2000/01 DAIRY SITUATION
& OUTLOOK and
FEDERAL MILK ORDER
REFORM
C.W."Bill" Herndon, Jr.
Department of Agricultural Economics
Mississippi State University
Snail Mail Address:
Box 9755
MS State, MS 39762
Phone/FAX/E-MAIL:
Phone: (601)325-7999
FAX: (601)325-8777
E-MAIL: herndon@agecon.msstate.edu
Southern Region Outlook Conference
Westin Airport Hotel, Atlanta, GA
September 25 and 26, 2000
2000/01 DAIRY SITUATION & OUTLOOK
Southern Region Ag. Outlook Conference
September 25 and 26, 2000
TOPICS DISCUSSED
1)
Review of State-level and Southeast regional milk
production statistics for 2000 versus 1999
 1998 versus 1999 Annual Statistics
 Review of 15 Southeastern States
 first 6-months of 1999 versus 2000
2)
Dairy Prices and Milk Price Volatility or Risk
 Review past 20 years, 1999 and 2000
 Record high prices followed by sharp declines
 Critical Supply-Demand Balance
3)
Review of Dairy Prices in 1999 and 2000
4)
What Have Milk Prices Done in 2000?
5)
Milk Price Outlook for Rest of 2000 and 2001
6)
Features of Federal Milk Market Order Reform
7)
Class I “Mover” Price or the Base Skim Milk Price
 benefits to dairy farmers during 2000
2
8)
Authorization of Dairy Compacts
 Northeast Dairy Compact
 Southern Dairy Compact
9)
Federal Dairy Legislation/Features for FY2000
 review four features implemented
10) Dairy Policy and Programs Expected for FY2001
11) Election Year Effects on Farm and Dairy Policies
 impacts of changes in leadership in Congress and
the White House
12) Mergers and Restructuring of Dairy Cooperatives
 motives for restructuring
3
1) Review State-level & Southern Region milk
production statistics for 1998 vs 1999
Annual Milk Production in Millions of Pounds of Milk
1998
1999
1999 - 1998
% Change
Alabama
386
374
-12
-3.11%
Arkansas
540
520
-20
-3.70%
Florida
2,337
2,398
+61
+2.61%
Georgia
1,437
1,449
+12
+0.84%
Kentucky
1,710
1,645
-65
-3.80%
Louisiana
751
711
-40
-5.33%
Mississippi
579
552
-27
-4.66%
Missouri
2,367
2,220
-147
-6.21%
N. Carolina
1,251
1,216
-35
-2.80%
Oklahoma
1,236
1,249
+13
+1.05%
374
369
-5
-1.34%
Tennessee
1,501
1,417
-84
-5.60%
Texas
5,605
5,620
+15
+0.27%
Virginia
1,841
1,879
+38
+2.06%
West Virginia
278
275
-3
-1.08%
15-State Total
22,193
21,894
-299
-1.35%
California
27,654
30,475
+2,821
+10.20%
Wisconsin
22,842
23,071
+229
+1.00%
5,765
6,453
+688
+11.93%
157,348
162,711
+5,363
+3.41%
S. Carolina
Idaho
Total U.S.
