Bill Wavrin, DVM: Speaker Interview Series

On this special episode of Let’s Chat Dairy, Eric Meyer welcomes Bill Wavrin, DVM, of Sunny Dene Ranch, and featured speaker at HighGround Dairy’s third annual Global Dairy Outlook Conference this June. The podcast can be found here, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!

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Early Bird Registration is ENDING SOON and space is limited at the historic Union League Club so be sure to register promptly to secure your spot! ⁠⁠⁠⁠⁠⁠Find everything you need to know, including the official agenda, a list of our expert speakers, our Chicago Summer Guide and more by clicking the banner below:

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Transcript:

(0:14) Eric: Welcome back to Let’s Chat Dairy, HighGround Dairy’s informative podcast keeping the industry abreast of market-impacting news on a regular basis. I’m Eric Meyer, Founder and President of HighGround, and today we are bringing you a special podcast to introduce one of the dairy farmers that will be speaking at our upcoming third annual Global Dairy Outlook Conference, taking place from June 18th to the 20th at the historic Union League Club in downtown Chicago. The HighGround Conference has quickly become the must-attend show of the summer in the dairy industry, and like the past two years, the team has put together a fantastic session schedule that starts the morning of Wednesday, June 19th. Topics include a domestic and international dairy market outlook and price forecast by HighGround’s market intelligence team, a discussion and update from speakers in Europe and China, Federal Milk Marketing Order reform, a U.S. producer panel, global weather outlook, an agricultural lending panel, as well as a dairy protein demand trends panel. We look forward to seeing you there. And if you have not yet registered, our Early Bird rate will sunset on Friday, May 10th so be sure to visit highgrounddairy.com/conference to learn more about our speakers and discussion topics and get your spot locked in. Now, let’s get on with the interview.

(01:31) Back in July of 2001, I got my start in the dairy industry as I joined the Downes-O’Neill dairy team, one of the industry’s first dairy-specific brokerage companies that specialized in dairy in an office right above the Chicago Board of Trade. I knew very little about futures and options and truthfully, virtually nothing about the dairy industry back then. But my mentors in the business, Mike Downes and Joe O’Neill, were eager to spread the word of the benefits of using these tools for the hedging community. And I was a quick study. One of Mike and Joe’s first producer customers they signed back in the late 1990s was a dairyman out of the Pacific Northwest, Bill Wavrin. Bill and I have remained close throughout my dairy career journey over the past 22 years. Bill, why don’t you give us the nickel tour of your background, how you got started in the dairy industry, and how you landed in Washington over 30 years ago?

(2:25) Bill: Yeah, thanks, Eric. It’s been kind of a wild ride as agriculture tends to be. I grew up in hospitality, not agriculture. So like you, I didn’t know much about dairy derivatives or dairy farming early on—in the 90s especially. I was trained as a veterinarian and still am practicing to some degree, despite having a full-fledged day job in production. I had interned—or in vet school, they call it an externship—with several veterinarians and immediately was attracted to food production veterinary medicine rather than companion animals. I had a tour in the Pacific Northwest during that later part of my education and then was initially hired to a practice in Southern California that was very dairy-intense. When people ask where I was trained, I often say the University of Chino. That was really where dairy was happening in the late 80s, sort of the first versions of scaled dairy farming.

(3:33) But, you know, fell in love with the production side of the dairy industry as well. California had harder barriers to entry, which is one of agriculture’s issues. So, I made my way back to the Pacific Northwest, remained in practice, but in 1990, my wife and I moved to Eastern Washington, opened a new practice where I hung out my shingle in a pharmaceutical distribution business and the dairy. And things just took off from there. We had a lot to learn. So that’s how we got started in a little side hustle that turned into what I see out the window today. That was not the expected outcome, but here we are. We’re in production, pretty integrated in that side, all the way from, you know, repair and fabrication is a big part of our business, which is a big part of farming, raise our own replacements, grow our own feed (about 80%) and actually have a small processing business where we take our raw product and process it into a consumer packaged goods: cheese.

(4:40) Eric: That’s great.

And so now I know you’re an owner of more than one farm in Washington now, and they really aren’t all that close to one another, which for some would be a lot to handle as a day job. But you’ve continued to practice as a vet and a consultant in other areas of the country, is that right?

