Balancing a Deficit Milk Market

1
Balancing a Deficit Milk Market An Overview of
the Current System for Supplying the Southeast
U.S. Southern Dairy Conference February 9,
2004 Jeffrey Sims Dairy Cooperative Marketing
Association, Inc. Southern Marketing Agency, Inc.
2
MYTHS OF A DEFICIT MARKET
Myth No. 1 Deficit Means Not- Supplied Myth
No. 2 Deficit Means There is No Surplus Myth
No. 3 Increasing Deficit Means the Situation
is Hopeless
3
Annual Milk Production, U.S. Southeastern
States 1980-2003
4
Annual Milk Production, Eleven Southeastern
States1980-2003
5
Annual Milk Production,Southeast States as
Percent of U.S.1981-2003
6
Avg. Annual Milk Production Per FarmSoutheast
States U.S.1992-2003
7

• Options For Supplying
• A Deficit Fluid Milk Market
• Cover Seasonal Shortage Only
• Committed purchases
• Standby-pool agreements
• Spot Purchases

8

• Options For Supplying
• A Deficit Fluid Milk Market, Continued
• Purchase Volume necessary to cover worst shortage
  by purchasing year around
• Balance supply demand in short season
• Market becomes surplus rest of year

9

• Options For Supplying
• A Deficit Fluid Milk Market, Continued
• Consign portion of market to outside supplier
• Consign entire supply for plant or plants
• Consign portion of supply for plant or plants

10

• Options For Supplying
• A Deficit Fluid Milk Market, Continued
• Combination of A, B, and C
• (Seasonal Purchase, Year-round Purchase,
  Consigned Supply)
• Supply plants with locally available milk and
  let plants decide how to cover their seasonal
  shortage

11

• Issues to Consider in
• Choosing Supply Option(s)
• How deficit is the market?
• How consolidated is the supply?
• How do Federal Orders Impact the flow of milk
  and sales returns?
• Blend Price Differences
• Producer Qualification Provisions
• Transportation Credits

12

• Issues to Consider in
• Choosing Supply Option(s)
• Where are, and how distant are, the
  supplemental supplies?
• What capabilities are there to balance the
  supplemental supplies?

13

• Issues to Consider in
• Choosing Supply Option(s)
• F. What are the acquisition costs of the
  supplemental supplies?
• Local Blend Price Over Order Prices
• Hauling Costs
• Production Seasonality
• Balancing Costs
• What is the economic shortage cost?

14

• Issues to Consider in
• Choosing Supply Option(s)
• How good are the supply-demand projections?
• What are the logistical bottlenecks?
• Plant receiving capacities
• Availability of rolling stock
• Route and Producer sizes
• Milk Quality Issues

15

• Supply Issues in The Southeast
• Southeast is undersupplied with local milk
• Local supplies have to move substantial
  distances to meet local processing demand
• Production seasonality is seriously out of sync
  with Class I seasonality

16
Southern Marketing Agency, Inc. Production and
Sales to Distributing Plants November 2003,
Million pounds
77 10
44 59
28 50
73 30
68 100
3 31
26 28
13 43
24 0
23 54
21 87
32 58
4 0
8 43
86 0
6 31
45 50
AVERAGE LOAD ON AVERAGE DAY TRAVELS 125 MILES
FARTHER THAN THE PRODUCERS CLOSEST DEMAND PLANT
17
Southern Marketing Agency, Inc., Daily Average
Member Milk April 2002 to December 2003
34.5 swing lo - hi
35.3 swing lo - hi
18
Appalachian and Southeast Federal Orders, Daily
Avg. FMP Disposition January 2001 to December 2003
11.9 lo - hi
15.5 lo - hi
15.0 lo - hi
19
Daily Average --- April 2002 to December 2003
SMA Member Milk Production
In-Area Route Disp. FOs 5 7
20
PRODUCTION SEASONALITY IMPACT ON RESERVE
REQUIREMENTS Hypothetical Example
September SE is projected to be 200,000,000
pounds short Secure 5 extra to cover
possible error in projection 210,000,000
pounds Secure additional 20 to cover
daily, weekly monthly variation
250,000,000 pounds April Production is 30
higher than September must procure and
handle 325,000,000 pounds
21

• Southern Marketing Agency, Inc.
• Supplemental Supply System
• Combination of seasonal purchase, standby pools,
  year round purchase, and market consignment
• ---- What milk is purchased what way is a product
  of all of the decision factors.
• Primary supplemental supplies
• Southwest
• Central
• Mideast
• Middle Atlantic / Northeast

22
Southern Marketing Agency, Inc. Primary Sources
of Supplemental Supplies




23
Primary Sources of Supplemental Supplies And
Distances to Processing Areas



374 miles
467 miles
304 miles

894 miles
24

• What Can Be, and Is Being Done?
• Economic Development Attract Dairies /or
  Encourage Expansion
• Replace outside supplemental milk
• Decrease intra-market hauling
• Continue to Seek Economies in Milk Hauling
• Evaluate milk seasonality incentives/disincentiv
  es

25
Encouraging New Milk In the Southeast
????? 60,000,000 Pounds per month ?????
26
New Milk In the Southeast BENEFITS
Savings on Purchases From Outside the
Southeast Savings on Hauling Milk From Outside
the Southeast Savings on Hauling Milk Inside the
Southeast Lower Balancing Costs by Having
Supplies Nearer to Processing Locations More
Efficient Use of Seasonal Balancing
Plants Spill-over economic impact
27
New Milk In the Southeast POTENTIAL HAULING
SAVINGS
60,000,000 pounds per month 1,200 loads Avg.
Extra Distance Outside Milk Moves to the S.E.
525 miles Hauling Cost per Loaded mile
1.90 Hauling Cost per Load 1,000 Potential
Hauling Savings per Month 1,000,000
0.20 per CWT in SMA Pool
28
THE SOUTHEAST WE MAY BE DOWN BUT WERE NOT
OUT!
29
(No Transcript)