities and it will take a lot of capital to build new.

What Lenders Need to Do Ø We need to understand your current business model Ø Understand what your financial needs are. Ø Don t assume but ask questions that give you a better understanding of the business. Ø Our job is to make our clients the best at what they do and provide guidance to make them better. (Saying yes might not always be the right answer J!) Ø As deals get bigger it is better to have bank partners that you can trust.

What Clients Need to Do Ø Explain your business model and have a plan detailed if you want to grow Ø Show me the numbers accurate financials are essential. GAAP is preferred over market and accrual is the preferred method over cash. Ø What is your projection (Capex, P/L, Risk Mg t) Ø If you are planning an expansion a detailed description with time and cost parameters Ø Communication is critical with your lender more than just borrowing money

Dairy Comparison to Broilers Broilers are almost all vertically integrated profit/loss can be predicted out for close to 90 days. Broilers all have very good financials GAAP numbers. Every month we get financials within 30 days of month end. They own plants and birds not barns. Branded is better than not branded. Cut throat business only the strong survive

Dairy Compared to Swine Ø Top 25 production systems have over 60% of the production. Ø Very good financials monthly financial reporting Ø 35% integrated 80-90% aligned through agreements Ø Very strong risk management by the producers that are left Ø 2009 they found religion

Swine PD Gross Volume 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 9.33 9.32 9.47 8.99 9.07 8.57 8.21 8.25 7.69 7.84 8.01 7.98 7.62 7.50 6.50 6.00 5.50 5.00 5.90 5.69 5.87 6.59 6.67 6.79 6.66 6.63 6.26 6.25

Benchmarking Ø We like benchmarking our clients. Ø We show how they stack up to their peers Ø This also shows us who might be a survivor and who we have to watch. Ø We are now benchmarking large swine, dairy and working on crops. Ø It helps set the stage for talking points on how you stack up and what you need to work on. Ø We are in a last people standing business and only the strong survive.

WI/MN Dairy Clients Cows/Springers 2010 2011 2012 Average # Lactating Cows 1,033 1,093 1,092 Average # Dry Cows 124 129 130 Average # Total Cows 1157 1222 1221 % Cows Lactating 89.3% 89.4% 89.3% # Culls - Cow 347 388 406 % Culls 30.5% 31.1% 32.3% # Deads - Cow 80 79 83 % Deads 7.6% 7.0% 7.0% Replacement Rate % 38.1% 38.1% 39.3% Cull Cow Income - $ /hd. $661 $831 $952

WI/MN Dairy Consulting Clients Milk 2010 2011 2012 Milk Shipped /Lact. Cow/Day - Lbs. 82.2 82.0 84.3 Milk Shipped /Lact. Cow/Day - Lbs. *(Energy corrected) 82.5 83.4 86.5 Milk Shipped /Cow (All) / Year 26,765 26,739 27,480 Milk Shipped /Cow (All) / Year *(Energy corrected) 26,872 27,220 28,198 Class III Price $14.39 $18.36 $17.44 Milk Marketing /cwt. $0.13 -$0.92 -$0.35 MILC Payments /cwt. $0.01 $0.00 $0.09 Basis (Before Trucking) $1.96 $2.48 $2.39 Total Milk Price /cwt. $16.49 $19.91 $19.57

WI/MN Dairy Consulting Clients Liquidity & Solvency 2010 2011 2012 Working Capital /Cow $441 $734 $851 Profitability Return On Equity (ROE) 8.2% 21.6% 10.4% Return On Assets (ROA) 6.5% 12.2% 7.4% Operating Profit Margin Ratio 8.8% 15.0% 9.4% Asset Turnover Ratio 0.72 0.80 0.78 Net Profit / Cwt. $1.33 $3.62 $2.05 Net Profit / Cow $363.72 $973.28 $577.46 Top 25% AgStar Consulting Clients Net Profit / Cwt. $3.52 $6.29 $3.93 Net Profit / Cow $963.06 $1,708.84 $1,120.12

WI/MN Dairy Consulting Clients Cost of Production 2010 2011 2012 Feed Cost /cwt. $7.87 $9.24 $10.82 Labor Cost /cwt. $3.05 $3.06 $3.07 Net Herd Replacement Cost /cwt. $1.65 $1.42 $1.25 Capital Cost /cwt. (Depr.,interest, leases) $2.24 $2.22 $2.18 Other Production Cost /cwt. $2.27 $2.26 $2.26 Overhead Cost /cwt. $5.99 $6.42 $6.34 Less Other Income /cwt. $7.94 $8.60 $8.82 Whole business /cwt. $15.12 $16.02 $17.08 Top 25% AgStar Consulting Clients Whole business /cwt. $13.05 $13.76 $15.25

