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Dairy Situation and Outlook in the I-29 Corridor
Dr. Marin Bozic, University of Minnesota
North Central Cheese Industry AssociationRochester, MN Oct 16, 2013
Year-On-Year Milk Production Change (%)
Jan-09
Apr-09Jul-0
9
Oct-09
Jan-10
Apr-10Jul-1
0
Oct-10
Jan-11
Apr-11Jul-1
1
Oct-11
Jan-12
Apr-12Jul-1
2
Oct-12
Jan-13
Apr-13Jul-1
3-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Source: USDA, Milk Production reports, various issues
1 21 41 61 81101
121141
161181
201221
241261
281301
321341
361381
4010
5
10
15
20
25
IOFC Margins Feed Prices All-Milk Prices
U.S
Dai
ry IO
FC M
argi
ns, $
/ c
wt
Source: USDA, various reports and own calculations
Income over Feed Costs Margins: 1980-2013
Purchased Feed Costs as % of Total Feed Costs
Historical and Forecasted Income Over Feed Costs Margins
• Forecasted IOFC Margins for 2014 are higher than 75% of historical IOFC margins since 2000.
Source: USDA, CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University
Sep
Oct NovDec
Jan '1
4Fe
bMar Apr
May Jun JulAug
Sep
13.00
15.00
17.00
19.00
21.00
23.00
25.00
U.S. All-Milk Price 2014 Outlook (80% Confidence Interval)
Source: CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University
Domestic Sales of Dairy Foods (Year-To-Date Ending August 11, 2013)
Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013
Milk: TotalCheese: String/Stick
Cheese: SlicesCheese: Chunk/Loaf
Cheese: TotalMilk: Flavored
Yogurt: TotalMilk: Organic
Cheese: ShredsCheese: Grated/Crumbled
Yogurt: Greek
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Domestic Sales of Dairy Foods (Year-To-Date Ending August 11, 2013)
Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013
Milk: TotalCheese: String/Stick
Cheese: SlicesCheese: Chunk/Loaf
Cheese: TotalMilk: Flavored
Yogurt: TotalMilk: Organic
Cheese: ShredsCheese: Grated/Crumbled
-4% -2% 0% 2% 4% 6% 8%
• In July 2013, 17.6% of total milk solids exported.• Over the last five years, over two thirds of the growth in the U.S.
milk production was exported.
Dairy Exports 2013 Year-To-Date Growth
Source: USDA FAS Data, USDEC Global Dairy Market Outlook July 2013, and own calculations
Long-term Outlook on Cheese Consumption
• U.S. Population growth and per capita cheese consumption growth slowing down.
U.S. Per Capita Consumption Growth (lbs) U.S. Population
GrowthAmerican Italian Total
1970-1980 2.63 2.38 6.16 22.18 mil
1980-1990 1.48 4.53 6.43 22.39 mil
1990-2000 1.56 3.00 4.89 32.54 mil
2000-2010 0.63 2.48 3.04 27.19 mil
2010-2020 ?? ?? 2.00 24.54 mil
Source: future.aae.wisc.edu, own calculations
20012002
20032004
20052006
20072008
20092010
20112012
2013140
142
144
146
148
150
152
154
Dai
ly S
ales
(Mil
Lbs)
• Fluid milk story: from per capita decline to total volume decline?
U.S. Fluid Milk Sales (12-months Rolling Average)
Over the next 10 years, U.S. milk production may grow by 25 billion lbs. Where will we sell that?
• Needed increase in exports (vs 2012):• Milk Powders: 56% • Butterfat: 270%• Cheese: 60%
• In order to export products accounting for 10 billion lbs of milk in 2023, the U.S. would need to capture 70% of the entire forecasted increase in world’s imported demand for skim milk powder and even higher share of additional butter trade.
Cheese (16.5 bil lbs)Other Domestic (3.5 bil lbs)Exports (10 bil lbs)Fluid Milk (-5 bil lbs)
• Interstate 29 (I-29) is an 745.5 miles long Interstate Highway in the Midwestern United States. I-29 runs from Kansas City, MO, at a junction with Interstate 35 and Interstate 70 to the Canadian border near Pembina, ND.
Defining the I-29 Dairy Corridor
Growing Milksheds in the U.S.
A Closer Look at the Upper Midwest
Dairy Situation in the I-29 Corridor
Dairy Growth in South Dakota
Cow Inventory Growth By County2000-2013
Grant 2,700Codington 500Hamlin 2,300Brookings 5,800Moody 4,600Minnehaha 2,300Total 18,200
Dairy Growth in Iowa
Cow Inventory Growth By County2000-2013
Lyon 5,800Osceola 2,765Sioux 5,100Total 13,665
Dairy Growth in Minnesota
Cow Inventory Growth By County2000-2013
Stevens 15,800Swift 2,100Nobles 1,200Total 19,100
Growth Dynamics in I-29 Corridor vs. Northeast WI and Central MI
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(4,000)
(2,000)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
I-29 Northeast WI Central MI
I-29 Corridor Daily Milk Demand (lbs of milk)
Other processing plants in the region include Dean Foods in Siux Falls, SD and Le Mars, IA, AMPI cheese plant in Sanborn, IA and drying plant in Freeman, SD, and Wells Blue Bunny in Le Mars, IA.