4
1998 versus 1999 SOUTHERN STATES MILK COWS NUMBERS, OUTPUT PER COW, & MILK PRODUCTION
Alabama
Number of Milk Cows
1998 1999
(1999 - 1998)
------ 1,000 ------% Change
28
27
-1
-3.57%
Milk Output per Cow
Annual Milk Production
1998
1999
(1999 - 1998)
1998
1999 (1999-1998)
-------- Pounds -------- % Change ---Million Pounds--- %Change
13,786 13,852 +66
+0.48%
386
374 -12 -3.11%
Arkansas
45
42
-3
-6.67%
12,000
12,381
+381
+3.18%
Florida
160
158
-2
-1.25%
14,606
15,177
+571
Georgia
93
89
-4
-4.30%
15,452
16,281
Kentucky
140
133
-7
-5.00%
12,214
Louisiana
63
61
-2
-3.17%
Mississippi
42
38
-4
Missouri
170
159
N. Carolina
75
Oklahoma
520
-20
-3.70%
+3.91%
2,337 2,398
+61
+2.61%
+829
+5.37%
1,437 1,449
+12
+0.84%
12,368
+154
+1.26%
1,710 1,645
-65
-3.80%
11,921
11,656
-265
-2.22%
751
711
-40
-5.33%
-9.27%
13,786
14,526
+740
+5.37%
579
552
-27
-4.66%
-11
-6.47%
13,924
13,962
+38
+0.27%
2,367 2,220
-147 -6.21%
73
-2
-2.67%
16,680
16,658
-22
-0.13%
1,251 1,216
-35
-2.80%
92
92
0
0.00%
13,435
13,576
+141
+1.05%
1,236 1,249
+13
+1.05%
S. Carolina
25
24
-1
-4.00%
14,960
15,375
+415
+2.77%
369
-5
-1.34%
Tennessee
105
97
-8
-7.62%
14,295
14,608
+313
+2.19%
1,501 1,417
-84
-5.60%
Texas
352
345
-7
-1.99%
15,923
16,290
+367
+2.30%
5,605 5,620
+15
+0.27%
Virginia
124
121
-3
-2.42%
14,847
15,529
+682
+4.59%
1,841 1,879
+38
+2.06%
W.Virginia
18
18
-0
-0.00%
15,444
15,278
-166
-1.99%
-3
-1.08%
TOTAL
AVERAGE
1,532 1,447 -59
22,193 21,894 -299
-1.35%
14,218
14,501
+283
+1.99%
-3.59%
540
374
278
275
5
Looking at the first 6 months of 1999 versus 2000 -- for the same States
Jan-June
1999
Jan-June
2000
Alabama
206
195
-11
-5.34%
Arkansas
273
283
+10
+3.66%
Florida
1,344
1,358
+14
+1.04%
Georgia
792
786
-6
-0.76%
Kentucky
855
892
+37
+4.33%
Louisiana
401
401
0
0.00%
Mississippi
309
308
-1
-0.32%
1,193
1,200
+7
+0.59%
N. Carolina
628
619
-9
-1.43%
Oklahoma
642
662
+20
+3.12%
S. Carolina
201
200
-1
-0.50%
Tennessee
752
745
-7
-0.93%
3,058
3,152
+94
+3.07%
Virginia
943
993
+50
+5.30%
West Virginia
140
137
-3
-2.14%
15-State Total
11,737
11,931
+194
+1.65%
California
15,039
16,201
+1,162
+7.73%
Wisconsin
11,705
11,767
+62
+0.53%
3,059
3,496
+437
+14.29%
82,534
85,730
+3,196
+3.87%
Missouri
Texas
Idaho
Total U.S.
Jan-June
Difference
% Change
2) Dairy Prices and Milk Price Volatility and RISK
6
A.
The BIGGEST and MOST DIFFICULT problem
facing Dairy Farmers today and into the future is
the risk associated with PRICE VARIATIONS
(1) Prior to 1987, dairy prices were very stable
and were dominated by the government milk
price support level.
(2) During the 1984 to 1987 period, the level of
dairy price supports were lowered because of
the large costs to the U.S. Treasury of
operating the dairy program ($2.2B/yr)
(3) With the exception of 2000, dairy product
prices have remained well above price support
levels since 1987 that augmented and
facilitated wide & volatile price swings in milk
prices and dairy farmers’ incomes
(4) Dairy farmers have been faced with large
changes in milk revenues and manage “cash
flow” problems within each season
 1999 and 2000 were good examples
(5) During 1999, the second and third largest
monthly price increases were recorded along
with the first and second largest monthly
decreases in milk prices ever recorded
3) Review of Dairy Prices in 1999/2000
8
A.
