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Department of Agricultural Economics 1 2008/09 Outlook for Dairy Prices and Dairy Policy … or the Pretty Good, the Really Bad, & Not So Ugly C.W. “Bill”

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Presentation on theme: "Department of Agricultural Economics 1 2008/09 Outlook for Dairy Prices and Dairy Policy … or the Pretty Good, the Really Bad, & Not So Ugly C.W. “Bill”"— Presentation transcript:

1 Department of Agricultural Economics 1 2008/09 Outlook for Dairy Prices and Dairy Policy … or the Pretty Good, the Really Bad, & Not So Ugly C.W. “Bill” Herndon, Jr. Mississippi State University Southern Outlook Conference Atlanta, GA September 22, 2008

2 Department of Agricultural Economics 2 THE PRETTY GOOD… Sustaining Strong/Near Record High Milk Prices

3 Department of Agricultural Economics 3 Current Dairy/Milk Price Highlights Dairy Product Prices: as of Sept. 22 nd Cheese Prices  “volatile” block prices 40# Blocks  $1.9825/lb … up/down ~60¢ since Jan. 2 500# Barrels  $1.9325/lb … up over the past 2 weeks Butter Prices  improving & stable Grade AA Butter  $1.7250 … up ~45 ¢ since January Nonfat Dry Milk Prices   from ’07 record highs Grade A NDM  $1.10 … down 12¢ last Friday & weak Dry Whey prices   from record highs Dry Whey  ~22+¢ … steady but  75% since June 07 Adv. October Class I milk price was supposed to be announced last Friday (Sept 19)  BUT Sept. Adv. Class I price is $21.45/cwt … DOWN $3.13 (  12.7%) from July Milk prices “weakening” slightly

4 Department of Agricultural Economics 4 Why are Dairy Product Prices Important?  Drive Milk Prices!! Source: Roger Cyan, NMPF, Dairy Market Report

5 Department of Agricultural Economics 5 Global Demand has & is Sustaining U.S. Dairy Prices … WHY!! U.S. dairy markets and prices have historically been heavily influenced by supply issues  or, the ebbs and flows of milk output in U.S. & worldwide 2007 saw a “sea change” and now U.S. dairy prices are responding to demand factors … & specifically, global demand Dairy traders and industry personnel are seeing this “shift” continue in 2008 and into 2009  and beyond ??

6 Department of Agricultural Economics 6 Factors causing Global Demand to Influence U.S. Dairy Prices Supply side factors … limiting exports 1. European Union (EU) changed milk price supports which decreased milk output 2. EU added 12 nations (Eastern European) and these countries have consumed most of the EU’s former dairy exports 3. New Zealand has limited land area to continue expanding milk production … so, exports have not grown 4. Australia’s prolonged drought has curtailed milk output ~30% & exports

7 Department of Agricultural Economics 7 Factors causing Global Demand to Influence U.S. Dairy prices Demand side factors … enhancing exports 1. China’s & India’s economy transforming into an industrial society  these new industrial workers with added income want to consume dairy products 2. China & India have almost 2.5 Billion consumers 3. Value of U.S. Dollar has declined significantly (60+%) making U.S. dairy products less costly for international consumers

8 Department of Agricultural Economics 8 Weak US Dollar Aiding U.S. Exports

9 Department of Agricultural Economics 9 Weak US Dollar Aiding U.S. Exports

10 Department of Agricultural Economics 10 Resulting in … Increased U.S. Dairy Product Demand/Exports Exports as % of US Production Product GroupTotal 2007 Jan-July 2008 SMP/NDM39%50% Butter/AMF/butteroil6%12.8% Cheese2%3.2% Total Whey58%47% Milk Solids9.5%11.5% FY 07/08 Exports will exceed $4B  1 st Trade Surplus

