Factors Driving Dairy Market Trends and Impacts and Portents for Policy

1. Factors Driving Dairy Market Trends and Impacts and Portents for Policy Andrew M. Novakovic, PhD The E.V. Baker Professor of Agricultural Economics January 2019 Cornell University Charles H. Dyson School of Applied Economics and Management

2. Outline (linking each to a policy/legislative action) • Labor • immigration policy • Exemption from labor law (min. wage, hours per day, hours per week, overtime, sick leave, vacation, etc.) • Competition for labor, both in US and in home country of immigrant • Trade • Doing something good • Not doing something bad • Environmental regulation • Making it easier/cheaper to farm (perhaps with long term negatives) • Making it harder/more expensive to farm (perhaps with long term positives • With scientific/objective support vs. because of subjective belief • Costs of business • Consumer attitudes and Market Environment • Driven by individual choices • Driven by external influences • Market Structure -> Market Behavior -> Market Outcome • Changes in number of suppliers and buyers and • How it influences what we do individually and collectively and • What it means for market dynamics (price in particular) prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

3. Labor Policy • A national survey of dairy farms was conducted during Fall 2014, with responses from all regions of the United States and all herd sizes. • Dairy farms employed an estimated 150,418 workers in 2013. An estimated 76,968 of those are immigrants, accounting for 51 percent of all dairy labor and dairies that employ immigrant labor and producing 79 percent of the U.S. milk supply. • Dairy farm workers are paid an average wage of $11.54/hour and with non-wage benefits included, an annual equivalent compensation of $34,443. Dairy farms that hire immigrant labor pay hire average wages than farms that do not hire immigrants. • Eliminating immigrant labor would reduce the U.S. dairy herd by 2.1 million cows, milk production by 48.4 billion pounds and the number of farms by 7,011. Retail milk prices would increase by an estimated 90.4 percent. • Eliminating immigrant labor on dairy farms would reduce U.S. economic output by $32.1 billion and reduce employment by 208,208 jobs • Approximately 64 percent of the losses noted above would occur in input supply sectors and services provided to U.S. dairy farms. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

4. Implications of Changing Ag. Exemption in NYS • Potential Impacts of Minimum Wage Increases on New York Dairy Farms • Jennifer Ifft & Jason Karszes • This study considers the impact of minimum wage increases on New York dairy farm labor costs and net farm income, under two wage compression scenarios. • Average net farm income could decrease by at least one-third and labor costs could increase by at least 34 percent under the new minimum wage law, compared to an expected 10 percent decline in net farm income and a 13 percent increase in labor costs based on historic wage increases. • Under the current short term outlook for low milk prices, increasing wage pressure may accelerate the decades-long trends towards (1) larger and more productive dairy farms and (2) capital-intensive or labor-saving production methods. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

5. External Factors Complicating Labor Policy Decisions • Animal Welfare and Worker Justice will only grow in importance – part of the Millennial social contract prepared by A.M. Novakovic, use with attribution

6. US Immigration Law • Acceptable solutions to the use of immigrants for seasonal and year around labor in agriculture are not especially contentious, per se, BUT • Some insist on linking a solution to larger issues of immigration and “border security”, plus • There are plenty of other political tensions to thwart a solution. • Don’t get your hopes up prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

7. Trade (or not to Trade) • Current focus has been driven by a renewed belief in the long term (eventual) benefits of protectionism and mercantilism, with a focus on economic gains measured by US jobs and less attention to 1) consumer costs and 2) the non-economic benefits of a more closely knit global community. • USCMA (NAFTA 1.1) • Sec. 233 Tariffs and the Retaliatory Responses • We lost ground just by threatening NAFTA and USMCA does very little (NAFTA 1.1) • We are on the outside looking in with new TPP • Sec. 232 quotas on steel and aluminum, and all China, continue to cost us in retaliatory tariffs prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

8. Exports of Lowfat or Nonfat products,especially, are growing (push and pull) prepared by A.M. Novakovic

9. Impacts of Retaliatory Tariffs – Cheese to Mexico A bit too early to get specific about numbers, but available data and anecdotal evidence indicates something is going on. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

10. International S&D Drives Powder Markets(and lactose and ordinary MPCs) With 2/3 to ¾ of sales being exports, skim solids products are very much driven by prices in world trade. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