Dairy Farmers may look back at 1999 as a “typical”
year displaying extreme price volatility and price risk
(1) first three months of 1999 saw milk/dairy product
prices display the lingering effect of 1998
 Class I milk price set an all-time record in
February of $20.42/cwt. (Atlanta zone)
(2) next five months saw Class I milk prices tumble
sharply & stabilize between $14.00 and $15.00/cwt
 April suffered the largest monthly decline of
$6.00/cwt. or 30% (from $19.35 to $13.35)
(3) September, October and November saw Class I
prices jump sharply (33.4%) due to USDA report
 Class I prices rose $4.84/cwt. between August
and November and peaked at $19.34/cwt.
(4) December again witnessed another price plummet
of $4.77/cwt. (25%, from $19.34 to $14.57)
 second largest monthly price decline recorded
REASONS for Near Record HIGH DAIRY PRICES in 1999
a) Rebounding but sluggish milk production throughout
the U.S. caused by primarily three factors:
(1) local weather events (floods, heat, etc.)
(2) over-reaction/correction to various market factors
(erroneous USDA Cold Storage Report in June??)
(3) most important, “tight”/low inventories
b) Strong demand for all dairy products spurred by the
general economic growth experienced in the U.S.
 dairy product disappearance/use increased
 demand remained strong in 2000
c) Tight milk supplies and a corresponding market
psychology keep pushing dairy/milk prices up
9
These factors caused milk processors and handlers to
compete vigorously for available raw milk supplies, despite
U.S. milk production increasing by almost 3.5% in 1999.
Farm-level milk and Class I prices fluctuated violently in 1999
because cheese price were extremely unstable.
 Cheddar cheese prices fell from $1.70 to $1.25/lb. in
January and then stabilized near $1.30 to $1.35 until June
 from June to August, cheese price rose to almost $2.00/lb.
due to an erroneous?? USDA Cold Storage report
 last four months witnessed a steady decline of dairy
prices and where cheese prices fell to the USDA price
support level by November in the $1.10-1.15/lb range
In summary, 1999 was a very wild ride that was the last year of
milk and dairy prices being calculated under the “former”
classified milk pricing system. On January 1, 2000, the USDA
implemented its long awaited and much anticipated “reformed”
system of classified milk pricing that uses a different set of
procedures, formulae and methods for estimating dairy prices.
So as we discuss milk prices during 2000, several of the
fundamental mechanisms that influence milk and dairy prices
have changed and these are:
a) there are now 4 Classes of Milk that are estimated using a
set of 16 pricing formulae based on the prices of cheese,
butter, nonfat dry milk and dry whey
b) the 4 Classes of Milk are: Class I – “Fluid” Products;
Class II – “Soft” products; Class III – American cheeses;
Class IV – butter and powders
4)
WHAT have Milk Prices done during 2000?
10
A) The record “high” milk prices and moderate/low feed costs
experienced during 1998 and 1999 have caused milk
production to increase SIGNIFICANTLY during 2000.
Each month of 2000 has recorded an increase in:
 milk output ranging from 2.4% to 8.2% compared to
the same month of 1999.
 60,000 to 90,000 MORE milk cows in the national
dairy herd versus the same month of 1999.
B) These burdensome/excess milk supplies have forced cheese
and nonfat dry milk prices to fall below their respective
USDA dairy price support levels for most of 2000.
 in April and May, 40# block cheese prices fell below
the $1.10/lb support price
C) Late summer months brought hot, dry weather that has
curtailed production -- especially in the South (but NOT in
other regions of the U.S.)
D) Also, fluid milk demand has seen its usual seasonal increase
with the end of school summer recesses.
 since late June, block cheese prices have increased and
stabilized in the $1.20 to $1.30/lb. range
 last Friday September 22, the cash 40# block cheddar
cheese price was reported at $1.2975/lb. on the
Chicago Mercantile Exchange
Analysts believe that a continued strong milk demand
coupled with the seasonal “slowdown” in milk output should
enhance and stabilize milk/dairy product prices over the
remaining months of 2000.
 with the usual seasonal price decline expected in
December and continuing through the early (Jan. –
April) months of 2001 precipitated by:
a) diminishing demand for dairy products at the end of
the Thanksgiving, Christmas and Super Bowl seasons
11
b) increasing milk production and supplies with the onset
of the spring “flush” period
5) Milk Price Outlook for Rest of 2000 and 2001
At the end of 1999, most dairy market experts were
predicting that milk prices during 2000 will be $1.50 to $1.75
cents per cwt. BELOW 1999 milk prices.