11 Department of Agricultural Economics 11 Bottomline: U.S. Dairy Products are a “Good Value” The lack of export competition from: EU – world’s largest dairy exporter New Zealand – 2 nd largest exporter Australia – 3 rd largest dairy exporter Weak U.S. Dollar making U.S. dairy products “cheaper” in world markets Growing dairy demand in China, India and Latin America Caused record-high U.S. dairy prices in 2007 & transforming dairy markets

12 Department of Agricultural Economics 12 Domestic Dairy Demand Strong, too!! Per capita consumption of dairy products increasing over past 10 years 19972007 % Δ All Products, ME567 lbs610 lbs+7.6% Fluid Milk/Cream216 lbs206 lbs-4.6% Butter4.1 lbs4.7 lbs+14% American Cheese11.8 lbs12.8 lbs+8.5% Other Cheeses15.7 lbs19.9 lbs+27%

13 Department of Agricultural Economics 13 Supply trying to Keep Up with Demand Growth in milk production is “slowing” … Aug ‘08 vs Aug ’07  up 1.1% (feed costs!!) First 8 months of ’08 vs. ‘07  up 2.5% Since May, same month ‘07vs‘08 growth ebbing US Milk production is expected to rise 2.1% in 2008  up only 3.9 B lbs. 2008 Output projected to be 189.5B 2009 Output projected @ 190.3B   0.4% High feed costs have curtailed growth in milk output Farmers very cautious about adding cows and holding “cull” cows

14 Department of Agricultural Economics 14 Source: Roger Cyan, NMPF, Dairy Market Report

15 Department of Agricultural Economics 15 Up 2.53% thru Aug

16 Department of Agricultural Economics 16 Increasing Milk Output Driven by More Cows Up 120-130K Head, or 1.4%

17 Department of Agricultural Economics 17 Sustaining Prices in ’08 & ‘09 USDA expects a slight decrease in milk and dairy product prices in 2008  down 5-7% Milk prices forecast down 25-30¢ vs. ‘07 All Milk Price expected to fall from $19+/cwt in ’07 to ~$18.85 in ’08 to ~$18.25 in ‘09 Class III (cheese) price could fall $0.20/cwt from $18 to $17/cwt in ‘08 Class IV (butter/powder) price projected to decline about $2.00 from $18.35 to $16.30/cwt Dairy product prices moves mixed in ’08 Cheese prices rise from $1.73 to $1.92lb Butter prices up from $1.34 to $1.42/lb NDM prices down from $1.71 to $1.38/lb

18 Department of Agricultural Economics 18 Source: Roger Cyan, NMPF, Dairy Market Report

19 Department of Agricultural Economics 19 Source: Roger Cyan, NMPF, Dairy Market Report

20 Department of Agricultural Economics 20 Source: Roger Cyan, NMPF, Dairy Market Report

21 Department of Agricultural Economics 21 My Forecast for 2008 is “Better” Based on ebb & flow of cheese prices, it is my opinion that milk prices could set yet another record high during 2008  up (or down) 20-25¢ Strong global demand, weak US Dollar and CWT herd buyout leads me to contend that farm-level milk prices will average more than $20/cwt again during 2008

22 Department of Agricultural Economics 22 2003 thru 2007 & Forecast 2008 Avg Class I Price: FO#7 Base Zone $0.27/cwt

23 Department of Agricultural Economics 23 2003 thru 2007 & Forecast 2008 Avg “Blend” Prices: FO#7 Base Zone 2008 = $20.25 5-yr = $14.69 2006 = $13.89 2007 = $20.40 2008 All Milk Price for MS = $20.40/cwt.

24 Department of Agricultural Economics 24 Price Outlook …THE PRETTY GOOD Most dairy market analysts expect global demand to maintain milk prices and average $20/cwt during 2008 Even the most pessimistic forecasts have milk prices exceeding $18/cwt in 2008 & 2009 CONCERN?  milk output is still increasing! Dairy & milk prices will “rise” slightly in 2008  up $0.20 -$0.25/cwt, or ~1% Dairy & milk prices expected to fall in 2009  down $0.50 -$0.60/cwt, or ~2-3% Key factor: Continued robust international demand for U.S. dairy products  ???

