2008/09 outlook for dairy prices and dairy policy …

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Department of Department of Agricultural Agricultural EconomicsEconomics

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 ConferenceAtlanta, GA

September 22, 2008

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THE PRETTY GOOD…

Sustaining Strong/Near

Record High Milk Prices

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Current Dairy/Milk Price Highlights

Dairy Product Prices: as of Sept. 22nd 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

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Why are Dairy Product Prices Important? Drive Milk Prices!!

Source: Roger Cyan, NMPF, Dairy Market Report

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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 ??

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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

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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

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Weak US Dollar Aiding U.S. Exports

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Weak US Dollar Aiding U.S. Exports

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Resulting in … Increased U.S. Dairy Product Demand/Exports

Exports as % of US ProductionProduct Group Total

2007Jan-July

2008

SMP/NDM 39% 50%

Butter/AMF/butteroil 6% 12.8%

Cheese 2% 3.2%

Total Whey 58% 47%

Milk Solids 9.5% 11.5%

FY 07/08 Exports will exceed $4B 1st Trade Surplus

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Bottomline: U.S. Dairy Products are a “Good Value”

The lack of export competition from: EU – world’s largest dairy exporter New Zealand – 2nd largest exporter Australia – 3rd 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

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Domestic Dairy Demand Strong, too!!

Per capita consumption of dairy products increasing over past 10 years

1997 2007 % ΔAll Products, ME

567 lbs

610 lbs

+7.6%

Fluid Milk/Cream

216 lbs

206 lbs

-4.6%

Butter 4.1 lbs 4.7 lbs +14%

American Cheese

11.8 lbs

12.8 lbs

+8.5%

Other Cheeses 15.7 lbs

19.9 lbs

+27%

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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

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Up 2.53% thru Aug

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Increasing Milk Output Driven by More Cows

Up 120-130K Head, or 1.4%

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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

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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 2008up (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

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2003 thru 2007 & Forecast 2008 Avg Class I Price: FO#7 Base Zone

Average Class I Milk Prices in Southeast FO

$18.08$17.50

$14.98

$21.24 $21.51

$17.26

$14.00

$16.00

$18.00

$20.00

$22.00

2004 2005 2006 2007 Proj.2008 03-'07 Avg

Years

Dol

lars

per

Cw

t.

$0.27/cwt

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2003 thru 2007 & Forecast 2008 Avg “Blend” Prices: FO#7 Base Zone

Southeast FO Monthly "Blend" Milk Prices

$12

$14

$16

$18

$20

$22

$24

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec.

Months

2006 2007 2008 2003 - 2007

2008 = $20.25

5-yr = $14.692006 = $13.89

2007 = $20.40

2008 All Milk Price for MS =

$20.40/cwt.

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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 ???

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THE REALLY BAD …

Dramatically Increased Feed

Costs!!

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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

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Record Low Milk-Feed Price Ratio

May = 1.83

Aug = 1.89

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Milk Production Cost IncreasesMilk Production Cost Increases

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2003 2004 2005 2006 2007 2008 2009

Dol

lars

per

Cw

t. v

s. 2

002

Feed Non-feed

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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

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WOW … US Corn Balance Sheet

2004/05 2005/06 2006/07 2007/08 2008/09

Harv Acres

73.60 75.10 70.60 86.586.5 79.3

Yield 160.4 148.0 149.1 151.1 142.9

Prodn. 11.807 11.114 10.535 13.074 12,070

Ethanol 1.323 1.603 2.117 3.000 4.000Exports 1.818 2.147 2.125 2.425 2.000

Total Use 10.662 11.270 11.210 12.820 12.645

End. Stks.

2.114 1.967 1.304 1.576 1.018

Price 2.06 2.00 3.04 4.20 5.00-6.00

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Increasing Corn Use for Ethanol

57.8%

54.6%

49.9%

47.5%

41.2%

12.4%

14.2%

18.9%

23.1%

32.0%

12.8%

12.2%

12.2%

10.5%

11.0%

17.1%

18.9%

19.0%

18.9%

16.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mar

keti

ng Y

ear

% of Total Corn Use

Feed & Residual Ethanol Other Industrial Exports

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Feedstuff Prices @ Memphis

05/08/07 06/17/08 09/16/08

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

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Futures Contract Feedgrain Prices

Sept 19 Settle $$

July 2009

July 2010

July 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

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Dairy Policy/Programs are …

The NOT SO UGLY!!

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The “New” 2008 Farm Bill

FINALLY PASSED/BECAME LAW on JUNE 18th

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!!

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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

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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

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MILC -- continued Under 2008 Farm Bill, payment rate

and eligible volume increases … along with adding a Feed Cost Adjuster

Starting October 1st (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

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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.

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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.

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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

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MILC Trigger CalculationMILC Trigger Calculation

Aug 2008 $19.45

Dairy Ration Cost =$9.77/cwt

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Summary of “New” Farm Bill?

New features to MILCNew features to MILC Feed cost adjuster adds a new twistFeed cost adjuster adds a new twist Especially if you meet the cap in a Especially if you meet the cap in a

month or twomonth or two

2008 Farm Bill raises the safety 2008 Farm Bill raises the safety netnet 2009 may see MILC payments made 2009 may see MILC payments made

… but not expected to be used often… but not expected to be used often Lower energy prices would change Lower energy prices would change

thatthat

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5th Round of CWT’s Herd Buyout

June 3rd, NMPF/CWT announced its 5th 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

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CWT maintained NO Regional Safeguards during this 5th

Round

32 Bids Accepted in

SE

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USDA Implements Revised Class I Price Surface for SE Federal Orders

On May 1st, 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

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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

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QUESTIONS??

and/or

Comments??

2008/09 outlook for dairy prices and dairy policy …

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