(4:57) Bill: That is right. And the only reason it’s other places in the country is they’re farms that originated and were part of my practice portfolio in Washington. A couple of limitations on growth in our region, or for some individuals at least, ended up in other prominent dairy states. So I just travel with them, but it’s the original small group that I established my practice with the, I think at the time we established the relationships, there might have been around 2,000 cows in that little group of friends. And now there’s about 40 or 50,000 cows in that group so I joined the right teams.

(5:36) Eric: The teams that grow, that’s right.

So, something timely that I think you may be able to relate to as it pertains to the most recent industry event, which is this Avian Influenza (HPAI) impacting dairy cattle, now in dairies in multiple states around the country. Even just this morning, the FDA update on the discussion of traces of that genetic material showing up in commercial fluid milk, it seems like it’s an event that may snowball here.

(6:14) And while that’s happening today, it was on your dairy from what I remember that phone call coming in to our office at Downs O’Neill, Christmas Eve of 2003, that the mad cow disease that they were talking about on the news was actually at your dairy in eastern Washington. And a real industry shocker at the time with some interesting knee-jerk reactions in dairy as well as in the cattle markets. What can you tell us about that experience? The emotional impact or the actual commercial impact of how that worked and how does it relate to what dairy producers are dealing with or may have to deal with in the coming weeks and months with this new avian virus strain and its impact on dairy?

(7:02) Bill: Yeah, that was exciting, of course. We didn’t know on the first day where that was headed. We probably were pretty sure that was the end of us, which it didn’t turn out to be and that’s a good lesson.

(7:13) The U.S. scientific community and the support system to agriculture and food production is remarkably capable. So while there are some similarities being new diseases, BSE in those days and avian influenza today, there are some pretty important differences. We weren’t the first to the party with BSE, so there was quite a bit known about it by the time it arrived in the US. Europe had had a fairly lengthy experience already, Canada was ahead of us and the scientific community was engaged there. We knew a lot about it and its transmission methods and how to intervene with BSE by the time it showed up on my farm. Avian influenza, again, is similar because it’s a new disease in livestock and in food production on the ruminant side. But we don’t know as much about this crossover to non-avian species so we’re still working out transmission methods and what this will mean in the long run for the industry and for public health.

(8:21) But I want to take a minute to address the recent popular media discussion about this and the detection of genetic material in finished product. Laboratory capabilities these days are amazing and PCR is a common laboratory method and it picks up genetic material. But there is a stark difference between the presence of genetic material and the presence of viable organisms. So while the business channels or the popular press is making something of that, that is a long way from viable virus in finished product and a long way from infectivity—the virus is not well adapted to humans and genetic material is not in and of itself infective or meaningful in any way. So, you know, we’re learning fast.

(09:10) Part of what makes dairy derivatives fun is the difference between short-term and long-term reactions or outcomes. It’s that business, that prices risk. So in the case where you have a new risk factor, you have to establish a risk premium. But I think on the demand side, the prevailing wisdom about finished product being entirely safe for human consumption will remain true. One of the similarities between BSE and avian influenza, which is not intuitive, is that the cattle markets in the case of BSE and I think in the case of avian influenza reacted more than the dairy markets.

(9:49) When consumers hear the word cattle, I think they think of beef more often than dairy, despite the fact that they both obviously originate from cattle. So I’ve been impressed that the market reaction was not that irrational. And I think pasteurization will prove the original premise that finished products are completely safe for human consumption and all of this will tone down. But admittedly, we have plenty to learn.

(10:14) I have herds in my ecosystem that have experienced it and it is not fun. I think my view from here with plenty still to learn is that the long-term outcome will not be remarkable, but it is pretty demanding for the humans and the cattle involved at the time of the outbreak. But a month on, six months on, two years on—as in our case with BSE, if we look back in the financial reporting and look for where was BSE, and I think this will remain similar in herds that experienced avian influenza outbreaks—is can you see an aberration in financial outcomes for dairy farms that have been exposed or involved with a BSE or avian influenza outbreak? You cannot find evidence of BSE in our financial history. And I think that will be, to a significant extent, the outcome for these dairy farms.

(11:09) Eric: Yeah, there’s still plenty more to learn and plenty more headlines to come. And that has the impact, as you mentioned, on the derivatives market in a knee-jerk reaction, which can sometimes present opportunities.

