Dairy Situation and Outlook

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Dairy Situation and Outlook

• Geoff Benson
• Dept. of Agricultural Resource Economics
• NC State University
• Southern Agricultural Outlook Conference
• Atlanta, September 24-26, 2007

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Topics

• National Short-term Situation and Outlook
• National dairy policies
• Demand
• Supply
• Regional Outlook
• Summary and Conclusions
• Implications

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National Dairy Programs
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Dairy Programs

• Price support program
• Milk Income Loss Contract MILC
• Tariff Rate Quotas on imports
• Federal Orders
• Cooperatives Working Together CWT

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Price Support Program

• Authorized until Dec 31, 2007
• Government acts as a buyer of last resort for
  cheese, butter and nonfat dry milk
• Support price is 9.90/cwt, basically unchanged
  since 1990
• Current product prices are
• Cheese at 1.1314/lb -- blocks
• Butter at 1.05/lb -- bulk
• NFDM at 0.80/lb -- unfortified
• Indirectly supports farm prices

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Price Support Program

• Important historically, now provides a low safety
  net
• Since 1989, Government purchases have been
  seasonal relatively small
• Butter in the early 1990s, NFDM more recently
• Farm prices have been market driven and have been
  very volatile
• Seasonality in production and sales
• Inelastic supply demand
• Market psychology

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Milk Income Loss Contract

• MILC
• A countercyclical income support program passed
  as part of the 2002 Farm Bill sunset date Sept.
  30, 2005
• The Agricultural Reconciliation Act of 2005
  reauthorized the program through August 31, 2007
  (MILC-X)
• MILK-X extended one month as part of an
  Iraq/Katrina/Veterans funding bill. As a
  consequence, MILC is included in the 2007 Farm
  Bill baseline

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MILC-X Program

• Trigger and cap
• National target price or trigger for payments
  16.94/cwt Class I price in the Boston zone,
  Northeast federal order
• Payments are limited to 2.4 mil. lb. of milk per
  operation per fiscal year 125 cows _at_19,000
  lb/cow/year
• MILC payment rate was 45 when the Class I price
  was below 16.94
• MILK-X payment rate is 34 of the difference

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MILC Impacts.
US All Milk Price MILC Payment /cwt MILC as of All Milk
FY 2002 12.72 1.08 9.0
FY 2003 11.91 1.46 12.2
FY 2004 15.64 0.22 1.4
FY 2005 15.37 0.00 0.0
FY 2006 13.24 0.50 3.8
10 Months
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Federal Orders

• Classify milk based on use
• Class I Fluid milk
• Class II Soft products
• Class III Cheese
• Class IV Butter NFDM
• Set monthly minimum class prices based on
  wholesale prices for cheese, butter and non-fat
  solids, yield factors, make allowances Derived
  demand for milk
• Establish pooling rules determining which
  handlers and producers are in an order
• Audit milk handlers

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Federal Orders

• 7 orders pay on components most milk is used
  for manufacturing in these FOs
• 4 high fluid use order markets pay on a per 100
  lb. of milk basis, including the Appalachian and
  Southeast Orders
• Requested changes
• Larger make allowances
• Higher Class I II prices
• Modifications to Class III IV formulas
• Increased transportation credits and new
  incentives to move milk and reduce costs in FO 5
  and 7

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CWT Program

• Dairy coop members of the National Milk Producers
  Federation operate a voluntary supply management
  program to cut production and boost prices
• Funded by an assessment
• Supported by coops with 70 of milk
• 1. Herd Reduction 4 rounds with 200,000
  cows removed
• 2. Production Reduction 1 round
• 3. Export subsidies, mainly cheese
• FAPRI estimated impact on milk prices of 2 bil.
  through first 3 rounds of buyouts

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Farm Bill Dairy Programs

• House dairy legislation is similar to the
  expiring farm bill
• Senate?
• Some are seeking a higher MILC trigger price and
  a higher percentage payment rate
• The new DFWT wants a national, mandatory CWT
  buyout program
• Change federal milk market orders

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Market Demand

• Cheese byproducts
• Fluid milks butterfat
• Butter ice-cream
• Milk powders and components
• Organic specialty products

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Demand

• Domestic
• Conventional products
• rBST free (affects supply)
• Organic and specialty products
• Exports