11. Environmental Regulation • Current Administration is unwinding some regulations with the belief that they are 1) worrying about stuff that does need worrying about and 2) stifling short term economic growth. • #2 is assuredly correct. #1? • Need to keep in mind: • There are State and local (e.g., Watershed) rules as well • Some practices have implications for consumer demand • There are things you may decide to do because they are right for you. • Increased funding for EQIP under AIA 2018 • Implications of increased traceability prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

12. Key Mega Consumer Market Factors • Traceability expectations will be amplified by Block Chain technologies • These technologies are being looked at very seriously by the food industry, for a variety of reasons – food safety is a big one. prepared by A.M. Novakovic, use with attribution

13. Cost of Business • Taxes • Income, property, employment etc., etc. • Right to farm, tax abatement, ag exemptions • Business risk • What kind of risk • Production, price, revenue, market • What kind of solutions • Private/Personal, Cooperative/Collective, Public/Social prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

14. Key Mega Market Factors and Policies • MPP-Dairy was a sure bet for 2018. MPP 3.0 will be way better than MPP 1.0 but also better than MPP 2.0 • LGM-Dairy is improved (more available) but its benefit is certainty not adequacy. Offers little help in low markets. Still complicated • RP-Dairy looks more attractive and gaining attention but still a long way from MPP-Dairy sign-up • Bottom line: new DMC is a boon for small to medium sized farms (up to 500-750 cows). RP-Dairy (with a little help from DMC) provides a very reasonable set of tools for larger farms prepared by A.M. Novakovic, use with attribution

15. Market Risk – Market Solutions – Collective Strategies prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

16. MPP-Dairy 3.0 = Dairy Margin Coverage The Agricultural Improvement Act of 2018 is signed and ready to go, but waiting for USDA to get back to work so that rules can be written. ”New” dairy program is a serious revision of MPP-Dairy that is much more generous to average sized or smaller farms in terms of premiums (costs less) Coverage Level Threshold (pays more often) prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

17. DMC Premium Rise Sharply above 5 Million Pounds per Year Every farmer in the US can enroll in DMC but now almost every farmer can limit his enrollment to Tier 1, because the minimum enrollment is now 5% of PH. Farmers may also now choose a different margin coverage in Tier 2 for milk in excess of 5 million pounds. Thus, you can take $9.50 coverage for the first 5 million and drop it to, say, $5 for the remainder of your enrollment. You may never get a payment for milk in Tier 2, but the cost is very small – just in case, or if your 5% exceeds 5 million pounds. Whatever you do in DMC, you can also enroll in DRP or LGM-D. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

18. Refunds, Discounts and other Special Deals • Knowing that MPP-D 1.0 was an unmitigated disappointment, Congress decided to allow refunds of net premiums for farms enrolled in 2015-2017. • You can choose to take 50% of the net in cash, right away, or • You can use 75% of the net as a credit towards premiums under DMC • In addition, if you choose to elect one time coverage (same percentage enrolled and same margin), you will get a 25% discount on your premiums. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

19. Takeaways from DMC So Far • With the new premiums, it probably makes sense to enroll at $9.50 (Tier 1, max amount of milk) • With the 25% discount, it probably makes sense to select it for all 5 years at the gitgo. • Farms with more that 5 million pounds might well consider $4 to $5 coverage, simply because the cost is so low. • Larger farms, in particular, should consider Dairy RP prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

20. Consumer Attitudes and Market Environment • What do consumers want? • More than one kind of consumer (worldwide) • Because of the product itself • Because of something related (believed to be related to the product) • Because of me • Implications for • Sales trends • Product development • Marketing strategies • Public regulation prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

21. Key Mega Consumer Market Factors • Health and Nutrition – we have an underlying good story but it is hard to change decades of teaching and beliefs • Labeling and standards – we will likely win the battle on what can be called milk but the victory may be Pyrrhic • Front-of-Pack (FOP) labeling is on the cusp of exploding and could be good news and bad news for dairy products Intermountain Traffic Light Diet Plan prepared by A.M. Novakovic, use with attribution

