Dairy Situation and Outlook

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

3. National Dairy Programs 3

4. Dairy Programs Price support program Milk Income Loss Contract – MILC Tariff Rate Quotas on imports Federal Orders Cooperatives Working Together – CWT 4

5. Price Support Program • Authorized until Dec 31, 2007 • Government acts as a buyer of last resort for cheese, butter and nonfat dry milk • Support price is $9.90/cwt, basically unchanged since 1990 • Current product prices are: • Cheese at $1.1314/lb -- blocks • Butter at $1.05/lb -- bulk • NFDM at $0.80/lb -- unfortified • Indirectly supports farm prices 5

6. Price Support Program • Important historically, now provides a low safety net • Since 1989, Government purchases have been seasonal & relatively small • Butter in the early 1990s, NFDM more recently • 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. Milk Income Loss Contract • 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. MILC-X Program • 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 • MILC payment rate was 45% when the Class I price was below $16.94 • MILK-X payment rate is 34% of the difference 9

10. MILC Impacts…. * 10 Months 10

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12. Federal Orders Classify milk based on use Class I = Fluid milk Class II = “Soft” products Class III = Cheese Class IV = Butter & NFDM Set monthly minimum class prices based on wholesale prices for cheese, butter and non-fat solids, yield factors, make allowances = Derived demand for milk Establish pooling rules determining which handlers and producers are in an order Audit milk handlers 12

13. Federal Orders 7 orders pay on components – most milk is used for manufacturing in these FOs 4 high fluid use order markets pay on a per 100 lb. of milk basis, including the Appalachian and Southeast Orders 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. CWT Program Dairy coop members of the National Milk Producers Federation operate a voluntary supply management program to cut production and boost prices Funded by an assessment 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 FAPRI estimated impact on milk prices of $2 bil. through first 3 rounds of buyouts

15. Farm Bill Dairy Programs • House dairy legislation is similar to the expiring farm bill • 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. Market Demand Cheese & byproducts Fluid milks & butterfat Butter & ice-cream Milk powders and components Organic & specialty products

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

21. Dairy Exports 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 21

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27. 2007 Exports Total Value of US dairy exports up 35% Jan-July ‘07 v. ’06 Sharply higher prices since January Skim Milk Powder up 70% Cheese up 70% Butter up 90% We may be seeing some price resistance

28. Current Situation • 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% • 2006 Commercial Sales  2.5% • Cheese  4.6% • Butter  0.5% • Nonfat dry milk  4.5% • Fluid milk  0.1% 28

29. Current Situation • 2007 January – August total milk production  1.7% • Cows @ 9.168 mil,  0.06% in Aug • Milk per cow  2.8% in Aug • 2007 January – June Commercial Sales  2.7% • Cheese  3.0% • Nonfat Dry Milk  3.4% • Butter  8.1% • Fluid milk  0.9% 29

30. Outlook for 2008 30

31. Export Prospects Continued world demand growth but consumer price resistance Continued weakness of the US$ Supply-demand balance in EU27 Normal supplies from New Zealand but continued drought related problems in Australia Some expansion of world supplies World market prices will soften? 31

32. US Sales Outlook US Demand + Slow economic growth + Continued population growth + Continued producer & processor funded advertising and promotion + Lower consumer prices v. 2007 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 32

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 33

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35. Dairy Cattle, US & Canada Historically, US heifer imports = 50-75,000 head/year 36

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37. Fuel & Feed Costs • Persistent higher oil & energy prices • Ethanol demand and the knock-on effects on other crops represents a permanent increase in feed costs for dairy farmers • Feed prices are projected to continue above historic averages in 2007-08 • Corn @ $3.10/bu, US farm avg. • 48% soybean meal @ $220/ton • Current Milk:Feed Price ratio remains high enough to make some more milk but forecast price ratio is unfavorable 38

38. Feed costs $1.00 per bushel = $36/ton 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 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 If you sell 20,000 lb. of milk per cow, an increase of $100 = $0.50 per 100 lb. 39

40. Prices Paid for Feed and Fuel Source: Ag. Prices, NASS, April issues, selected years 41

41. Prices Paid for Selected Fertilizers, $/ton Source: Ag. Prices, NASS, April issues, selected years 42

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43. USDA Forecast 2007 production 9.13 mil. cows --  0.2% 20,250 lb. per cow --  1.5% 184.9 bil. lb. milk --  1.7% 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. !!!! 44

44. USDA Forecast 2008 production 9.15 mil. cows --  0.2% 20,610 lb. per cow --  1.8% 188.6 bil. lb. milk --  2.3% 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 45

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

46. US & FO5 Milk Prices, $/cwt.

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