Dairy Exports and Your Milk Check Dr. Marin Bozic Midwest Dairy Expo │ November 30, 2011

Presentation Outline 1)What’s going on? Putting U.S. Dairy Exports in Perspective 2)What does it mean? Dairy Exports and Price Volatility Dairy Exports and Price Level in the Long Run 3)What do we do about it?

Dairy Exports as Percentage of U.S. Milk Supply

2010 Composition of U.S. Dairy Exports (by value) Milk Powders (28%) Cheese (18%) Butter (5%) Dairy Consumer Goods (12%) Lactose (7%) Other Dairy Commodities (6%) Fluid & Soft Products (5%) Dry Whey (19%)

Who is buying?

Market Value, mil USD (2011 Jan-Aug) Market Growth Rate (2011 over 2010) Mexico % Japan % Canada % Philippines % China % World2, % USA (domestic sales) Fluid milk14, % Butter3, % Cheese33, % Putting Dairy Exports in Perspective

Who is exporting?

FY 2010 Dairy Exports (mil USD) Wisconsin % California % New York % Idaho % New Mexico % Minnesota % Pennsylvania % Ohio % Iowa % South Dakota % Other States % Unallocated % United States %

Macroeconomic imbalances abroad Production fluctuation in export competitors Demand shocks abroad Removal of price floors Exchange rate fluctuations Exports and Volatility

S D D′D′ Quantity Price

“We must eliminate the possibility of diverting our milk products into government warehouses during periods of low milk prices. As long as we have a government price support system, willing to purchase milk products off our domestic market when milk prices are low, Price floors going away our industry takes the easy way out and sells to the government. We thus leave our valued worldwide customers high and dry, and they don’t return when milk prices turn better again.” George Mueller, dairy farmer, in Progressive Dairyman 11/1/2011

Price Floors Case Study: 1. Dry Whey

Price Floors Case Study: 2. Skim Dry Milk

Weather and Yield Per Cow

Demand Shocks Abroad

Exchange rate fluctuations

Power is in numbers… …and numbers are down

Sec. Vilsack Ag Policy Principles Supporting sustainable productivity Promoting vibrant markets Maintaining a strong safety net –Assistance quickly after disaster hits –Programs to be simple and understandable –Safety net has to be accountable and justifiable to everyone Source: Cheese Reporter, 10/28/2011, pg. 8

Dairy Exports and Price Levels: A tale of two corn crops per acreNorth DakotaIowa Direct Costs$289.94$ Yield113 bu180 bu Returns (before land costs) $146.47$ Land Charge$65.20$ Net returns$81.27$82.57

Dairy Exports and Price Levels in the Long Run S D D′D′ Quantity Price

Dairy Exports and Price Levels in the Long Run S D D′D′ Quantity Price

It is not so much the level or the growth of dairy exports that will boost milk prices, but uncertainty about the growth rate will! –Oceania milk supply growth rate?? –EU milk quotas going away – what’s the effect?? –Chinese import controls?? But in the long run we are all dead… what will happen soon?

Exports: You have to love them. The three most things that matter in property: 1)Location 2)Location 3)Location The three things why we should embrace dairy exports: 1)Volume 2)Volume 3)Volume

U.S. Supply Situation With high feed prices, will the dairy production shift back to Midwest? Best indicator is to see where plants are being built/expanded, e.g. … First District – Litchfield, MN Agropur - Hull, IA Leprino – Greely, CO

So, what do we do? Appreciate Influence Control New Market Realities U.S. Affairs Your Farm Business

How can Midwest compete in the world market? –Whey? Ingredients? What works as sustainable model for catastrophic risk insurance? –LGM? Margin Protection (FFTF)? Dairy Futures? What should we research?

Dairy Exports and Your Milk Check presented at Midwest Dairy Expo 2011 Dr. Marin Bozic Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN You may download this presentation at Exports.pptx