WI/MN Dairy Consulting Clients Basis / cwt. 2010 2011 2012 Gross Revenue $/cwt. $ 16.55 $ 19.92 $ 19.57 Gains/losses- Milk Marketing $ 0.13 $ (0.92) $ (0.35) Government Pymts /cwt. $ 0.01 $ - $ 0.09 AgStar $ 0.00 $ 0.01 $ 0.01 Gross Milk Check/ cwt. $ 16.40 $ 20.83 $ 19.83 Class III Price $ 14.39 $ 18.36 $ 17.44 Basis before Trucking $ 2.00 $ 2.48 $ 2.39 Trucking /cwt. $ 0.16 $ 0.19 $ 0.19 Basis after Trucking $ 1.84 $ 2.29 $ 2.20 Basis Adj. to 3.5% BF & 3.0% Protein/cwt. $ 1.52 $ 1.65 $ 1.39 Basis Influences PPD $ 0.43 $ 0.34 $ 0.08 SCC ( x 1000) 237 213 199 Butterfat % 3.62% 3.70% 3.75% Protein % 3.04% 3.09% 3.12% Other Solids % 5.81% 5.78% 5.78%

Dairy Consulting Clients 2013 6 Months 2012 2013 6 months Average # Lactating Cows 1090 1147 Average # Dry Cows 130 135 Average # Total Cows 1221 1282 % Culls 32.3% 31.5% % Deads 7.0% 6.1% Replacement Rate % 39.3% 37.6% Milk Shipped/Lactating Cow/Day (lbs) *(Energy corrected) 86.5 85.2

Dairy Consulting Clients 2013 6 months Cost of Production 2012 2013 6 months Feed Cost /cwt. $10.82 $11.73 Labor Cost /cwt. $3.07 $3.02 Net Herd Replacement Cost /cwt. $1.25 $1.19 Capital Cost /cwt. (Depr.,interest, leases) $2.18 $2.10 Other Production Cost /cwt. $2.26 $2.12 Overhead Cost /cwt. $6.34 $3.82 Less Other Income /cwt. $8.82 $4.69 Whole business /cwt. $17.08 $19.27 Average Bottom 25% Top 25% Net Income (pretax) - $ / cow 2013 6 months $65.21 $(219.82) $334.90

Swine Database 2013* 2012 2011 Owner Equity 55% 53% 53% WC/Sow* $928 $983 $869 Fixed Debt/Sow $555 $620 $640 Op. Debt/Pig $54 $65 $52 P/L Per Hd ($5.69) $8.84 $22.95 Cost Per Hd $181 $167 $154 *2013 # s are through June 30, 2013 * Working capital excludes sows in working capital #

Database Compared to ISU 2011-2010 2011 ISU Database Difference Breakeven $65.02 $57.20 $7.82 P/L per hd $4.92 $22.95 $18.03 2010 ISU Database Difference Breakeven $52.07 $50.85 $1.22 P/L per hd $12.94 $16.30 $3.36

Database Compared to ISU 2013-2012 2013 ISU Database Difference Breakeven $73.06 $67.07 $5.99 P/L per hd ($21.66) ($5.69) $15.97 2012 ISU Database Difference Breakeven $68.12 $62.02 $6.08 P/L per hd ($12.47) $8.84 $21.31

Portfolio Management You need to understand the model Underwrite differences, depending on the location Experience helps with managing through adversity Managing risk and predicting when there could be adversity helps mitigate portfolio risk We track operating line balances monthly on the following, dairy, swine, renewables and grain

Dairy Revolving Principal as % of Peak 78% 76% 74% 72% 70% 68% 75.5% 71.6% 73.6% 72.8% 69.9% 68.1% 68.3% 67.9% 67.1% 67.2% 67.2% 66% 64% 63.5% 62% 60% 58% 56%

Swine Revolving Principal as % of Peak 70% 60% 50% 40% 36.4% 43.0% 59.8% 41.7% 37.9% 36.0% 42.5% 43.4% 48.7% 48.6% 48.5% 52.4% 30% 20% 10% 0%

Loan Structure Ø Simple is better. Ø Real estate term and term revolver Ø Operating borrowing base Ø Machinery and equipment line. Ø I want the ability for the client to manage their business and allow them to live within the parameters of the credit facility Ø I would prefer to have RE and chattel all as one with all the lenders on the same page. Ø We do some that just want real estate and others chattel.

Take Action Items Ø What information do you look at to make decisions? Ø Who do you have that are trusted advisors? Ø Do you make decisions as a group or alone? Ø Is their a governance in your family business?

2014 Dairy Outlook Ø Overall the US is looking at a much better corn crop which is leading to lower feed costs and in turn a potentially larger dairy herd, greater production and falling milk prices Ø Milk production projected to be 1.5-2.5% higher in 2014 Ø World production is increasing Ø New Zealand has recovered from drought and production could be up several percent in the new season Ø Demand remains strong for dairy in all import markets supporting continued strong exports

Margin Management Ø This is the biggest weakness in the industry Ø Very little being done Ø If the margin is there why not take some profits Ø If you are optimistic you can use options Ø Risk management on all commodities will be essential. Ø There is too much volatility to not use risk management tools Ø Only the strong survive

One Last Thing The importance of advocacy in our industry 11/18/13 NPIC Presentation 29

Thank You Questions?