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Dairy Exports

• For 2006 and year-to-date in 2007 exports of
  dried milk powders, whey products, other milk
  components, showed strong revenue growth
• Low US prices in 2006 and early 2007
• Weakening dollar
• Reduced production exports from NZ Australia
• Reduced exports from the EU as a result of CAP
  reforms
• Demand growth, especially in Asia

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2007 Exports

• Total Value of US dairy exports up 35 Jan-July
  07 v. 06
• Sharply higher prices since January
• Skim Milk Powder up 70
• Cheese up 70
• Butter up 90
• We may be seeing some price resistance

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Current Situation

• 2006 US Milk Production _at_ 181.8 bil. lb.? 2.8
• Milk per cow 19,951 lb, ? 2.0
• Cow numbers _at_ 9.1 mil, ? 0.1
• 2006 Commercial Sales ? 2.5
• Cheese ? 4.6
• Butter ? 0.5
• Nonfat dry milk ? 4.5
• Fluid milk ? 0.1

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Current Situation

• 2007 January August total milk production ?
  1.7
• Cows _at_ 9.168 mil, ? 0.06 in Aug
• Milk per cow ? 2.8 in Aug
• 2007 January June Commercial Sales ? 2.7
• Cheese ? 3.0
• Nonfat Dry Milk ? 3.4
• Butter ? 8.1
• Fluid milk ? 0.9

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Outlook for 2008
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Export Prospects

• Continued world demand growth but consumer price
  resistance
• Continued weakness of the US
• Supply-demand balance in EU27
• Normal supplies from New Zealand but continued
  drought related problems in Australia
• Some expansion of world supplies
• ?World market prices will soften?

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US Sales Outlook

• US Demand
• Slow economic growth
• Continued population growth
• Continued producer processor funded
  advertising and promotion
• Lower consumer prices v. 2007
• Overall sales will grow at trend rates, say 2.0
• Cheese ? 2-3, adequate stocks, lower prices
• Butter ? adequate stocks, lower prices
• Fluid milk little change
• Milk powders little change in use

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Supply Outlook

• ? Cheese butter inventories are edging up
• ? August cow numbers were up 54,000 over August
  2006 and up 11,000 over July 07
• ?July 1 heifer inventory was up 3.0
• ? US will re-open Canadian border to breeding
  stock November 19, 2007
• ? Feed costs have increased but feed-milk price
  ratio has been favorable
• Cow cull rate is fairly neutral
• ? Milk/cow will be affected by reduced rBST
• ? Higher fertilizer and energy related costs

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Dairy Product Stocks
Uncommitted Government stocks
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Dairy Cattle, US Canada
Item US Mil. Head Canada Mil. Head Canada of US
Dairy Cows 9.15 0.98 10.7
Dairy Heifers 3.9 (Over 500 lb.) 0.48 (Over 12 mo.) 12.3
Heifers as of cows 42.6 49.0 --
Historically, US heifer imports 50-75,000
head/year
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Fuel Feed Costs

• Persistent higher oil energy prices
• Ethanol demand and the knock-on effects on other
  crops represents a permanent increase in feed
  costs for dairy farmers
• Feed prices are projected to continue above
  historic averages in 2007-08
• Corn _at_ 3.10/bu, US farm avg.
• 48 soybean meal _at_ 220/ton
• Current MilkFeed Price ratio remains high enough
  to make some more milk but forecast price ratio
  is unfavorable

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Feed costs

• 1.00 per bushel 36/ton
• If you feed 2 tons of corn per cow per year and
  if the cost increase
• is 1.00/bu. 72/cow/year
• is 1.50/bu. 108/cow/year
• If you feed 3 tons of corn per cow per year and
  if the cost increase
• is 1.00/bu. 108/cow/year
• is 1.50/bu. 162/cow/year
• If you sell 20,000 lb. of milk per cow, an
  increase of 100 0.50 per 100 lb.