So keeping the topic of risk management, since you brought up the derivatives, you’ve been a long-time hedger, as I had mentioned early, and an early adopter of leveraging the tools available at the Chicago Mercantile Exchange. What’s one secret—or maybe I’m guessing this really isn’t a secret—to the success that you’ve had managing price risk for all those years, which is dated back to using a deliverable milk futures contract in the late 1990s before we had the cash-settled futures and options. So you’re truly a veteran at this, having dealt with everything that this market has had to offer for producers.

(12:04) Bill: Yeah, well, here’s the disclaimer: the fact that I was involved in a fluid delivery contract in the 90s probably tells you all you need to know about how not smart I am about this. That was the wild, wild west. Markets were extremely thin. That was a delivery contract on milk that was already contracted to my processor. So it relied on trading in and trading out and there were no traders, there were no market makers (or very little), the hedge fund and the speculator community was too small, producers weren’t very interested, buy-side hedgers weren’t very interested. And it takes all of that to make markets useful.

(12:50) But I admire Mike and Joe for pushing this issue and having not come from agriculture and seen the effects of volatility on profitability and not understanding why someone would be willing to work all year for less than nothing, which is common in agriculture. We have two or three good years out of ten, four or five so-so years out of ten and two or three very bad years. And it was not part of my experience or my nature to be willing to work all year for less than nothing.

(13:21) So how could we look forward? I probably had some small understanding that the tools available at the time were not very good, but I firmly believe that we needed tools to see the future. It’s common for the dairy industry to use leverage, sometimes a lot of it. And in effect, you are going to a bank with a pro forma asking for leverage capital when you had no idea of what the outcome is.

(13:49) You know, the variation in milk price on an annual basis has gotten worse than then. But even then, we were leaving the period where the federal government was using something close to cost of production against a support price. But in 1990, which happened to be the year we started, they were going away from safety nets based on cost of production, asking the private sector to take over managing that risk of keeping the food supply ample, which is really the reason for all of these programs to make sure that there is plentiful food, which means keep producers in business. But they were, you know, the public sector was losing their appetite for putting lots of powder and lots of cheese into caves. And so they were backing away from the safety net that could actually keep people in business. And we were looking for ways to replace that safety net and decrease the volatility and be able to go to the bank actually with some forward visibility into what the outcome would be during the early parts of the term of a lending agreement.

(14:58) We just had none. We would make a budget, but I mean, there was all kinds of evidence that it wasn’t worth the paper it was printed on. Who could tell you the price of milk one year from now, even on a five-year cow loan? So we needed a mechanism to manage that risk and Mike and Joe were just committed to bringing that idea to fruition, to birthing some way for private sector to manage the risk that the public sector had been managing for us. So it was new and it wasn’t very functional, but I believe the industry needed it and I needed it. I had other ways to earn a living. Really, being in business is about alternative investments. If you can’t figure out a way to plan solidly for a return on your capital in this business, why would you get in it? Maybe there’s another business that has less volatility, less risk and a stable return. So I love the dairy business, wanted to stay in it, but I needed a reason. And that was the reason I was looking for was some way to plan for profitability that justified the investment in agriculture.

(16:06) Eric: And continues to this day, it’s still quite a robust piece of what you do on a daily, weekly, monthly basis is to pay attention to these markets and manage that risk, right?

(16:17) Bill: Yeah. I mean, anytime you run a business, if it’s a useful business, it produces new capital and you have to decide what to do with that. You could buy another cow or you could buy a share of Pfizer. And it’s rational that you would need to compare the two alternatives unless you can produce a risk-adjusted rate of return in agriculture, then you probably ought to invest that dollar in something else.

(16:43) Now, farmers generally don’t do that, but I’m a pretty pure capitalist and there have been times where it didn’t make sense to invest in dairy. But if you watch these dairy contracts over the life of the contract—the reason I still pay attention—there are other parts of managing risk and return that are probably bigger, protecting your balance sheet, keeping that strong to be able to take some variability and to be able to take what is always the inevitable bumps in an expansion or a startup, a defensive cost of production. But even when you take care of those higher priorities, if you’re undergoing an initiative that will put a load on repayments or just the confidence to make business decisions, then forward pricing both cost and price. It’s common for me to say, if you hedge your milk, that’s half a hedge, right. So we are pretty adamant about hedging margin, which is the difference between the price of milk and the price of feed. So half hedges tend to be almost worse than no hedges. But if you’re putting your balance sheet at risk, then I think there’s a good rationale for knowing both the price of milk and the cost of your main cost categories, primarily feed, so that you can manage with confidence.