22. U.S. Food & Nutrition Policy

23. Domestic Use Has Increased Rather Nicely, especially, oh yes, milkfat or cream based products (think cheese first) prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

24. Retail Price Inflation has been considerably lower than for All Food or All Items prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

25. Does consumption respond to changes in price? prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

26. Beverage milk sales are struggling and it has nothing to do with price. There have been headwinds for beverage milk for many years, but PBB are likely culprits for the 2010 downturn. In the United States, almond milk remained a niche health food item until the early 2000s, when its popularity began to increase. In 2011 alone, almond milk sales increased by 79%.In 2013, it surpassed soy milk as the most popular plant-based milk in the U.S.As of 2014 it comprised 60 percent of plant-milk sales and 4.1 percent of total milk sales in the US prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

27. Children’s Nutrition, Childhood Obesity, Subsidized Food Consumption, and Consumer Choice Secretary Perdue relaxed several requirements, permitting lowfat chocolate milk and white bread. He argues feeding kids is the first priority, then what you feed them. First Lady, and First Mom, spearheaded the Obama Administration’s effort to shape how kid’s eat by what schools had to serve them (to qualify for federal cafeteria subsidies). Kids were served healthier meals, but were they eating them? What you eat vs. how much you eat. prepared by A.M. Novakovic, permission to use with attribution

28. Food Attitudes and Science (what should you eat) • The latest Scientific Report of the 2015 Dietary Guidelines Advisory Committee • Under-consumption : vitamin D, calcium, potassium and fiber. Dairy products are good sources of vitamin D, calcium and potassium, and can be paired with fiber. • Over-consumption: Saturatedfat and sodium, but removed restrictions on fat consumption and dietary cholesterol. • Dairy is associated with lower risk of a number of chronic diseases and conditions, such as heart disease, diabetes and obesity • Attempting to link environmental sustainability with food choices (very Millennial) Perdue critics cite the 2009 Study, on which M. Obama’s policy recommendation was based. prepared by A.M. Novakovic, permission to use with attribution

29. Can I Figure It Out?Knowing vs. Understanding How do we communicate our stories, our rationale, our arguments to the general public? Are we transmitting science to a receiver tuned to values? Does science prove a truth? Is there a truth? Is it all just too complicated? (Type I vs. Type II thinking) => “Therefore, everything in moderation!” prepared by A.M. Novakovic, permission to use with attribution

30. Key Mega Consumer Market Factors • Bacteria produced animal proteins (including milk!) and gene editing will refocus attention on what are acceptable technologies and why prepared by A.M. Novakovic, use with attribution

31. Cheeses are showing troubling signs as well. prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

32. Market Structure -> Market Behavior -> Market Outcome • Changes in number of suppliers and buyers and • How it influences what we do individually and collectively and • What it means for market dynamics (price in particular) prepared by A.M. Novakovic, please feel free to reuse or distribute but with attribution

33. Key Mega Market Factors and Policies • Federal Orders remain secure, but their ability to help dairy farm economics is limited • Focused on “efficient movement of milk to fluid markets” • Vertical price coordination, beginning at wholesale, not price support • Aims for a predictable system, not a pleasing outcome • Class III and IV make allowances are a major “Catch—22”, creating serious disincentives to plant investment even as the market expands • Watch California market as it adjusts to a Federal Order prepared by A.M. Novakovic, use with attribution

34. Politics aside….. • Implications of the Blue Wave (and the Pink Wave inside of it) are both clear and hard to predict. • The Democrats policy agenda is fairly predictable • Their ability to get something through the Senate is no better than it was for a Republican House • And probably worse as Senate Republicans are both more “Trumpy” and more angry than before. • 2019 Farm Bill was a positive outcome but is not a sign of bipartisanship • Failure to pass remaining Appropriations bills is a better test of cooperation vs. conflict, but the shutdown is testing Senate Republican party loyalty vs. getting things done. • The future for NAFTA, immigration law, and other non-farm bill legislation is not particularly rosy. prepared by A.M. Novakovic, use with attribution

35. Factors Driving Dairy Market Trends and Impacts and Portents for Policy Andrew M. Novakovic, PhD The E.V. Baker Professor of Agricultural Economics January 2019 Cornell University Charles H. Dyson School of Applied Economics and Management