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Prices Paid for Feed and Fuel
Item April 2003 April 2005 April 2006 April 2007 ? 2003-07
Diesel, /gal 1.24 1.97 2.28 2.43 96
Gasoline, /gal 1.60 2.23 2.60 2.64 65
L.P. Gas, /gal 1.21 1.47 1.69 1.73 43
20 CP dairy Feed, /ton 201 206 226 258 28
Source Ag. Prices, NASS, April issues, selected
years
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Prices Paid for Selected Fertilizers, /ton
Item April 2003 April 2005 April 2006 April 2007 ? 2003-07
Amm. Nitrate 243 292 366 382 57
Urea 261 332 362 453 74
30 N Solution 161 215 232 277 72
Super-phosphate 243 299 324 418 72
Muriate of Potash 165 245 273 280 70
Source Ag. Prices, NASS, April issues, selected
years
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USDA Forecast

• 2007 production
• 9.13 mil. cows -- ? 0.2
• 20,250 lb. per cow -- ? 1.5
• 184.9 bil. lb. milk -- ? 1.7
• 2007 prices, midpoint
• All Milk _at_ 19.30/cwt -- ? 6.40 from 2006 at
  12.90/cwt
• Class III Milk _at_ 18.20/cwt -- ? 6.31 from 2006
  at 11.89/cwt
• Class IV Milk _at_ 18.45/cwt -- ? 7.39 from 2006
  at 11.06/cwt. !!!!

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USDA Forecast

• 2008 production
• 9.15 mil. cows -- ? 0.2
• 20,610 lb. per cow -- ? 1.8
• 188.6 bil. lb. milk -- ? 2.3
• 2008 prices, midpoint
• All Milk _at_ 18.75/cwt -- ?0.55 from 2007
• Class III Milk _at_ 16.90/cwt -- ? 1.30 from 2007
• Class IV Milk _at_ 18.00/cwt -- ?0.45 from 2007

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Class III prices, /100 lb.
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US FO5 Milk Prices, /cwt.
Item 2002 2003 2004 2005 2006 2007F 2008P
US All Milk 12.14 12.52 16.04 15.15 12.90 19.30 18.00
US Class III Milk 10.42 11.42 15.39 14.05 11.89 18.20 16.00
FO 5 Blend 13.24 13.55 17.01 16.23 13.99 20.50 19.50
MILC 1.21 1.09 0.22 0.04 0.60 0.01 0.0
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Causes of Structural Change

• Productivity (milk/cow) has grown at a faster
  rate than the rate of growth in dairy product
  sales
• ? Pressure on milk prices and profit margins per
  cow and per cwt.
• Milk price pressures plus advances in
  mechanization create incentives and opportunities
  to increase herd size, both to achieve economies
  of size and to sustain family living standards
• ? Declining farm numbers as smaller farms leave
  survivors expand
• Regional differences in dairy farming systems and
  input costs create differences in profitability
• ? Production is increasing in the west, with
  other regions losing market share

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Regional Competitiveness

• The southern region is quite diverse
• The average herd size in Florida is 825 cows,
  selling 13.5 million pounds of milk annually
• The average herd size in Kentucky is 79, selling
  1.0 million pounds of milk annually
• 90 or more of the herds in Florida, Georgia, and
  North Carolina are confinement operations
• 95 of the herds in Louisiana and 75 in
  Mississippi are pasture-based
• Several states have organic herds and/or on-farm
  processing, some have neither

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Summary

• 2007 saw record high milk prices
• The dairy industry is still on the price
  rollercoaster will it be a crash landing or
  will export markets continue to support prices?
• Outlook is for continued growth in total US milk
  production and lower milk prices
• Production costs have increased and will stay at
  higher levels
• Higher corn and other feed prices
• Higher energy prices
• Higher fertilizer costs

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Summary

• Projections are for higher net incomes in 2007
  because higher milk prices more than offset
  increases in production costs
• Net income will be lower in 2008
• Structural change will continue
• Regional competitiveness determines the market
  share of the national milk production pie
• Dairy diversity means at least some farms in a
  state and region are competitive

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Implications

• The future will look a lot like the past
• Price volatility is not the cause of structural
  change and there are strategies for managing
  around these price swings
• National policies are unlikely to help but some
  states have provided subsidies
• Some southeastern dairy producers are competitive
  but many will need to become more focused on
  profitability -- Many farmers do not know their
  cost of production, financial performance and
  financial status. Infrastructure is a concern
• Is there more the LGUs can should do?

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Geoff Benson

• Phone [phone]
• Fax [phone]
• E-mail Geoff_Benson_at_ncsu.edu
• Web page
• http//www.ag-econ.ncsu.edu/ faculty/benson/bens
  on.html

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