U.S. & Global Economic Outlook: What’s Ahead For U.S. Dairy? Response: Focus on Dairy
2008/09 Outlook for Dairy Prices and Dairy Policy …
description
Transcript of 2008/09 Outlook for Dairy Prices and Dairy Policy …
1
Department of Department of Agricultural Agricultural EconomicsEconomics
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 ConferenceAtlanta, GA
September 22, 2008
2
Department of Department of Agricultural Agricultural EconomicsEconomics
THE PRETTY GOOD…
Sustaining Strong/Near
Record High Milk Prices
3
Department of Department of Agricultural Agricultural EconomicsEconomics
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
4
Department of Department of Agricultural Agricultural EconomicsEconomics
Why are Dairy Product Prices Important? Drive Milk Prices!!
Source: Roger Cyan, NMPF, Dairy Market Report
5
Department of Department of Agricultural Agricultural EconomicsEconomics
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 ??
6
Department of Department of Agricultural Agricultural EconomicsEconomics
Factors causing Global Demand to Influence U.S. Dairy Prices
Supply side factors … limiting exports
1. European Union (EU) changed milk price supports which decreased milk output
2. EU added 12 nations (Eastern European) and these countries have consumed most of the EU’s former dairy exports
3. New Zealand has limited land area to continue expanding milk production … so, exports have not grown
4. Australia’s prolonged drought has curtailed milk output ~30% & exports
7
Department of Department of Agricultural Agricultural EconomicsEconomics
Factors causing Global Demand to Influence U.S. Dairy prices
Demand side factors … enhancing exports
1. China’s & India’s economy transforming into an industrial society these new industrial workers with added income want to consume dairy products
2. China & India have almost 2.5 Billion consumers
3. Value of U.S. Dollar has declined significantly (60+%) making U.S. dairy products less costly for international consumers
8
Department of Department of Agricultural Agricultural EconomicsEconomics
Weak US Dollar Aiding U.S. Exports
9
Department of Department of Agricultural Agricultural EconomicsEconomics
Weak US Dollar Aiding U.S. Exports
10
Department of Department of Agricultural Agricultural EconomicsEconomics
Resulting in … Increased U.S. Dairy Product Demand/Exports
Exports as % of US ProductionProduct Group Total
2007Jan-July
2008
SMP/NDM 39% 50%
Butter/AMF/butteroil 6% 12.8%
Cheese 2% 3.2%
Total Whey 58% 47%
Milk Solids 9.5% 11.5%
FY 07/08 Exports will exceed $4B 1st Trade Surplus
11
Department of Department of Agricultural Agricultural EconomicsEconomics
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
12
Department of Department of Agricultural Agricultural EconomicsEconomics
Domestic Dairy Demand Strong, too!!
Per capita consumption of dairy products increasing over past 10 years
1997 2007 % ΔAll Products, ME
567 lbs
610 lbs
+7.6%
Fluid Milk/Cream
216 lbs
206 lbs
-4.6%
Butter 4.1 lbs 4.7 lbs +14%
American Cheese
11.8 lbs
12.8 lbs
+8.5%
Other Cheeses 15.7 lbs
19.9 lbs
+27%
13
Department of Department of Agricultural Agricultural EconomicsEconomics
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
14
Department of Department of Agricultural Agricultural EconomicsEconomics
Source: Roger Cyan, NMPF, Dairy Market Report
15
Department of Department of Agricultural Agricultural EconomicsEconomics
Up 2.53% thru Aug
16
Department of Department of Agricultural Agricultural EconomicsEconomics
Increasing Milk Output Driven by More Cows
Up 120-130K Head, or 1.4%
17
Department of Department of Agricultural Agricultural EconomicsEconomics
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
18
Department of Department of Agricultural Agricultural EconomicsEconomics
Source: Roger Cyan, NMPF, Dairy Market Report
19
Department of Department of Agricultural Agricultural EconomicsEconomics
Source: Roger Cyan, NMPF, Dairy Market Report
20
Department of Department of Agricultural Agricultural EconomicsEconomics
Source: Roger Cyan, NMPF, Dairy Market Report
21
Department of Department of Agricultural Agricultural EconomicsEconomics
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 2008up (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
22
Department of Department of Agricultural Agricultural EconomicsEconomics
2003 thru 2007 & Forecast 2008 Avg Class I Price: FO#7 Base Zone
Average Class I Milk Prices in Southeast FO
$18.08$17.50
$14.98
$21.24 $21.51
$17.26
$14.00
$16.00
$18.00
$20.00
$22.00
2004 2005 2006 2007 Proj.2008 03-'07 Avg
Years
Dol
lars
per
Cw
t.
$0.27/cwt
23
Department of Department of Agricultural Agricultural EconomicsEconomics
2003 thru 2007 & Forecast 2008 Avg “Blend” Prices: FO#7 Base Zone
Southeast FO Monthly "Blend" Milk Prices
$12
$14
$16
$18
$20
$22
$24
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec.
Months
2006 2007 2008 2003 - 2007
2008 = $20.25
5-yr = $14.692006 = $13.89
2007 = $20.40
2008 All Milk Price for MS =
$20.40/cwt.
