2008/09 Outlook for Dairy
Prices and Dairy Policy …
Department of
Agricultural
Economics
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
THE PRETTY GOOD…
Department of
Agricultural
Economics
Sustaining
Strong/Near Record
High Milk Prices
2
Current Dairy/Milk Price Highlights
Department of
Agricultural
Economics

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

Grade AA Butter  $1.7250 … up ~45¢ since January

Grade A NDM  $1.10 … down 12¢ last Friday & weak

Dry Whey  ~22+¢ … steady but  75% since June 07

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Nonfat Dry Milk Prices from ’07 record highs
Dry Whey prices   from record highs
Adv. October Class I milk price was supposed
to be announced last Friday (Sept 19)  BUT


3
Butter Prices  improving & stable
Sept. Adv. Class I price is $21.45/cwt …
DOWN $3.13 ( 12.7%) from July
Milk prices “weakening” slightly
Why are Dairy Product Prices
Important?  Drive Milk Prices!!
Department of
Agricultural
Economics
4
Source: Roger Cyan, NMPF, Dairy Market Report
Global Demand has & is Sustaining
U.S. Dairy Prices … WHY!!
Department of
Agricultural
Economics
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5
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 ??
Factors causing Global Demand to
Influence U.S. Dairy Prices
Department of
Agricultural
Economics

Supply side factors … limiting exports
1.
2.
3.
4.
6
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
Factors causing Global Demand to
Influence U.S. Dairy prices
Department of
Agricultural
Economics

Demand side factors … enhancing
exports
1.
2.
3.
7
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
Weak US Dollar Aiding U.S. Exports
Department of
Agricultural
Economics
8
Weak US Dollar Aiding U.S. Exports
Department of
Agricultural
Economics
9
Resulting in … Increased U.S. Dairy
Product Demand/Exports
Department of
Agricultural
Economics
Exports as % of US Production
Product Group
Total
2007
39%
Jan-July
2008
50%
Butter/AMF/butteroil
6%
12.8%
Cheese
2%
3.2%
Total Whey
58%
47%
Milk Solids
9.5%
11.5%
SMP/NDM
FY 07/08 Exports will exceed $4B 1st Trade Surplus
10
Bottomline: U.S. Dairy Products are a
“Good Value”
Department of
Agricultural
Economics

The lack of export competition from:

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11
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
Domestic Dairy Demand Strong, too!!
Department of
Agricultural
Economics

Per capita consumption of dairy products
increasing over past 10 years
1997
2007
%Δ
All Products, ME
567 lbs 610 lbs +7.6%
Fluid Milk/Cream
216 lbs 206 lbs
-4.6%
Butter
4.1 lbs
+14%
4.7 lbs
American Cheese 11.8 lbs 12.8 lbs +8.5%
Other Cheeses
12
15.7 lbs 19.9 lbs +27%
Supply trying to Keep Up with Demand
Department of
Agricultural
Economics

Growth in milk production is “slowing” …




US Milk production is expected to rise 2.1%
in 2008  up only 3.9 B lbs.

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2008 Output projected to be 189.5B
2009 Output projected @ 190.3B 0.4%
High feed costs have curtailed growth in
milk output

13
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
Farmers very cautious about adding cows and
holding “cull” cows
Department of
Agricultural
Economics
Source: Roger Cyan, NMPF, Dairy Market Report
14
Department of
Agricultural
Economics
15
Up 2.53% thru Aug
Increasing Milk Output Driven by More Cows
Department of
Agricultural
Economics
Up 120-130K Head, or 1.4%
16
Sustaining Prices in ’08 & ‘09
Department of
Agricultural
Economics

USDA expects a slight decrease in milk and
dairy product prices in 2008 down 5-7%


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



17
Milk prices forecast down 25-30¢ vs. ‘07
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
Department of
Agricultural
Economics
Source: Roger Cyan, NMPF, Dairy Market Report
18
Department of
Agricultural
Economics
Source: Roger Cyan, NMPF, Dairy Market Report
19
Department of
Agricultural
Economics
Source: Roger Cyan, NMPF, Dairy Market Report
20
My Forecast for 2008 is “Better”
Department of
Agricultural
Economics


21
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
2003 thru 2007 & Forecast 2008
Avg Class I Price: FO#7 Base Zone
Department of
Agricultural
Economics
Average Class I Milk Prices in Southeast FO
Dollars per Cwt.
$22.00
$0.27/cwt
$21.24
$21.51
$20.00
$18.08
$18.00
$17.50
$16.00
$17.26
$14.98
$14.00
2004
2005
2006
2007
Years
22
Proj.2008 03-'07 Avg
2003 thru 2007 & Forecast 2008 Avg
“Blend” Prices: FO#7 Base Zone
2008 All Milk Price
for MS = $20.40/cwt.
Department of
Agricultural
Economics
Southeast FO Monthly "Blend" Milk Prices
2006
2007
2008
2003 - 2007
$24
$22
2007 = $20.40
2008 = $20.25
$20
$18
$16
5-yr = $14.69
$14
2006 = $13.89
$12
Jan Feb Mar
Apr
May Jun
Jul
Months
23
Aug Sep Oct Nov Dec.
Price Outlook …THE PRETTY GOOD
Department of
Agricultural
Economics

Most dairy market analysts expect global
demand to maintain milk prices and average
$20/cwt during 2008


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24
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  ???
THE REALLY BAD …
Department of
Agricultural
Economics
Dramatically
Increased Feed
Costs!!
25
THE REALLY BAD…  Feed Costs
Department of
Agricultural
Economics


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


USDA reported the Milk-Feed Price
Ratio for May at 1.83  vs. 3.0??

