financial outlook for dairy - scott brown

Financial Outlook for Dairy

Scott Brownbrownsc@missouri.edu

Volatility and Uncertainty to Remain In the Near Term

General Economic Outlook Becoming Worse U.S. Rest of World

US Consumer’s Becoming More Cautious At a Time US Dairy Producers Need More Demand

Major Equity Drain Could Have Major Effects on Food Spending

Where Do Oil Prices Move From Here?

U.S. Income Growth

Global Insight, September 2008

Daily Livestock Report, October 7, 2008

Daily Livestock Report, October 7, 2008

Corn Prices Are Declining

Other Feed Prices Declining

Milk Futures Have Also Moved Lower

Two Possible Scenarios for 2009

Milk prices move substantially lower for the first half of 2009

The industry feels substantial pain that results in a larger supply adjustment

Allows for a better outlook for in the second half of the year All milk prices below $15.50 per cwt.

Milk prices tend to level at around $17 in the first half of 2009

Continued pain for much of the year Requires an exogenous shock to get milk prices higher

A possibility: Corn plantings down next spring and oil prices rise next summer

U.S. Dairy Cows

U.S. Dairy Cows

U.S. Milk Yields

U.S. Milk Production

2008 189.6 billion pounds

Cheese Prices

Butter Prices

Nonfat Dry Prices

Retail Dairy Prices

Dairy Exports

Federal Order Class Prices

U.S. All Milk Price

Wisconsin Dairy Operating Costs

Milk Income Loss Contract (MILC) Program

October 2008 through August 2012 45% of the price difference 2.985 million pound cap

January 2008 through August 2012 Dairy feed ration cost adjustment $7.35 Calculate the trigger price as 45% of the percentage

dairy feed ration exceeds $7.35

Revert to pre-2008 farm bill levels after August 2012

34% of the price difference 2.4 million pound cap Dairy feed ration cost adjustment increases to $9.50

MILC Trigger Calculation

Effect of the CWT Program on the Effect of the CWT Program on the US All Milk Price *US All Milk Price *

* - Only includes 2008 CWT export assistance as of 10/16/2008

Year 2003 2004 2005 2006 2007 2008 *

US All Milk Price

$12.55 $16.13 $15.19 $12.90 $19.13 $19.08

CWT Herd Retirement Impact

$0.05 $0.16 $0.44 $0.55 $0.62 $0.57

CWT Export Assistance Impact

NA $0.01 $0.01 $0.09 $0.16 $0.14

TOTAL CWT Impact

$0.05 $0.17 $0.45 $0.64 $0.77 $0.71

* - Includes export assistance through 10/16/2008

My Forecast

2007 2008 2009

Milk Cows 9,153 9,265 9,216

(thou. head)

Milk Production 185.6 189.6 190.9

(bill. pounds)

All Milk Price 19.13 18.45 17.10

(dollars per cwt.)

Class III Price 18.04 17.55 16.20

(dollars per cwt.)

Class IV Price 18.36 15.20 13.80

(dollars per cwt.)

Summary

The first six to nine months of 2009 will be some of the toughest months dairy producers have faced in this decade

Domestic demand anemic World demand for US dairy products will be less

Increasing supplies from competitors Slowing demand in Asian countries

Programs available to help in 2009 Dairy price support program MILC program CWT

Things to watch in 2009 Corn plantings Oil prices General economy

QUESTIONS