The Midwest Role in World Dairy Trade 54th Annual Rural Energy Conference

Mark Stephenson, Ph.D.

Director of Dairy Policy Analysis

University of Wisconsin, Madison

Diverse

Traditional

Specialized

Traditional

Intensive

A Tale of Three States

Millions of Pounds of Milk

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1905

1908

1911

1914

1917

1920

1923

1926

1929

1932

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

New York

Wisconsin

California

Milk per Cow

0

5000

10000

15000

20000

25000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

U.S. lbs/cow

Milk per cow

Milk per cow has grown at roughly 2% per year.

About half of yield efficiencies is attributable to genetic gains and half to management

Population growth has been roughly 1% per year.

Yield growth has outpaced demand

Implies fewer cows are needed

Number of Cows & Yield

0

5000

10000

15000

20000

25000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Cow Loss

Most farms have not reduced cow numbers

Indeed, new technologies, like the bulk tank,

artificial insemination, TMRs and rBST have

encouraged farms to explore returns to scale.

We have been losing farms to adapt to

increased efficiencies

Number of Dairy Farms

0

50000

100000

150000

200000

250000

300000

350000

400000

1980 1985 1990 1995 2000 2005 2010

U.S. Dairy Farms

Growth is in the Large Herds

0

25000

50000

75000

100000

125000

150000

175000

200000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2000+ Head

1000-1999 Head

500-999 Head

200-499 Head

100-199 Head

50-99 Head

30-49 Head

1-29 Head

Where Are The Dairy Cows?

Traditional

Intensive

Having

Problems

Change in Milk Intensity.

Traditional

20 Billion Surplus

Intensive

35 Billion

Surplus Having

Problems

43 Billion

Deficit

California Net Production

-5000

0

5000

10000

15000

20000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Trade as a Percent of Production

U.S. Role in World Markets

0

5

10

15

20

25

30

35

40

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$U

S p

er

hu

nd

red

we

igh

t

US

NZ

EU 27

Canada

Australia

Source:DairyAustralia

“Rents” Will Be Capitalized

In countries like New Zealand, land is most

binding constraint.

In Canada, quota is most binding constraint

In countries like the United States, cows have

been a binding constraint.

New Zealand Land Values

Canadian Quota Value

Current Canadian Quota value is from

$25,000 to $33,000 per kg butterfat

That is about $25,000 to $30,000 per cow

Dairy Farm Business Models

Milk price is similar across countries competing

for world trade

Total costs of production is similar across

countries competing for world trade

Cost structure is quite different

Grazing versus Intensive

0

5

10

15

20

25

UnitedStates NewZealand

$USpercw

t

FixedCost

VariableCost

Production Risk v.s. Price Risk

New Zealand

Large fixed costs in land assets

Lose money when price falls below total cost of production

Price has to drop a long way before there is any change in production strategy

More production risk in this business model

United States

High variable costs in feed and labor

Lose money when price falls below total cost of production

Price may fall below variable cost of production and can cause cessation of production or operating below capacity

More price risk in this business model

Business Structure has

Consequences

We are fast sprinters…

…But we tire quickly

Fixed&

Variable&

Different U.S. Business Models

“Traditional” Dairy Farm

Own enough land to grow

forages house and milk

cows and spread

manure.

Smaller average number

of cows per farm.

Somewhat larger average

milk price.

Lower variable costs—

higher fixed costs of

production.

“Western-Style” Dairy Farm

Own enough land to

store feed and house

and milk cows, grow

some feed.

Larger average number

of cows per farm.

Somewhat smaller

average milk price.

Higher variable costs—

lower fixed costs of

production.

Fixed&

Variable&

Some Observations…

We are experiencing a blending of business models Larger farms to capture economies of scale in traditional dairy regions

of the U.S.

Highly specialized dairy farms purchasing a land base to handle

manure and grow at least forage needs

Longer distance transportation of milk and dairy products and longer

shelf life of products

Still trying to determine our role in export markets

Drought in the west is a major problem but the real

issue is more fundamental

Observation…

Western U.S. producers are really balancing the

milk supplies in response to our milk price

volatility.

Balancing is lots of fun on the up-side

Balancing is no fun on the down-side

Estimates are that dairy farms may have lost as

much as 30% equity in 2009.

California dairy producers are getting clobbered

again this year.

Milk Pricing in a Global Context…

Some U.S. farms are seeking higher fixed but

lower variable cost production strategies

Some U.S. farms will need to be better

prepared to turn off production in down phase

Dairy farms need to use more risk

management tools

Midwest has a nicely balanced role to play in

world dairy trade

We sell a lot of whey products and increasingly

cheese

Concluding Observations…

Wisconsin has superior agronomic resources

for milk production

The “traditional” dairy business model may be

superior in times of volatile prices

There are still economies of scale to explore

Achieving those economies will be a challenge

in Wisconsin while retaining the “traditional”

business model