1. Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota North Central Cheese Industry Association Rochester, MN Oct 16, 2013

2. Year-On-Year Milk Production Change (%) Source: USDA, Milk Production reports, various issues

3. Income over Feed Costs Margins: 1980-2013

4. Purchased Feed Costs as % of Total Feed Costs

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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 Growth AmericanItalianTotal 1970-19802.632.386.1622.18 mil 1980-19901.484.536.4322.39 mil 1990-20001.563.004.8932.54 mil 2000-20100.632.483.0427.19 mil 2010-2020 ?? 2.0024.54 mil

11. Source: future.aae.wisc.edu, own calculations Fluid milk story: from per capita decline to total volume decline? U.S. Fluid Milk Sales (12-months Rolling Average)

12. 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.

13. 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

14. Growing Milksheds in the U.S.

15. A Closer Look at the Upper Midwest

16. Dairy Situation in the I-29 Corridor

17. Dairy Growth in South Dakota Cow Inventory Growth By County 2000-2013 Grant 2,700 Codington 500 Hamlin 2,300 Brookings 5,800 Moody 4,600 Minnehaha 2,300 Total 18,200

18. Dairy Growth in Iowa Cow Inventory Growth By County 2000-2013 Lyon 5,800 Osceola 2,765 Sioux 5,100 Total 13,665

19. Dairy Growth in Minnesota Cow Inventory Growth By County 2000-2013 Stevens 15,800 Swift 2,100 Nobles 1,200 Total 19,100

20. Growth Dynamics in I-29 Corridor vs. Northeast WI and Central MI

21. 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. CurrentFuture Valley Queen Cheese – Milbank, SD4,000,000 Davisco Foods Intl. – Lake Norden, SD3,200,0006,000,000 Agropur – Hull, IA2,500,0005,000,000 Bel Brands – Brookings, SD750,000 Total Aggregate Demand 9,700,00015,750,000 Approximate Cows Needed 145,000240,000

22. 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

23. 100 mile radius of Agropur in Hull, IA 23

24. Source: Agropur Back to the Future in Southern SD In 1960: 53,570 cows In 2012: 23,997 cows

25. Source: Nebraska Department of Agriculture Cutting Through the Red Tape in NE

26. 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

27. Corn Yield Land Price Increase Since 2005 (x Times) Source: Blimling and Associates

28. 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)

29. Source: Blimling and Associates Upper Midwest from Lenders Perspective 2004 (I-29, Michigan, Wisconsin) ItemQuantityCost/UnitInvestment Dairy3,000$4,00012,000,000 Land100$3,000 300,000 Cows1,500$1,250 1,875,000 Total Investment14,175,000

30. Source: Blimling and Associates 2012 Michigan & Wisconsin ItemQuantityCost/UnitInvestment Dairy3,000$4,00012,000,000 Land500$5,0002,500,000 Cows1,500$1,250 1,875,000 Total Investment16,375,000 2012 I-29 Corridor ItemQuantityCost/UnitInvestment Dairy3,000$4,00012,000,000 Land500$12,000 6,000,000 Cows1,500$1,250 1,875,000 Total Investment19,875,000

31. Source: Own Calculations Importance of Risk Management / Federal Policy Coverage Level Fees & Premiums Expected Indemnity DMSP PenaltyNet 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.

32. U.S. Alfalfa Hay Acreage

33. U.S. Corn Basis Map (Early 2013)

34. 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

35. 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.

36. Dairy Situation and Outlook in the I-29 Corridor presented at the North Central Cheese Industry Association, October 16, 2013. Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 Thank you for your help: Duane Banderob and Katie Behnke, Blimling and Associates Tim Czmowski and Deeann Bylsma, Agropur Roger Scheibe, SD Dairy Producers Willow Holoubek, A-FAN, Nebraska Research supported by a grant by the Minnesota Milk Producers Association