24
Department of Department of Agricultural Agricultural EconomicsEconomics
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 ???
25
Department of Department of Agricultural Agricultural EconomicsEconomics
THE REALLY BAD …
Dramatically Increased Feed
Costs!!
26
Department of Department of Agricultural Agricultural EconomicsEconomics
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
27
Department of Department of Agricultural Agricultural EconomicsEconomics
Record Low Milk-Feed Price Ratio
May = 1.83
Aug = 1.89
28
Department of Department of Agricultural Agricultural EconomicsEconomics
Source: Roger Cyan, NMPF, Dairy Market Report
29
Department of Department of Agricultural Agricultural EconomicsEconomics
Milk Production Cost IncreasesMilk Production Cost Increases
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2003 2004 2005 2006 2007 2008 2009
Dol
lars
per
Cw
t. v
s. 2
002
Feed Non-feed
30
Department of Department of Agricultural Agricultural EconomicsEconomics
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
31
Department of Department of Agricultural Agricultural EconomicsEconomics
WOW … US Corn Balance Sheet
2004/05 2005/06 2006/07 2007/08 2008/09
Harv Acres
73.60 75.10 70.60 86.586.5 79.3
Yield 160.4 148.0 149.1 151.1 142.9
Prodn. 11.807 11.114 10.535 13.074 12,070
Ethanol 1.323 1.603 2.117 3.000 4.000Exports 1.818 2.147 2.125 2.425 2.000
Total Use 10.662 11.270 11.210 12.820 12.645
End. Stks.
2.114 1.967 1.304 1.576 1.018
Price 2.06 2.00 3.04 4.20 5.00-6.00
32
Department of Department of Agricultural Agricultural EconomicsEconomics
Increasing Corn Use for Ethanol
57.8%
54.6%
49.9%
47.5%
41.2%
12.4%
14.2%
18.9%
23.1%
32.0%
12.8%
12.2%
12.2%
10.5%
11.0%
17.1%
18.9%
19.0%
18.9%
16.0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Mar
keti
ng Y
ear
% of Total Corn Use
Feed & Residual Ethanol Other Industrial Exports
33
Department of Department of Agricultural Agricultural EconomicsEconomics
Feedstuff Prices @ Memphis
05/08/07 06/17/08 09/16/08
CSM 41% $140 $305 $300
WCS $148 $405 $320
Wheat Midds $79 $140 $120
Corn Gluten Feed (20% Protein)
$105 $170 $165
Soybean Hulls $100 $137 $175
Rice Bran $77 $110 $120
Source: USDA Ag Marketing Service. LR_GR210.txt
34
Department of Department of Agricultural Agricultural EconomicsEconomics
Futures Contract Feedgrain Prices
Sept 19 Settle $$
July 2009
July 2010
July 2011
CORN $5.78 $5.94 $5.74
SOYBEANS
$11.92 $11.39 $11.34
WHEAT $7.62 $8.16 $8.50
Source: FutureSource.com
35
Department of Department of Agricultural Agricultural EconomicsEconomics
Dairy Policy/Programs are …
The NOT SO UGLY!!
36
Department of Department of Agricultural Agricultural EconomicsEconomics
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!!
37
Department of Department of Agricultural Agricultural EconomicsEconomics
The “New” 2008 Farm Bill BIG QUESTION ANSWERED: All
basic 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
38
Department of Department of Agricultural Agricultural EconomicsEconomics
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
39
Department of Department of Agricultural Agricultural EconomicsEconomics
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
40
Department of Department of Agricultural Agricultural EconomicsEconomics
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.
41
Department of Department of Agricultural Agricultural EconomicsEconomics
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.
42
Department of Department of Agricultural Agricultural EconomicsEconomics
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
43
Department of Department of Agricultural Agricultural EconomicsEconomics
MILC Trigger CalculationMILC Trigger Calculation
Aug 2008 $19.45
Dairy Ration Cost =$9.77/cwt
44
Department of Department of Agricultural Agricultural EconomicsEconomics
Summary of “New” Farm Bill?
New features to MILCNew features to MILC Feed cost adjuster adds a new twistFeed cost adjuster adds a new twist Especially if you meet the cap in a Especially if you meet the cap in a
month or twomonth or two
2008 Farm Bill raises the safety 2008 Farm Bill raises the safety netnet 2009 may see MILC payments made 2009 may see MILC payments made
… but not expected to be used often… but not expected to be used often Lower energy prices would change Lower energy prices would change
thatthat
45
Department of Department of Agricultural Agricultural EconomicsEconomics
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
46
Department of Department of Agricultural Agricultural EconomicsEconomics
CWT maintained NO Regional Safeguards during this 5th
Round
32 Bids Accepted in
SE
47
Department of Department of Agricultural Agricultural EconomicsEconomics
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
48
Department of Department of Agricultural Agricultural EconomicsEconomics
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
49
Department of Department of Agricultural Agricultural EconomicsEconomics
50
Department of Department of Agricultural Agricultural EconomicsEconomics
51
Department of Department of Agricultural Agricultural EconomicsEconomics
QUESTIONS??
and/or
Comments??