1. Dairy Situation and Outlook Geoff Benson Dept. of Agricultural & Resource Economics NC State University Southern Agricultural Outlook Conference Atlanta, September 24-26, 2007

2. 22 Topics n National Short-term Situation and Outlook  National dairy policies  Demand  Supply n Regional Outlook n Summary and Conclusions n Implications

3. 3 National Dairy Programs 3

4. 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

5. 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

6. 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. 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

9. 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

10. 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. 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

13. 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

14. 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

15. 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

16. 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. 20 Demand n Domestic  Conventional products  rBST “free” (affects supply)  Organic and specialty products n Exports 20

21. 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. 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

28. 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

29. 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

30. 30 Outlook for 2008 30

31. 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

32. 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

33. 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

34. 34 Dairy Product Stocks *Uncommitted Government stocks

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36. 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. 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

39. 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. 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

42. 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. 44 USDA Forecast n 2007 production  9.13 mil. cows --  0.2%  20,250 lb. per cow --  1.5%  184.9 bil. lb. milk --  1.7% n 2007 prices, midpoint  All Milk @ $19.30/cwt --  $6.40 from 2006 at $12.90/cwt  Class III Milk @ $ 18.20/cwt --  $6.31 from 2006 at $11.89/cwt  Class IV Milk @ $18.45/cwt --  $7.39 from 2006 at $11.06/cwt. !!!!

45. 45 USDA Forecast n 2008 production  9.15 mil. cows --  0.2%  20,610 lb. per cow --  1.8%  188.6 bil. lb. milk --  2.3% n 2008 prices, midpoint  All Milk @ $18.75/cwt --  $0.55 from 2007  Class III Milk @ $16.90/cwt --  $1.30 from 2007  Class IV Milk @ $18.00/cwt --  $0.45 from 2007

46. 46 Class III prices, $/100 lb. 46

47. 47 US & FO5 Milk Prices, $/cwt. Item200220032004200520062007F2008P US All Milk 12.1412.5216.0415.1512.9019.3018.00 US Class III Milk 10.4211.4215.3914.0511.8918.2016.00 FO 5 Blend 13.2413.5517.0116.2313.9920.5019.50 MILC1.211.090.220.040.600.010.0

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52. 52 Causes of Structural Change n 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. n 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 n 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

53. 53 Regional Competitiveness n 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

54. 54 Summary n 2007 saw record high milk prices n 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

55. 55 Summary n Projections are for higher net incomes in 2007 because higher milk prices more than offset increases in production costs n Net income will be lower in 2008 n Structural change will continue n Regional competitiveness determines the market share of the national milk production “pie” n Dairy diversity means at least some farms in a state and region are competitive

56. 56 Implications n The future will look a lot like the past n Price volatility is not the cause of structural change and there are strategies for managing around these price swings n National policies are unlikely to help but some states have provided subsidies n 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 n Is there more the LGUs can & should do?

57. 57 Geoff Benson n Phone: 919.515.5184 n Fax: 919.515.6268 n E-mail: Geoff_Benson@ncsu.edu n Web page: http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html 57