 Cheese and NDM prices at near support levels
 Milk production is up sharply
 Record Prices in 1998 and 1999 NOT sustainable
Other Factors influencing Milk Prices in 2000 and 2001:
a) Renewed and increased activities in the Dairy Export
Incentive Program (DEIP) – limited activity in late 1999
 In March, the USDA increased DEIP allocation
b) Continued strong economic growth has strengthened
dairy demand in 2000 & excepted to continue in 2001.
c) Increased number of milk cows -- despite low milk prices
 U.S. milk output has increased 3.9% during the first
6 months of 2000.
d) Moderate/low feed prices and costs has continued to
sustain increased milk production
e) CCC purchases of nonfat dry milk and cheddar cheese
since October 1999 have totaled about 550 million
pounds of NDM and processed cheeses (as of Sept. 22)
 U.S. government purchases of dairy products have
indirectly supported farm level milk prices
Forecasters NOW expect 2000 Class I milk prices to average
about $2.00 cents to $2.20 per cwt. less than 1999.
Atlanta Zone “Advanced” Class I Milk Prices for
12
1999 and 2000 and PROJECTIONS
“My
Guess”
2001
$14.50*
$14.00*
$13.70*
$13.50*
$13.75*
$14.25*
$14.50*
$15.00*
$15.50*
$15.80*
$15.75*
$15.00*
January
February
March
April
May
June
July
August
September
October
November
December
Actual
Class I
1999
$19.92
$20.42
$19.35
$13.35
$14.70
$14.89
$14.34
$14.50
$16.67
$18.87
$19.34
$14.57
Actual
Class I
2000
$14.00
$13.81
$13.94
$14.03
$14.58
$14.80
$15.56
$15.05
$14.94
$14.99
$15.25*
$14.75*
Differ
99 vs 00
$ -5.92
$ -6.61
$ -5.41
$ 0.68
$ -0.12
$ -0.09
$ 1.22
$ 0.55
$ -1.73*
$ -3.88*
$ -4.09*
$ 0.18*
Average
$16.74
$14.64
$ -2.20* $14.67*
Obviously, these BFP/milk price projection are VERY
sensitive to milk production/weather conditions and, as was
seen in 1999, dairy product inventories.
The $14.67 average BFP prices forecast for 2001 is about the
average price recorded during 2000. BUT, 2000 has certainly
been and is a very stressful year for dairy farmers.
6) Features of Federal Milk Market Order Reform
On April 4, 1996, the 1996 Farm Bill went into effect and
called for a “reform” of the classified milk pricing system.
13
The USDA implemented its program for reforming federal
milk orders on January 1, 2000 and the basic features of this
“new” environment of federal milk pricing are briefly
described as follows:
a)
Eliminates ALL federal dairy price supports for cheddar
cheese, butter and NDM on January 1, 2000.
 however, Congress has maintained these price
supports until January 1, 2001
 most of the dairy industry expects Congress to
extend these price supports until Jan. 1, 2002.
