2008/09 Outlook for Dairy Prices and Dairy Policy …

1. 2008/09 Outlook for Dairy Prices and Dairy Policy … or the Pretty Good, the Really Bad, & Not So Ugly C.W. “Bill” Herndon, Jr. Mississippi State University Southern Outlook Conference Atlanta, GA September 22, 2008 1

2. THE PRETTY GOOD… Sustaining Strong/Near Record High Milk Prices 2

3. Current Dairy/Milk Price Highlights • Dairy Product Prices: as of Sept. 22nd • Cheese Prices “volatile” block prices • 40# Blocks  $1.9825/lb … up/down ~60¢ since Jan. 2 • 500# Barrels $1.9325/lb … up over the past 2 weeks • Butter Prices  improving & stable • Grade AA Butter  $1.7250 … up ~45¢ since January • Nonfat Dry Milk Prices from ’07 record highs • Grade A NDM  $1.10 … down 12¢ last Friday & weak • Dry Whey prices  from record highs • Dry Whey  ~22+¢ … steady but  75% since June 07 • Adv. October Class I milk price was supposed to be announced last Friday (Sept 19)  BUT • Sept. Adv. Class I price is $21.45/cwt … DOWN $3.13 ( 12.7%) from July • Milk prices “weakening” slightly 3

4. Why are Dairy Product Prices Important?  Drive Milk Prices!! 4 Source: Roger Cyan, NMPF, Dairy Market Report

5. Global Demand has & is Sustaining U.S. Dairy Prices … WHY!! • U.S. dairy markets and prices have historically been heavily influenced by supply issues  or, the ebbs and flows of milk output in U.S. & worldwide • 2007 saw a “sea change” and now U.S. dairy prices are responding to demand factors … & specifically, global demand • Dairy traders and industry personnel are seeing this “shift” continue in 2008 and into 2009  and beyond ?? 5

6. Factors causing Global Demand to Influence U.S. Dairy Prices • Supply side factors … limiting exports • European Union (EU) changed milk price supports which decreased milk output • EU added 12 nations (Eastern European) and these countries have consumed most of the EU’s former dairy exports • New Zealand has limited land area to continue expanding milk production … so, exports have not grown • Australia’s prolonged drought has curtailed milk output ~30% & exports 6

7. Factors causing Global Demand to Influence U.S. Dairy prices • Demand side factors … enhancing exports • China’s & India’s economy transforming into an industrial society  these new industrial workers with added income want to consume dairy products • China & India have almost 2.5 Billion consumers • Value of U.S. Dollar has declined significantly (60+%) making U.S. dairy products less costly for international consumers 7

8. Weak US Dollar Aiding U.S. Exports 8

9. Weak US Dollar Aiding U.S. Exports 9

10. Resulting in … Increased U.S. Dairy Product Demand/Exports Exports as % of US Production FY 07/08 Exports will exceed $4B 1st Trade Surplus 10

11. Bottomline: U.S. Dairy Products are a “Good Value” • The lack of export competition from: • EU – world’s largest dairy exporter • New Zealand – 2nd largest exporter • Australia – 3rd largest dairy exporter • Weak U.S. Dollar making U.S. dairy products “cheaper” in world markets • Growing dairy demand in China, India and Latin America • Caused record-high U.S. dairy prices in 2007 & transforming dairy markets 11

12. Domestic Dairy Demand Strong, too!! • Per capita consumption of dairy products increasing over past 10 years 12

13. Supply trying to Keep Up with Demand • Growth in milk production is “slowing” … • Aug ‘08 vs Aug ’07  up 1.1% (feed costs!!) • First 8 months of ’08 vs. ‘07  up 2.5% • Since May, same month ‘07vs‘08 growth ebbing • US Milk production is expected to rise 2.1% in 2008  up only 3.9 B lbs. • 2008 Output projected to be 189.5B • 2009 Output projected @ 190.3B 0.4% • High feed costs have curtailed growth in milk output • Farmers very cautious about adding cows and holding “cull” cows 13

