Dairy Situation and Outlook Geoff Benson Dept. of Agricultural & Resource Economics NC State University Southern Agricultural Outlook Conference Atlanta,

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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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  • 22 Topics n National Short-term Situation and Outlook National dairy policies Demand Supply n Regional Outlook n Summary and Conclusions n Implications
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  • 3 National Dairy Programs 3
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  • 4 Dairy Programs n Price support program n Milk Income Loss Contract MILC n Tariff Rate Quotas on imports n Federal Orders n Cooperatives Working Together CWT 4
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  • 5 Price Support Program n Authorized until Dec 31, 2007 n Government acts as a buyer of last resort for cheese, butter and nonfat dry milk n Support price is $9.90/cwt, basically unchanged since 1990 n Current product prices are: Cheese at $1.1314/lb -- blocks Butter at $1.05/lb -- bulk NFDM at $0.80/lb -- unfortified n Indirectly supports farm prices 5
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  • 6 Price Support Program n Important historically, now provides a low safety net n Since 1989, Government purchases have been seasonal & relatively small Butter in the early 1990s, NFDM more recently n Farm prices have been market driven and have been very volatile Seasonality in production and sales Inelastic supply & demand Market psychology 6
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  • 8 Milk Income Loss Contract n 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 8
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  • 9 MILC-X Program n 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 @19,000 lb/cow/year n MILC payment rate was 45% when the Class I price was below $16.94 n MILK-X payment rate is 34% of the difference 9
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  • 10 MILC Impacts. US All Milk Price MILC Payment $/cwt MILC as % of All Milk FY 2002*$12.72$1.089.0% FY 2003$11.91$1.4612.2% FY 2004$15.64$0.221.4% FY 2005$15.37$0.000.0% FY 2006$13.24$0.503.8% 10 * 10 Months
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  • 12 Federal Orders n Classify milk based on use Class I = Fluid milk Class II = Soft products Class III = Cheese Class IV = Butter & NFDM n Set monthly minimum class prices based on wholesale prices for cheese, butter and non-fat solids, yield factors, make allowances = Derived demand for milk n Establish pooling rules determining which handlers and producers are in an order n Audit milk handlers
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  • 13 Federal Orders n 7 orders pay on components most milk is used for manufacturing in these FOs n 4 high fluid use order markets pay on a per 100 lb. of milk basis, including the Appalachian and Southeast Orders n 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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  • 14 CWT Program n Dairy coop members of the National Milk Producers Federation operate a voluntary supply management program to cut production and boost prices n Funded by an assessment n 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 n FAPRI estimated impact on milk prices of $2 bil. through first 3 rounds of buyouts
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  • 15 Farm Bill Dairy Programs n House dairy legislation is similar to the expiring farm bill n 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 15
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  • 16 Market Demand n Cheese & byproducts n Fluid milks & butterfat n Butter & ice- cream n Milk powders and components n Organic & specialty products
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  • 20 Demand n Domestic Conventional products rBST free (affects supply) Organic and specialty products n Exports 20
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  • 21 Dairy Exports n 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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  • 27 2007 Exports n Total Value of US dairy exports up 35% Jan-July 07 v. 06 n Sharply higher prices since January Skim Milk Powder up 70% Cheese up 70% Butter up 90% n We may be seeing some price resistance
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  • 28 Current Situation n 2006 US Milk Production @ 181.8 bil. lb. 2.8% Milk per cow 19,951 lb, 2.0% Cow numbers @ 9.1 mil, 0.1% n 2006 Commercial Sales 2.5% Cheese 4.6% Butter 0.5% Nonfat dry milk 4.5% Fluid milk 0.1% 28
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  • 29 Current Situation n 2007 January August total milk production 1.7% Cows @ 9.168 mil, 0.06% in Aug Milk per cow 2.8% in Aug n 2007 January June Commercial Sales 2.7% Cheese 3.0% Nonfat Dry Milk 3.4% Butter 8.1% Fluid milk 0.9% 29
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  • 30 Outlook for 2008 30
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  • 31 Export Prospects n Continued world demand growth but consumer price resistance n Continued weakness of the US$ n Supply-demand balance in EU27 n Normal supplies from New Zealand but continued drought related problems in Australia n Some expansion of world supplies World market prices will soften? 31
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  • 32 US Sales Outlook n US Demand + Slow economic growth + Continued population growth + Continued producer & processor funded advertising and promotion + Lower consumer prices v. 2007 n 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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  • 33 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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  • 34 Dairy Product Stocks *Uncommitted Government stocks
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  • 36 Dairy Cattle, US & Canada Item US Mil. Head Canada Mil. Head Canada % of US Dairy Cows9.150.9810.7 % 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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  • 38 Fuel & Feed Costs n Persistent higher oil & energy prices n Ethanol demand and the knock-on effects on other crops represents a permanent increase in feed costs for dairy farmers n Feed prices are projected to continue above historic averages in 2007-08 Corn @ $3.10/bu, US farm avg. 48% soybean meal @ $220/ton n Current Milk:Feed Price ratio remains high enough to make some more milk but forecast price ratio is unfavorable 38
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  • 39 Feed costs n $1.00 per bushel = $36/ton n 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 n 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 n If you sell 20,000 lb. of milk per cow, an increase of $100 = $0.50 per 100 lb.
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  • 41 Prices Paid for Feed and Fuel Item April 2003 April 2005 April 2006 April 2007 % 2003-07 Diesel, $/gal1.241.972.282.43+ 96% Gasoline, $/gal1.602.232.602.64+ 65% L.P. Gas, $/gal1.211.471.691.73+ 43% 20% CP dairy Feed, $/ton201206226258+ 28% 41 Source: Ag. Prices, NASS, April issues, selected years
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  • 42 Prices Paid for Selected Fertilizers, $/ton Item April 2003 April 2005 April 2006 April 2007 % 2003-07 Amm. Nitrate243292366382+ 57% Urea261332362453+ 74% 30% N Solution161215232277+ 72% Super- phosphate243299324418+ 72% Muriate of Potash165245273280+ 70% 42 Source: Ag. Prices, NASS, April issues, selected years
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  • 44 US