Potential Impacts From the Growth of New Mexico Dairies

1. Potential Impacts From the Growth of New Mexico Dairies By Terry L. Crawford USDA-ERS at “Dairy Fair” At ENMU-Roswell, New Mexico August 7, 2000

2. Key Factors to Consider • Changes in the U. S. Dairy Industry • Changes in the South West Dairy Industry • New Mexico prospects • Impacts on New Mexico resources • Planning for growth

3. Changes in U.S. Dairy Industry • FMMO Reform • Scheduled Removal of Price Supports • NAFTA reductions in trade barriers with Mexico • Technology • Growth European type of Cheese Consumption

4. Federal Milk Marketing Order Reform

6. Class I =Class III + a regional differential Class II=Class III + a national differential Class III (market clearing price) Class III-A (market clearing price) Fluid milk products soft products (ice cream, yogurt) Cheese and butter Nonfat dry milk The Classified Pricing System

7. What did Congress direct USDA to do? • Required: • Consolidate the present order system into no less than 10 and no more than 14 orders

8. What did Congress direct USDA to do? • Allowed: • California may join the order system • Change in Class I price surface • Use utilization rates and multiple basing points in establishing Class I differentials • Use component pricing in establishing one or more Basic Formula Price (BFP)

9. What has AMS done? • Consolidated the 31 orders into 11 orders • Proposed 4 options on the price surface • Changed the Classified pricing system • Proposed uniform regulations ( these are different in each order)

18. Changes in the South Western Dairy Industry • Texas production growth slows • Texas environmental issues • Increasing Texas Demand/Supply imbalance provides opening for NM production. • Near term lower prices due US production response to previous higher prices.

19. New Mexico Prospects • Has the resources to support 50 to 100% more dairy cows, if developed carefully. • Increasing environmental limitations. • Critical location decisions for both plants and dairies. • If growth continues at the pace of the Ninties, could match Texas output in 5 to 6 years becoming the 7th largest dairy state.

20. NM Growth Scenario • For the past 10 years NM has added an average of 16,000 milk cows per year. • If NM only averages 10,000 cows per year and Texas and Washington continue to grow at current rates, NM will match Texas in 5 to 6 years, and surpass Washington and Michigan.

21. NM Growth Scenario Continued • Cows will increase from 246,000 in June, 2000 to 290,000 in 2005 or 2006. • Milk production will increase from 4.7 billion pounds in 1999 to nearly 6 billion lbs. in 2005/6; even as the rate production growth slows down. • Will need 22 to 32 new dairies, 2 to 3 new cheese plants the size of F&A or Lovington.

23. NM Growth Scenario Continued • Most of the added milk will need to be used by manufacturing because of limited fluid market growth. • This will cause lower blend prices as manufacturing utilization increases for the Southwest FMMO. • Or markets in Mexico need to be developed for fluid or manufactured products.

24. Impacts on New Mexico resources • An additional 50,000 milk cows will require: • 75,000 to 100,000 acres of production of hay and silage. • 25-35 large dairies and 700 workers • 2 to 3 plants equivalent to at least half of LePrino’s plant size and employment • Plus import of grain and concentrate from other regions.

25. Planning for growth • Environmental consequences • Water use for cows and forage • Development of community college level programs of study for dairy herd management and food technologists to supply dairies and plants with a trained supply of workers • Capital acquisition and tax structure

29. Additional Slides If Needed

30. Federal Milk Marketing Order Reform • “Milk “ says USDA’s Chief Economist Keith Collins, “can give you a headache.” -Wall Street Journal

31. What is the Federal Milk Marketing Order System? • FMMO’s were established in the late 1930’s • Farmers had few outlets for their milk • Poor roads • There was little or no refrigeration • Milk moved in 10 gallon cans • The concerns at the time were “market power” and “equity”

32. What do FMMO’s do? • FMMO’s set monthly minimum prices paid by first handlers of milk, by use. • Handlers are required to pay these minimum prices into a “pool” • A weighted average (blend) price, based on use, is paid to farmers from this “pool” • FMMO’s align prices to encourage the movement of Milk

33. Milk pricing options

34. Classified pricing changes under the Federal Milk Marketing Order Reform New proposal Old system Class I price = Class I price = Class III price (national price) + Basic Formula Price (national price) + Class I differential (order specific) Class I differential (order specific) Class II price= Class II price= Class IV price (national price) + Basic Formula Price + $0.70 (national) $0.30 (national) Class III price (national)= Basic Formula Price (national)= formula based on Minnesota-Wisconsin Grade B price butter, cheese, and whey prices updated by butter and cheese price formula Class IV price (national)= Class III-A (national)= formula based on butter and formula based on nonfat dry milk prices and nonfat dry milk prices the butter fat differential

35. What are the economic impacts of order reform • Change in the utilization rates-effect of consolidation • Merged orders may change the utilization rates of different classes • Intra-order zone pricing-effect of consolidation • within orders locations (plants) have different blend prices, based on distance from the main demand point

36. Intraorder pricing

37. Class I differentials-effect of the price surface • The basic economic principle behind the FMMO’s is price discrimination • Fluid milk has the most inelastic demand and is assigned the highest price in the system. • Manufacturing milk is more elastic therefore additional milk is moved onto this market. • The higher the Class I differentials, the higher farmer income and the higher consumer costs

38. Discriminatory pricing Se Sd Pd Pe Pdm D Qd Qe Qe Qd

39. Formula pricing input markets and price discrimination • Class I and II prices are based on fixed differentials added to the Class III and IV prices. • Class III and IV prices are formula driven based on output prices • Rule 1 of price discrimination: • allow at least one market to clear