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Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota

Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota North Central Cheese Industry Association Rochester, MN Oct 16, 2013. Year-On-Year Milk Production Change (%). Source: USDA, Milk Production reports, various issues.

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Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota

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  1. Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota North Central Cheese Industry Association Rochester, MN Oct 16, 2013

  2. Year-On-Year Milk Production Change (%) Source: USDA, Milk Production reports, various issues

  3. Income over Feed Costs Margins: 1980-2013

  4. Purchased Feed Costs as % of Total Feed Costs

  5. Historical and Forecasted Income Over Feed Costs Margins • Forecasted IOFC Margins for 2014 are higher than 75% of historical IOFC margins since 2000. Source: USDA, CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University

  6. U.S. All-Milk Price 2014 Outlook (80% Confidence Interval) Source: CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University

  7. Domestic Sales of Dairy Foods (Year-To-Date Ending August 11, 2013) Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013

  8. Domestic Sales of Dairy Foods (Year-To-Date Ending August 11, 2013) Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013

  9. Dairy Exports 2013 Year-To-Date Growth • In July 2013, 17.6% of total milk solids exported. • Over the last five years, over two thirds of the growth in the U.S. milk production was exported. Source: USDA FAS Data, USDEC Global Dairy Market Outlook July 2013, and own calculations

  10. Long-term Outlook on Cheese Consumption • U.S. Population growth and per capita cheese consumption growth slowing down.

  11. U.S. Fluid Milk Sales (12-months Rolling Average) • Fluid milk story: from per capita decline to total volume decline? Source: future.aae.wisc.edu, own calculations

  12. Over the next 10 years, U.S. milk production may grow by 25 billion lbs. Where will we sell that? • Needed increase in exports (vs 2012): • Milk Powders: 56% • Butterfat: 270% • Cheese: 60% • In order to export products accounting for 10 billion lbs of milk in 2023, the U.S. would need to capture 70% of the entire forecasted increase in world’s imported demand for skim milk powder and even higher share of additional butter trade.

  13. Defining the I-29 Dairy Corridor • Interstate 29 (I-29) is an 745.5 miles long Interstate Highway in the Midwestern United States. I-29 runs from Kansas City, MO, at a junction with Interstate 35 and Interstate 70 to the Canadian border near Pembina, ND.

  14. Growing Milksheds in the U.S.

  15. A Closer Look at the Upper Midwest

  16. Dairy Situation in the I-29 Corridor

  17. Dairy Growth in South Dakota

  18. Dairy Growth in Iowa

  19. Dairy Growth in Minnesota

  20. Growth Dynamics in I-29 Corridor vs. Northeast WI and Central MI

  21. I-29 Corridor Daily Milk Demand (lbs of milk) Other processing plants in the region include Dean Foods in Siux Falls, SD and Le Mars, IA, AMPI cheese plant in Sanborn, IA and drying plant in Freeman, SD, and Wells Blue Bunny in Le Mars, IA.

  22. Business Environment in South Dakota • Pre-permitted sites • Low taxes • Governor and Sec. of Agriculture actively involved in promoting the state • Consensus between producers, processors and government that SD wants to double the milk production

  23. 100 mile radius of Agropur in Hull, IA 23

  24. Back to the Future in Southern SD In 1960: 53,570 cows In 2012: 23,997 cows Source: Agropur

  25. Cutting Through the Red Tape in NE Source: Nebraska Department of Agriculture

  26. I-29 from Producers Perspective: Milk Price 3,000 cows; 24,000 lbs/cow Source: Blimling and Associates

  27. Source: Blimling and Associates

  28. Upper Midwest from Lenders Perspective • The game has clearly changed for dairy • What we think we know: • Banks no longer fund new dairy construction without a land base, increasing the upfront capital needs • 100 acres not enough; need land to grow some feed • Minimum collateral levels have also increased – need cows and cash (or an outside investor) • Successful 300 cow dairy will not be extended credit to move to 3,000 cows • Will take 20 years to grow the herd and slowly add on • This seems to answer the “who grows” question (not locals) Source: Blimling and Associates

  29. Upper Midwest from Lenders Perspective Source: Blimling and Associates

  30. Source: Blimling and Associates

  31. Importance of Risk Management / Federal Policy Expected Returns to participation in the Dairy Producer Margin Protection Program and Dairy Market Stabilization Program in 2009. 6,000 cow dairy at 24,000 lbs/cow. Sign-up date assumed to be January 15. Source: Own Calculations

  32. U.S. Alfalfa Hay Acreage

  33. U.S. Corn Basis Map (Early 2013)

  34. I-29 from a Processor’s Perspective • Assume a 3 M per day plant running 340 days • Easiest “solution” is to buy co-op milk indexed to the respective class price • Conversations with processors suggest the following premiums • Michigan: $1.50 - $1.75 ($16.3 M at $1.60) • I-29: $1.70+ ($17.3 M at $1.70) • Idaho: $0.25 - $0.50 ($ 3.5 M at $0.35) • Some other thoughts • At smaller volumes the spread means less • Freight expense will matter when comparing the West • State incentives can also close the gap

  35. Summing Up • Where does this all take us? • Economics of I-29 expansion seem complex. A lot depends on dairy development efforts (processors, state officials, university extension), but ultimately costs have to pencil out for investments to trickle in. • The 2013 farm bill, if passed, could remove a lot of risk (both DSA and DFA in their current form are potentially an overkill, though the devil is in the details), possibly spurring a new wave of dairy expansions across the country. We need to be ready to exploit this opportunity before milk prices decline as a result of new and very generous safety net.

  36. Dairy Situation and Outlook in the I-29 Corridor presented at the North Central Cheese Industry Association, October 16, 2013. Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 Thank you for your help: Duane Banderob and Katie Behnke, Blimling and Associates Tim Czmowski and DeeannBylsma, Agropur Roger Scheibe, SD Dairy Producers Willow Holoubek, A-FAN, Nebraska Research supported by a grant by the Minnesota Milk Producers Association

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