 USDA increased the support price levels (2%) for
cheddar cheese and butter on August 1, 2000
 2.2 cents for cheese and 1.8 cents for butter
 this was seen to help bolster very weak prices
 USDA said these adjustments were necessary to
correct misalignments under “new” system
b)
Consolidated the number Federal Milk Orders from 32
orders to 11 “new” Federal Order areas
 Southeast Order remains basically the same with
added areas in Arkansas, Missouri and Kentucky
 Florida Order is the combination of the former
three Federal Orders located in Florida
 Appalachian Order consists of the former Carolina
and Tennessee Valley Orders plus additional areas
c)
Employs are revised procedure for calculating prices for
the various classes of milk based on the market value of
milk components used in processing:
1) Cheddar cheese prices -- 40# Blocks and 500# Barrels
2) Butter price– Grade AA
3) Nonfat Dry Milk price – Grade A
14
4) Dry Whey price
 “new” procedure uses 16 formulae to calculate the value
of milk for four different classes of milk; which are:
1) Class I – all “Fluid” or beverage milk products
2) Class II – “Soft” dairy products (ice cream/yogurt)
3) Class III – American cheddar cheese products
4) Class IV – Butter and Nonfat Dry Milk powder
 this procedure calculates a price for “Skim Milk” and
“Butterfat” for each one of the 4 Classes of Milk
 this method recognizes that the value of skim milk
and butterfat is different/unique when used in
producing different types of dairy products
 dairy manufacturing “make allowances” are used to
calculate the value of skim milk and butterfat for
such milk components as:
1) Skim milk
2) butterfat
3) milk proteins
4) other milk solids
 these 16 pricing formulae found at:
http://www.ams.usda.gov/dairy/fmor_announce.htm
7) Class I Milk Price Mover or Base Skim Milk Price
One of the most interesting features of Federal Order
reform has been the Class I Milk Price Mover. Class I
prices are calculated based on the following procedure:
 use of the “higher” of either the Class III or
Class IV Advanced Skim Milk price
15
 then add the applicable Class I price (location)
differential to this Class I “mover” price
During 2000, the Class I Mover Price feature has meant
significant additional revenues to dairy farmers. Under
the former milk pricing process, the Class I price was
calculated by adding the Class I price differential was
added to the Class III price, only.
 For example, the actual monthly Class III and Class IV
Advanced Skim Milk prices for 2000 were:
Month
Class III
Class IV
Difference
January
$ 6.57
$ 7.72
$ 1.15
February
$ 7.23
$ 7.72
$ 0.49
March
$ 6.38
$ 7.71
$ 1.33
April
$ 6.24
$ 7.70
$ 1.46
May
$ 5.58
$ 7.70
$ 2.12
June
$ 5.29
$ 7.70
$ 2.41
July
$ 4.51
$ 7.71
$ 3.20
August
$ 6.43
$ 7.70
$ 1.27
September $ 6.14
$ 7.70
$ 1.56
October
$ 6.66
$ 7.76
$ 1.10
10-mo AVG. $ 6.10
$ 7.71
$ 1.61
 so, dairy farmers in the Southeast that have usually 60%
to 80% of their milk processed in Class I dairy products
this feature has realized an additional $1.00 to $ 1.30 per
cwt. in farm revenues
 for a farmer producing 100,000 lbs per month, this
has meant about $10,000 to $13,000 more income
therefore, the Class I “Mover” allows the value of “fluid”
milk to be based on the either the value of skim milk
16
used in producing cheese or in processing butter,
whichever has a higher value
 this “Mover” feature will NO longer penalize dairy
farmers’ Class I milk sales revenues when the price
of cheese falls below the price of butter
8) Authorization of Dairy Compacts
1996 Farm Bill authorized the creation of the Northeast
Dairy Compact which established a cartel for setting
FLUID milk prices (ONLY) in six New England states.
 new “sunset” clause authorizes until September 2001
15 Southern states are NOW attempting to form a
Southern Dairy Compact which would require BOTH
state and federal enabling legislation that would force
dairy handlers/processors to pay a legally mandated
OVER-ORDER PREMIUM for all milk used for bottled
milk purposes -- i.e. Class I milk ONLY.
 All but Texas have already passed the necessary
state enabling legislation.
 each state’s Commissioner of Agriculture is leading
the efforts to lobby for federal-level legislation
b)
Dairy processors and consumer groups have fought the
Northeast dairy Compact and are expected to fight these
efforts to establish a Southern Dairy Compact.
The low prices and resulting financial stress being
experienced by dairy farmers during 2000 and expected
during 2001 have caused Southern farmers and their
organizations to look for ways to improve and, most of all,
STABILIZE milk prices and farm incomes.