14. Source: Roger Cyan, NMPF, Dairy Market Report 14

15. Up 2.53% thru Aug 15

16. Increasing Milk Output Driven by More Cows Up 120-130K Head, or 1.4% 16

17. Sustaining Prices in ’08 & ‘09 • USDA expects a slight decrease in milk and dairy product prices in 2008 down 5-7% • Milk prices forecast down 25-30¢ vs. ‘07 • All Milk Price expected to fall from $19+/cwt in ’07 to ~$18.85 in ’08 to ~$18.25 in ‘09 • Class III (cheese) price could fall $0.20/cwt from $18 to $17/cwt in ‘08 • Class IV (butter/powder) price projected to decline about $2.00 from $18.35 to $16.30/cwt • Dairy product prices moves mixed in ’08 • Cheese prices rise from $1.73 to $1.92lb • Butter prices up from $1.34 to $1.42/lb • NDM prices down from $1.71 to $1.38/lb 17

18. Source: Roger Cyan, NMPF, Dairy Market Report 18

19. Source: Roger Cyan, NMPF, Dairy Market Report 19

20. Source: Roger Cyan, NMPF, Dairy Market Report 20

21. My Forecast for 2008 is “Better” • Based on ebb & flow of cheese prices, it is my opinion that milk prices could set yet another record high during 2008up (or down) 20-25¢ • Strong global demand, weak US Dollar and CWT herd buyout leads me to contend that farm-level milk prices will average more than $20/cwt again during 2008 21

22. 2003 thru 2007 & Forecast 2008 Avg Class I Price: FO#7 Base Zone $0.27/cwt 22

23. 2003 thru 2007 & Forecast 2008 Avg “Blend” Prices: FO#7 Base Zone 2008 All Milk Price for MS = $20.40/cwt. 2007 = $20.40 2008 = $20.25 5-yr = $14.69 2006 = $13.89 23

24. Price Outlook …THE PRETTY GOOD • Most dairy market analysts expect global demand to maintain milk prices and average $20/cwt during 2008 • Even the most pessimistic forecasts have milk prices exceeding $18/cwt in 2008 & 2009 • CONCERN? milk output is still increasing! • Dairy & milk prices will “rise” slightly in 2008 up $0.20 -$0.25/cwt, or ~1% • Dairy & milk prices expected to fall in 2009 down $0.50 -$0.60/cwt, or ~2-3% • Key factor: Continued robust international demand for U.S. dairy products  ??? 24

25. THE REALLY BAD … Dramatically Increased Feed Costs!! 25

26. THE REALLY BAD…  Feed Costs • Increasing demand for corn used as a feedstock for ethanol has pushed corn/feed prices up sharply in 07/08 • USDA is now predicting corn prices will be up +100% in 2008 vs. ‘06 • or, from $3.04 to $6.00+/bushel • USDA reported the Milk-Feed Price Ratio for May at 1.83  vs. 3.0?? • Lowest since began reporting in 1985 26

27. Record Low Milk-Feed Price Ratio May = 1.83 Aug = 1.89 27

28. Source: Roger Cyan, NMPF, Dairy Market Report 28

29. Milk Production Cost Increases 29

30. What’s driving up feed costs? • Primary factor that is obvious to virtually everyone on the planet Earth  Increasing corn use for growing ethanol production in the U.S. • Livestock and dairy producers have/are bearing burnt of the negative impacts of this “ethanol revolution” • Many questioning survival of industry • Let’s look at some “troubling” data 30

31. WOW … US Corn Balance Sheet 31

32. Increasing Corn Use for Ethanol 32

33. Feedstuff Prices @ Memphis 33

34. Futures Contract Feedgrain Prices 34

35. Dairy Policy/Programs are … The NOT SO UGLY!! 35

36. The “New” 2008 Farm Bill • FINALLY PASSED/BECAME LAW on JUNE 18th • Congress over-rode President’s veto for the second time • Most dairy features of the 2002 Farm Bill were maintained • Most controversial issue was Income Means test via Adjusted Gross Income, or AGI  not Dairy issues!! 36