Current Future
Valley Queen Cheese – Milbank, SD 4,000,000 4,000,000
Davisco Foods Intl. – Lake Norden, SD 3,200,000 6,000,000
Agropur – Hull, IA 2,500,000 5,000,000
Bel Brands – Brookings, SD 750,000
Total Aggregate Demand 9,700,000 15,750,000
Approximate Cows Needed 145,000 240,000
Business Environment in South Dakota
• Pre-permitted sites• Low taxes• Governor and Sec. of
Agriculture actively involved in promoting the state
• Consensus between producers, processors and government that SD wants to double the milk production
100 mile radius of Agropur in Hull, IA
23
Source: Agropur
Back to the Future in Southern SD
In 1960:53,570 cows
In 2012:23,997 cows
Source: Nebraska Department of Agriculture
Cutting Through the Red Tape in NE
Source: Blimling and Associates
I-29 from Producers Perspective: Milk Price
2008-2012 Average Milk Revenues
State $ Mil
Wisconsin $12.505
Minnesota $12.496
Michigan $12.261
PNW $11.955
W Texas $11.783
3,000 cows; 24,000 lbs/cow
Corn Yield Land Price Increase Since 2005 (x Times)
Source: Blimling and Associates
Source: Blimling and Associates
Upper Midwest from Lenders Perspective
• The game has clearly changed for dairy• What we think we know:
• Banks no longer fund new dairy construction without a land base, increasing the upfront capital needs
• 100 acres not enough; need land to grow some feed• Minimum collateral levels have also increased – need
cows and cash (or an outside investor)• Successful 300 cow dairy will not be extended credit to
move to 3,000 cows • Will take 20 years to grow the herd and slowly add on
• This seems to answer the “who grows” question (not locals)
Source: Blimling and Associates
Upper Midwest from Lenders Perspective
2004 (I-29, Michigan, Wisconsin)
Item Quantity Cost/Unit Investment
Dairy 3,000 $4,000 12,000,000
Land 100 $3,000 300,000
Cows 1,500 $1,250 1,875,000
Total Investment 14,175,000
Source: Blimling and Associates
2012 Michigan & Wisconsin
Item Quantity Cost/Unit Investment
Dairy 3,000 $4,000 12,000,000
Land 500 $5,000 2,500,000
Cows 1,500 $1,250 1,875,000
Total Investment 16,375,000
2012 I-29 Corridor
Item Quantity Cost/Unit Investment
Dairy 3,000 $4,000 12,000,000
Land 500 $12,000 6,000,000
Cows 1,500 $1,250 1,875,000
Total Investment 19,875,000
Source: Own Calculations
Importance of Risk Management / Federal Policy
Coverage Level Fees & Premiums
Expected Indemnity DMSP Penalty Net Revenue
$4.00 $ 1,000.00 $ 198,819 $ 583,925 $ (386,106)$4.50 $ 16,070.73 $ 364,747 $ 583,925 $ (235,248)$5.00 $ 37,205.75 $ 599,050 $ 583,925 $ (22,080)$5.50 $ 81,877.94 $ 887,684 $ 583,925 $ 221,881 $6.00 $ 155,350.87 $1,212,759 $ 583,925 $ 473,483 $6.50 $ 229,804.51 $1,568,854 $ 583,925 $ 755,124 $7.00 $ 442,254.43 $1,952,756 $ 583,925 $ 926,576 $7.50 $ 600,862.01 $2,362,024 $ 583,925 $1,177,236 $8.00 $ 938,411 $2,794,101 $ 583,925 $1,271,764
Expected Returns to participation in the Dairy Producer Margin Protection Program and Dairy Market Stabilization Program in 2009. 6,000 cow dairy at 24,000 lbs/cow. Sign-up date assumed to be January 15.
U.S. Alfalfa Hay Acreage
U.S. Corn Basis Map (Early 2013)
I-29 from a Processor’s Perspective
• Assume a 3 M per day plant running 340 days
• Easiest “solution” is to buy co-op milk indexed to the respective class price
• Conversations with processors suggest the following premiums• Michigan: $1.50 - $1.75 ($16.3 M at $1.60)• I-29: $1.70+ ($17.3 M at $1.70)• Idaho: $0.25 - $0.50 ($ 3.5 M at $0.35)
• Some other thoughts• At smaller volumes the spread means less• Freight expense will matter when comparing the West• State incentives can also close the gap
Summing Up
• Where does this all take us? • Economics of I-29 expansion seem complex. A lot depends on
dairy development efforts (processors, state officials, university extension), but ultimately costs have to pencil out for investments to trickle in.
• The 2013 farm bill, if passed, could remove a lot of risk (both DSA and DFA in their current form are potentially an overkill, though the devil is in the details), possibly spurring a new wave of dairy expansions across the country. We need to be ready to exploit this opportunity before milk prices decline as a result of new and very generous safety net.
Dairy Situation and Outlook in the I-29 Corridor
presented at the North Central Cheese Industry Association, October 16, 2013.
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108
Thank you for your help:Duane Banderob and Katie Behnke, Blimling and AssociatesTim Czmowski and Deeann Bylsma, AgropurRoger Scheibe, SD Dairy ProducersWillow Holoubek, A-FAN, Nebraska
Research supported by a grant by the Minnesota Milk Producers Association