(18:03) One of the interesting things that’s pretty visible for me, having worked for other operators and worked in other industries to some extent, is the failure of the human brain to function in decision-making and management at the extremes of the economic cycles. So if a dairy farm gets into a large loss position, their decision-making apparatus begins to fail. And if they get into even periods of a really high profit situation, this aura of invincibility also causes some questionable decision-making.

(18:40) So derivatives and other methods of seeing the future calm your mind and allow you to make stronger long-term decisions rather than decisions that arise from daily survival mentality or this euphoria and aura of invincibility that comes with these really high margin markets. So at least for us, we function better when we’re just creating steady returns and a look back at our annual financial reporting is pretty remarkable when you consider how volatile agriculture normally is. Our returns are remarkably stable and part of that is the ability to use tools that take an unknown in the future to a known and then execute to that known.

(19:24) Eric: That’s a real good way of putting it.

So last question, Bill, over the years, you and I have had a lot of in-depth conversations about the state of the dairy industry from a farmer’s perspective. Without giving away too much detail of what we’ll talk about at the Outlook Conference in June, what are a couple of things you think the industry should be thinking about? Just high-level topics that in the coming three to five years that may have a significant impact on commodity pricing for dairy.

(19:54) Bill: Well, I’m still a dairy producer, currently continuing to invest cattle in that sector, so that would tell you that I am generally bullish on the industry. I think dairy proteins just have such an advantage in terms of both cost and quality of nutrients for nourishing a large global population. So over time, I still remain confident that dairy proteins, dairy fats, high quality in terms of organoleptic experience and nourishment will be a large part of human diets. So we’re fine in the long run.

(20:28) What you know, I’m sort of the chief warrior officer for the business these days. I don’t work much, but I worry a lot still. So what concerns me, you know, I think we’re a bit addicted to the 10-year period or so from the financial crisis on to the low cost of capital and that is reflected in the capital structure of a lot of farms, not just dairy, but especially dairy. And I’m not sure we have a return to free money. So leverage in the end does matter and cost of production for the whole domestic dairy industry does matter because one out of every five or six cows is working overseas, even here. And we have to pay attention to what our competition looks like there because an adjustment from losing a significant portion of that offshore milk would have catastrophic effects on the domestic price. So we have to remain competitive and we have to be realistic about what markets we’ve served and we will serve. We can’t avoid the fact that we live in a country with a 60 or 70 thousand per capita GDP. And because of our cost of regulation and labor in a wealthy country like that, we have to be realistic about how much dairy products will go to countries with a per capita GDP of one-tenth of that or less. Realistic doesn’t mean pessimistic, but I think for us it does mean being as concerned or more concerned about the cost of the unit rather than the number of those units. Will the world continue to provide us a viable margin for exporting dairy? And I think that means a significant focus on making sure we remain competitive in our cost of production.

(22:12) Eric: Yeah, those are certainly important topics. Good to hear that you’re bullish on the on the industry. State of the industry is a good thing.

(22:21) Bill: Yeah, we’ve had a couple of interesting options to get out recently. I mean, one of the things that came out of the world of cheap money is the investment community looking at agriculture and specifically looking at agricultural operations that had a history of good returns. You know, that was that was kind of a wake-up call even to us as we were in advanced career thinking, well, maybe we should wind this down. But we had opportunities to get out and we looked at the opportunities of getting out and the opportunities of staying in and we just had to admit and we weren’t really biased toward this, that dairy industry, it’s just a very dynamic and promising future and we thought a legacy of a farm rather than a pile of money was the best of those options so here we are.

(23:11) Eric: Well, that’s a good way to end things and a great teaser for having you in less than two months here in Chicago so thank you very much for the time today, Bill, so that our listeners can learn more about you and what to expect at this year’s Outlook Conference, again, taking place June 18th to 20th right here in Chicago. Be sure to visit highgrounddairy.com/conference to learn more and register today. Thanks again and be sure to catch more podcasts with our upcoming speakers in the coming days.