37. The “New” 2008 Farm Bill • BIG QUESTION ANSWERED: Allbasic dairy programs were maintained in the “new” Farm Bill • There are 10 sections in the Dairy Title of the 2008 Farm Bill • Only 3 or 4 have any impacts on dairy farmers … and will review MILC • Focus on the changes in the MILC program which is of most importance to milk producers 37

38. Milk Income Loss Contract (MILC) • Dairy Income Loss Contract program is maintained under 2008 Farm Bill  and enhanced several ways • Currently, MILC has a payment rate of 34% of difference between the Class I Boston price and $16.94/cwt “trigger” • The maximum volume of milk eligible to receive MILC payments is 2.4 Million lbs. during a 12-month fiscal year • Volume represents amount of milk produced by 140-145 cows 38

39. MILC -- continued • Under 2008 Farm Bill, payment rate and eligible volume increases … along with adding a Feed Cost Adjuster • Starting October 1st (10 days), the MILC payment rate increases to 45% of the difference between the Class I Boston price & “adjusted” trigger price • Maximum volume of milk eligible to receive MILC payments increased to 2.985 Million lbs. during a 12-month fiscal year • Volume represents amount of milk produced by 160-165 cows 39

40. MILC -- continued • The Feed Cost Adjuster modifies/increases the “trigger” by 45% of the difference between the $7.35/cct base feed cost and the month’s adjusted feed cost • Base feed cost ration consist of: • 51% corn • 41% alfalfa hay • 8% soybeans • The $7.35/cwt. base feed cost will be used from Oct 2008 thru Sept. 2012  in Oct. 2012 base feed cost increases to $9.35/cwt • Also in Oct. 2012, payment rate reverts to 34% & the volume cap decreases to 2.4 Million lbs. 40

41. Feed Cost Adjuster – Impact on Trigger Price • Rules of Thumb … • If dairy feed ration exceeds $7.35 • $0.10 increase in corn price - $0.09 increase in the MILC trigger • $10 increase in alfalfa price - $0.21 increase in the MILC trigger • $0.20 increase in soybean price - $0.025 increase in the MILC trigger • For every $1.00 increase in base feed costs, trigger rises by ~ $1.00/cwt. 41

42. Feed Cost Adjuster – Impact on Trigger Price • For Aug 2008, the base feed cost has jumped to $9.77/cwt.  or by $2.42 above the $7.35 base cost • This caused the trigger price to increase from $16.94 to more than $19.40/cwt.  or $19.45 • See table and graphs for details 42

43. MILC Trigger Calculation Aug 2008 $19.45 Dairy Ration Cost =$9.77/cwt 43

44. Summary of “New” Farm Bill? • New features to MILC • Feed cost adjuster adds a new twist • Especially if you meet the cap in a month or two • 2008 Farm Bill raises the safety net • 2009 may see MILC payments made … but not expected to be used often • Lower energy prices would change that 44

45. 5th Round of CWT’s Herd Buyout • June 3rd, NMPF/CWT announced its 5th Dairy Herd Buyout Round • Retired 24,860 head from 209 herds • Removed 436 M lbs. of milk production • Average Bid Price = $6.10/cwt • 32 bids accepted from Southeast dairies • 2 AR, 1 FL, 3 GA, 3 KY, 4 LA, 5 MS, 6 MO, 4 NC, 2 TN, & 1 WV • If bid accepted, CWT pays farmer the “bid price” for volume of milk produced by that dairy herd in a 12 month period 45

46. 32 Bids Accepted in SE CWT maintained NO Regional Safeguards during this 5th Round 46

47. USDA Implements Revised Class I Price Surface for SE Federal Orders • On May 1st, the USDA implemented a revised Class I pricing surface for the Southeast, Appalachian and Florida Federal Milk Orders • Main Purpose: Increase Class I price differentials to provide price incentives to move milk west-to-east & north-to-south within 3 FOs 47

48. Impacts in Southeast … • Increases Class I price differentials in most locations/plants across the Southeast • No or little increase in LA, MS and AR • Atlanta differential increased by 70¢/cwt • Largest increases in South Florida by as much as $1.80/cwt. • USDA estimated increasing differentials added 24¢/cwt. to dairy farmers milk checks 48

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