26
or, from $3.04 to $6.00+/bushel
Lowest since began reporting in 1985
Record Low Milk-Feed Price Ratio
Department of
Agricultural
Economics
May = 1.83
Aug = 1.89
27
Department of
Agricultural
Economics
Source: Roger Cyan, NMPF, Dairy Market Report
28
Milk Production Cost Increases
Department of
Agricultural
Economics
Dollars per Cwt. vs. 2002
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2003
2004
2005
2006
Feed
29
2007
Non-feed
2008
2009
What’s driving up feed costs?
Department of
Agricultural
Economics

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”


30
Many questioning survival of industry
Let’s look at some “troubling” data
WOW … US Corn Balance Sheet
Department of
Agricultural
Economics
2004/05
2005/06
Harv Acres
73.60
75.10
70.60
86.5
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
4.000
Exports
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
2.06
2.00
3.04
4.20
5.006.00
Price
31
2006/07 2007/08 2008/09
Increasing Corn Use for Ethanol
Department of
Agricultural
Economics
32.0%
11.0%
16.0%
23.1%
10.5%
18.9%
20
07
/
08
47.5%
18.9%
12.2%
19.0%
12.2%
18.9%
06
/
07
49.9%
20
14.2%
54.6%
20
05
/0
6
Marketing Year
20
08
/
09
41.2%
12.4%
12.8%
17.1%
20
04
/
05
57.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of Total Corn Use
Feed & Residual
32
Ethanol
Other Industrial
Exports
Feedstuff Prices @ Memphis
Department of
Agricultural
Economics
05/08/07
06/17/08
09/16/08
CSM 41%
$140
$305
$300
WCS
$148
$405
$320
$79
$140
$120
Corn Gluten Feed
(20% Protein)
$105
$170
$165
Soybean Hulls
$100
$137
$175
$77
$110
$120
Wheat Midds
Rice Bran
Source: USDA Ag Marketing Service. LR_GR210.txt
33
Futures Contract Feedgrain Prices
Department of
Agricultural
Economics
Sept 19
Settle $$
CORN
SOYBEANS
WHEAT
July 2009 July 2010 July 2011
$5.78
$5.94
$5.74
$11.92
$11.39
$11.34
$7.62
$8.16
$8.50
Source: FutureSource.com
34
Dairy Policy/Programs are …
Department of
Agricultural
Economics
The NOT SO UGLY!!
35
The “New” 2008 Farm Bill
Department of
Agricultural
Economics


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36
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!!
The “New” 2008 Farm Bill
Department of
Agricultural
Economics




37
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
Milk Income Loss Contract (MILC)
Department of
Agricultural
Economics

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

38
Volume represents amount of milk produced
by 140-145 cows
MILC -- continued
Department of
Agricultural
Economics

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

39
Volume represents amount of milk produced
by 160-165 cows
MILC -- continued
Department of
Agricultural
Economics

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:




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

40
51% corn
41% alfalfa hay
8% soybeans
Also in Oct. 2012, payment rate reverts to 34%
& the volume cap decreases to 2.4 Million lbs.
Feed Cost Adjuster – Impact on
Trigger Price
Department of
Agricultural
Economics

Rules of Thumb …

If dairy feed ration exceeds $7.35



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41
$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.
Feed Cost Adjuster – Impact on
Trigger Price
Department of
Agricultural
Economics



42
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
MILC Trigger Calculation
Department of
Agricultural
Economics
Aug 2008
$19.45
Dairy Ration Cost =$9.77/cwt
43
Summary of “New” Farm Bill?
Department of
Agricultural
Economics

New features to MILC
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2008 Farm Bill raises the safety net

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44
Feed cost adjuster adds a new twist
Especially if you meet the cap in a month
or two
2009 may see MILC payments made …
but not expected to be used often
Lower energy prices would change that
5th Round of CWT’s Herd Buyout
Department of
Agricultural
Economics

June 3rd, NMPF/CWT announced
its 5th Dairy Herd Buyout Round

Retired 24,860 head from 209 herds

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Average Bid Price = $6.10/cwt
32 bids accepted from Southeast dairies

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45
Removed 436 M lbs. of milk production
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
Department of
Agricultural
Economics
32 Bids
Accepted in SE
CWT maintained NO Regional
Safeguards during this 5th Round
46
USDA Implements Revised Class I
Price Surface for SE Federal Orders
Department of
Agricultural
Economics


47
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-toeast & north-to-south within 3 FOs
Impacts in Southeast …
Department of
Agricultural
Economics


No or little increase in LA, MS and AR

Atlanta differential increased by 70¢/cwt

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48
Increases Class I price differentials in most
locations/plants across the Southeast
Largest increases in South Florida by as
much as $1.80/cwt.
USDA estimated increasing differentials
added 24¢/cwt. to dairy farmers milk
checks
Department of
Agricultural
Economics
49
Department of
Agricultural
Economics
50
Department of
Agricultural
Economics
QUESTIONS??
and/or
Comments??
51