17
9) Federal Dairy Legislation/Features for FY 2000
Dairy Policy Features of the FY2000 Appropriations Act
There were FOUR provisions for dairy policy included
in the Federal Appropriations bill signed in Nov. 1999
 AGAIN, conflicts between members of Congress will be
a major “sticking point” during 2001
 conflict focused in Senate over the authorization of
dairy compacts -- btw. Vermont and Wisconsin
Quick Review of the Four Dairy Policy Features:
a) Mandate the adoption of the Class I pricing scheme and
surface described as Option 1A in FO Reform
 completed and accepted (revisited, not likely??)
b) Require USDA to adopt formal rulemaking procedures
and hold hearings to reconsider Class III and Class IV
milk pricing formulas included in the Final Rule
 hearings held in Spring 2000 & most of industry believes
that USDA will adjust “make allowances” used in
formulas employed to calculate Class III & IV prices
 USDA must implement these changes by Jan. 1, 2001
c)
Establish a temporary pilot program monitored by the
USDA where milk producers/coops may enter into
forward price contracts with handlers/processors for
Class II, III and IV milk
 pilot program proposed by USDA and in review
d)
Re-authorizes Congressional consent for the continued
operation of the Northeast Dairy Compact in the original
six (6) states until Sept. 30, 2001 -- new “sunset” date
 No states added to Northeast & NO Southern Compact
18
 still expected to cause problems in Congress (Senate)
10) Dairy Policy Features Expected in FY 2001
Congressional attention given to federal dairy policies
and programs AGAIN will probably be one of the most
contentious and controversial issues debated on Capital
Hill. Dairy Compacts are expected to the “eye” of this
storm of controversy with various members of Congress
promising to make this single issue a “lynch pin” in
passing agricultural and general appropriations bills.
Various Dairy Policies being discussed are:
a) Extension of the dairy product price support program for
another year and maintain the current milk price support
level at $9.90 per cwt. until January 1, 2002
 appears to have bipartisan support in Congress
 most of the dairy industry expects this legislation to pass
and be enacted by Congress and signed by President
b) Provide disaster relief via payments to dairy farmers for
the effects of drought on pasture/forage production
 discussing $500 million in disaster payments to dairy
farmers during FY 2001
 compares to similar drought disaster payments of $200
million in FY’99 & $125 million in FY’99
c) Various dairy farmer groups continue to urge Congress to
assist in establishing a Dairy Supply Management Plan
 designed to increase dairy/milk prices via production
controls – similar to Canada’s dairy “quota” program
18
 Congress has NOT shown any interest or support in the
past – BUT, many members want to scrap the 1996
“Freedom to Farm” Bill and could consider this feature
During May, Northeast Dairy Compact producers approved
a “voluntary” supply management plan and will pay a
maximum of $12,000 to farmers who lowered production,
held it steady or increased output less than 1% in FY’00
 allocated a portion of the Compact premium for this
supply management scheme
d) Dairy Export Incentive Programs (DEIP) is expected to
receive continued support and funding to increase the
competitiveness of U.S. dairy products in international
markets – especially, Nonfat Dry Milk
 must satisfy WTO guidelines and specifications
 DEIP has been instrumental in bolstering farm-level
milk prices via USDA-subsidized exports of NDM, whole
milk powder, butteroil, etc.
11) Election Year Anticipated Effects on Dairy Policy
Mark Keenum, Senator Cochran’s Chief of Staff, believes
that Congressional action in changing the Farm Bill prior to
its expiration in 2002 will depends on the following:
 if Democrats win Presidency & one House of Congress,
then 1996 Farm Bill will be discussed and probably
changed/revised in 2001
 if Democrats win Presidency & BOTH Houses of
Congress remain in Republican control, then the Farm
Bill will NOT be changed until it expires in 2002
19
 if the Republicans win the Presidency and one of the
Houses of Congress remain in Republican control, then
Congress will not revise the 1996 Farm Bill
Political pundits expect a Presidential “dead heat” race,
Senate to remain Republican & House becoming Democratic
12) Mergers/Restructuring of Dairy Cooperatives
MEGA-MERGER of Regional Dairy Cooperatives that will
likely to continue as these marketing organizations attempt to
decrease marketing and other milk handling/processing costs
in an effort to compete with other cooperatives and “for
profit” corporations
 several examples: DFA, Florida Milk, Land O’ Lakes
20