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August 6, 2013 <br /> Page 3 of 7 <br /> 2) Revenue <br /> Dairy operations' revenues come from the milk check they receive each month. In California,there is a <br /> milk pricing system that guarantees a minimum price processors are required to pay. However, each <br /> dairy ends up getting a different price due to different milk components, premiums, marketing costs, <br /> etc.Therefore, the mailbox price, which represents the net price received by a dairy, was used to <br /> determine the dairy revenue for each farm in the sample. <br /> 3) Financing <br /> Because the cost of retrofitting dairy lagoons is significant, dairies would have to secure financing to pay <br /> for the project.The lack of available credit for dairy operations has been a popular topic in recent years <br /> and will be discussed in the Impact section further. For the sake of this study, it was assumed the dairy <br /> operation was able to secure a loan. But it is debatable whether a dairy would be able to secure a loan <br /> to proceed with the project because retrofitting a dairy lagoon does not create new value on the farm. <br /> Therefore, collateral,free of liens, would need to be available. Although some banks would rather lend <br /> on a shorter time frame, a twenty year loan seems to be a conservative option, lower yearly cost option <br /> and was used as an assumption. The current going interest rate for those terms is 6%. <br /> Impact to dairies <br /> 1) Financial impact <br /> Over the last decade, dairies have had to weather various pricing conditions,with some positive and some <br /> negative margin years. However,the overall trend is one of declining margins. A quick glance at the overbase <br /> price (minimum milk price paid producers) minus the cost of production (including allowances) illustrates that <br /> point (see Figure 1). <br /> Figure 1: California margin <br /> California margin (Overbase-Cost of <br /> Production) <br /> 2.00 <br /> 1.00 <br /> 0.00 <br /> -i.0o <br /> -2.00 <br /> -3.00 <br /> -4.00 <br /> -5.00 <br /> -6.00 - <br /> -7.00 - <br /> The bottom line experienced by dairies of the sizes outlined in the P&P memorandum did not exhibit a different <br /> trend during the past five years. 2008 and 2009 were not profitable years and forced dairies to dig into their <br /> equity to stay afloat (2008 for the 1,500 cow herd sample was an exception). 2010 and 2011 were profitable <br /> years while 2012 was not. Table 1 illustrates the net revenue per cow for each herd size. <br />