25 Department of Agricultural Economics 25 THE REALLY BAD … Dramatically Increased Feed Costs!!

26 Department of Agricultural Economics 26 THE REALLY BAD…  Feed Costs Increasing demand for corn used as a feedstock for ethanol has pushed corn/feed prices up sharply in 07/08 USDA is now predicting corn prices will be up +100% in 2008 vs. ‘06 or, from $3.04 to $6.00+/bushel USDA reported the Milk-Feed Price Ratio for May at 1.83  vs. 3.0?? Lowest since began reporting in 1985

27 Department of Agricultural Economics 27 Record Low Milk-Feed Price Ratio May = 1.83 Aug = 1.89

28 Department of Agricultural Economics 28 Source: Roger Cyan, NMPF, Dairy Market Report

29 Department of Agricultural Economics 29 Milk Production Cost Increases

30 Department of Agricultural Economics 30 What’s driving up feed costs? Primary factor that is obvious to virtually everyone on the planet Earth  Increasing corn use for growing ethanol production in the U.S. Livestock and dairy producers have/are bearing burnt of the negative impacts of this “ethanol revolution” Many questioning survival of industry Let’s look at some “troubling” data

31 Department of Agricultural Economics 31 WOW … US Corn Balance Sheet 2004/052005/062006/072007/082008/09 Harv Acres73.6075.1070.6086.5 79.3 Yield160.4148.0149.1151.1142.9 Prodn.11.80711.11410.53513.07412,070 Ethanol1.3231.6032.117 3.0004.000 Exports1.8182.1472.1252.4252.000 Total Use10.66211.27011.21012.82012.645 End. Stks.2.1141.9671.3041.576 1.018 Price2.062.003.044.205.00- 6.00

32 Department of Agricultural Economics 32 Increasing Corn Use for Ethanol

33 Department of Agricultural Economics 33 Feedstuff Prices @ Memphis 05/08/0706/17/0809/16/08 CSM 41% $140$305$300 WCS $148$405$320 Wheat Midds $79$140$120 Corn Gluten Feed (20% Protein) $105$170$165 Soybean Hulls $100$137$175 Rice Bran $77$110$120 Source: USDA Ag Marketing Service. LR_GR210.txt

34 Department of Agricultural Economics 34 Futures Contract Feedgrain Prices Sept 19 Settle $$ July 2009July 2010July 2011 CORN$5.78$5.94$5.74 SOYBEANS$11.92$11.39$11.34 WHEAT$7.62$8.16$8.50 Source: FutureSource.com

35 Department of Agricultural Economics 35 Dairy Policy/Programs are … The NOT SO UGLY!!

36 Department of Agricultural Economics 36 The “New” 2008 Farm Bill FINALLY PASSED/BECAME LAW on JUNE 18 th Congress over-rode President’s veto for the second time Most dairy features of the 2002 Farm Bill were maintained Most controversial issue was Income Means test via Adjusted Gross Income, or AGI  not Dairy issues!!

37 Department of Agricultural Economics 37 The “New” 2008 Farm Bill BIG QUESTION ANSWERED: All basic dairy programs were maintained in the “new” Farm Bill There are 10 sections in the Dairy Title of the 2008 Farm Bill Only 3 or 4 have any impacts on dairy farmers … and will review MILC Focus on the changes in the MILC program which is of most importance to milk producers

38 Department of Agricultural Economics 38 Milk Income Loss Contract (MILC) Dairy Income Loss Contract program is maintained under 2008 Farm Bill  and enhanced several ways Currently, MILC has a payment rate of 34% of difference between the Class I Boston price and $16.94/cwt “trigger” The maximum volume of milk eligible to receive MILC payments is 2.4 Million lbs. during a 12-month fiscal year Volume represents amount of milk produced by 140-145 cows

39 Department of Agricultural Economics 39 MILC -- continued Under 2008 Farm Bill, payment rate and eligible volume increases … along with adding a Feed Cost Adjuster Starting October 1 st (10 days), the MILC payment rate increases to 45% of the difference between the Class I Boston price & “adjusted” trigger price Maximum volume of milk eligible to receive MILC payments increased to 2.985 Million lbs. during a 12-month fiscal year Volume represents amount of milk produced by 160-165 cows

40 Department of Agricultural Economics 40 MILC -- continued The Feed Cost Adjuster modifies/increases the “trigger” by 45% of the difference between the $7.35/cct base feed cost and the month’s adjusted feed cost Base feed cost ration consist of: 51% corn 41% alfalfa hay 8% soybeans The $7.35/cwt. base feed cost will be used from Oct 2008 thru Sept. 2012  in Oct. 2012 base feed cost increases to $9.35/cwt Also in Oct. 2012, payment rate reverts to 34% & the volume cap decreases to 2.4 Million lbs.

41 Department of Agricultural Economics 41 Feed Cost Adjuster – Impact on Trigger Price Rules of Thumb … If dairy feed ration exceeds $7.35 $0.10 increase in corn price - $0.09 increase in the MILC trigger $10 increase in alfalfa price - $0.21 increase in the MILC trigger $0.20 increase in soybean price - $0.025 increase in the MILC trigger For every $1.00 increase in base feed costs, trigger rises by ~ $1.00/cwt.

42 Department of Agricultural Economics 42 Feed Cost Adjuster – Impact on Trigger Price For Aug 2008, the base feed cost has jumped to $9.77/cwt.  or by $2.42 above the $7.35 base cost This caused the trigger price to increase from $16.94 to more than $19.40/cwt.  or $19.45 See table and graphs for details

43 Department of Agricultural Economics 43 MILC Trigger Calculation Aug 2008 $19.45 Dairy Ration Cost =$9.77/cwt

44 Department of Agricultural Economics 44 Summary of “New” Farm Bill? New features to MILC New features to MILC Feed cost adjuster adds a new twist Feed cost adjuster adds a new twist Especially if you meet the cap in a month or two Especially if you meet the cap in a month or two 2008 Farm Bill raises the safety net 2008 Farm Bill raises the safety net 2009 may see MILC payments made … but not expected to be used often 2009 may see MILC payments made … but not expected to be used often Lower energy prices would change that Lower energy prices would change that

45 Department of Agricultural Economics 45 5 th Round of CWT’s Herd Buyout June 3 rd, NMPF/CWT announced its 5 th Dairy Herd Buyout Round Retired 24,860 head from 209 herds Removed 436 M lbs. of milk production Average Bid Price = $6.10/cwt 32 bids accepted from Southeast dairies 2 AR, 1 FL, 3 GA, 3 KY, 4 LA, 5 MS, 6 MO, 4 NC, 2 TN, & 1 WV If bid accepted, CWT pays farmer the “bid price” for volume of milk produced by that dairy herd in a 12 month period

46 Department of Agricultural Economics 46 CWT maintained NO Regional Safeguards during this 5 th Round 32 Bids Accepted in SE

47 Department of Agricultural Economics 47 USDA Implements Revised Class I Price Surface for SE Federal Orders On May 1 st, the USDA implemented a revised Class I pricing surface for the Southeast, Appalachian and Florida Federal Milk Orders Main Purpose: Increase Class I price differentials to provide price incentives to move milk west-to- east & north-to-south within 3 FOs

48 Department of Agricultural Economics 48 Impacts in Southeast … Increases Class I price differentials in most locations/plants across the Southeast No or little increase in LA, MS and AR Atlanta differential increased by 70¢/cwt Largest increases in South Florida by as much as $1.80/cwt. USDA estimated increasing differentials added 24¢/cwt. to dairy farmers milk checks

49 Department of Agricultural Economics 49

50 Department of Agricultural Economics 50

51 Department of Agricultural Economics 51 QUESTIONS?? and/or Comments??

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