US Dairy Industry
Situation and Outlook
September 2012
Executive Summary
2
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US Milk Supply Situation and Outlook
– Milk output was strong in the first part of the year, but is falling rapidly due to
increased herd culling and record high temperatures in some regions
– Severe drought in the US Midwest has forced grain/feed prices to record highs
resulting in a sharp decline in dairy farm profitability
•
Dairy Products Situation and Outlook
– Production is following milk supplies lower yet stock levels remain adequate
– Dairy prices are forecasted to increase for the balance of 2012 and sustain
relatively high price levels in 2013 with key watch-outs including
world/regional economic conditions and Oceania milk output
•
US Dairy Industry News
– Farm Bill legislation awaits action in House of Representatives, but delays are
possible due to November elections; key point for dairy is the end of the
support price program that dates from 1949
– New plant capacity coming in WMP and AMF
US Weather
Situation and Outlook
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•
3
US drought conditions on July 31 were the worst since 1988 with some comparisons
to the “Dust Bowl” years of the 1930’s
The prime corn and soybean growing states experienced extreme drought
conditions during the most critical time period for crop development
US Milk Supply
Situation and Outlook
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•
4
2012 started with positive farm
margins, but have dropped sharply
by summer
2012 and 2013 are expected to
have near average farm margins as
milk prices increase to compensate
for high feed prices
Aug 8 - $8.10/Bu
$/Bushel
$7.50
$6.50
$5.50
$4.50
$3.50
$2.50
Milk Price – Feed Cost =
Margin per Unit of Milk
Mar-12
May-11
Jul-10
Sep-09
Nov-08
Jan-08
Mar-07
May-06
Jul-05
Sep-04
Nov-03
Jan-03
Mar-02
May-01
Jul-00
Sep-99
$1.50
Jan-98
•
Due to the extreme drought
conditions, grain prices rallied to alltime record highs in July… over
$8.00/bu for corn with soybeans
near $17.00/bu
While the focus has been on the
supply shortage, high prices are
dampening demand from ethanol
(fuel), feed, and exports
Nov-98
•
Corn Prices - 1998-2012
$8.50
US Milk Supply
Situation and Outlook
•
•
•
•
•
5
Milk production in the first half of
2012 was 3% above 2011 levels
However, for the second half of
2012, due to the drought and high
feed prices, milk production is
expected to be flat to lower than
year ago
The number of dairy cows increased
for 2 ½ years, but started to drop in
the 2nd quarter
Dairy cow culling is increasing due
to high feed prices and
low/negative farm margins
Some regions could face feed
shortages due to the drought
US Dairy Products – Milk Powder
Situation and Outlook
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•
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6
With higher milk production to start the
year, particularly in the key milk powder
producing states (e.g. California), powder
production has been up strongly from
year-ago levels
Lower milk output in the 2nd half of the
year will likely curtail milk powder
production
As milk powder plants have been stressed
to maximize throughput, more NFDM was
produced instead of SMP in spring 2012
However, longer-term, both WMP and
SMP production are expected to increase
as drying plants are built or upgraded to
make those products
US Dairy Products – Milk Powder
Situation and Outlook
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7
While exports have been strong,
they have not been able to keep up
with production, therefore, milk
powder stocks have increased
Stocks are being drawn down
rapidly in the summer as end-users
build inventory in anticipation of
higher prices later in 2012
Through May, NFDM/SMP exports
were up 12% compared to 2011
US Dairy Products – Milk Powder
Situation and Outlook
• Due to lower milk output, dairy commodity prices are expected to move
higher in the 2nd half of 2012 with the magnitude dependent on end-user
demand and the need to ration anticipated smaller supplies
Nonfat Dry Milk Powder Prices
$/Lb
$2.20
Actual
Futures
$2.00
$1.80
$1.60
$1.40
$1.20
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Sep-…
May…
Jan-13
Sep-…
May…
Jan-12
Sep-…
May…
Jan-11
Sep-…
May…
Jan-10
Sep-…
May…
Jan-09
Sep-…
May…
Jan-08
Sep-…
Jan-07
$0.80
May…
$1.00
US Dairy Products – Butter
Situation and Outlook
9
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Butter production has posted
continual year-over-year gains, but
will see seasonal declines into the
summer
•
The growth in butter stocks has
been strong due to higher
production and lower exports
US Dairy Products – Butter
Situation and Outlook
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•
10
Butter exports through May 2012 were 26% below year-ago levels, but were only
2% below year-ago in May and the highest in 12 months
In the March-May period, over 75% of US butter exports went to the Middle East
and North Africa, primarily Saudi Arabia
US Dairy Products – Butter
Situation and Outlook
• Butter exports have been increasing over the last 5 years and are expected
to increase in the future as more milk is used in the production of SMP,
thereby generating more butterfat
• CME butter futures prices also have an upward trend
$2.40
Butter Prices
$/Lb
Actual
Futures
$2.20
$2.00
$1.80
$1.60
$1.40
$1.20
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Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
$1.00
US Dairy Products – Cheese
Situation and Outlook
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•
•
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Following higher milk supplies,
American cheese production has
been above year ago levels so far in
2012
Lower milk supplies will likely result
in cheese production dropping
below year ago levels in the 2nd half
of the year
Mozzarella production is more
sensitive to demand and slipped
below year ago levels in May
Longer-term consumption trends
favor additional mozzarella
production given demand from
pizza restaurants and exports
Annual per capita consumption of
mozzarella in the US is over 5 kg
US Dairy Products – Cheese
Situation and Outlook
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•
•
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13
With higher American cheese
production, stocks have increased
above last year, but are not
burdensome
US domestic demand has been steady,
but exports have been very strong
Through May, cheese exports totaled
258 million pounds, equal to 6% of US
production and up 18% on a year-overyear basis
US cheese exports will likely increase in
the future as cheese-friendly items like
pizza and cheeseburgers become more
prevalent
US Dairy Products – Cheese
Situation and Outlook
• Cheese prices in 2012 have ranged from $1.40-1.70/lb through July, but have
moved sharply higher for the balance of 2012
• CME cheese futures prices exhibit the same upward price trend as seen in the
other dairy commodities
$2.20
Cheese Prices
$/Lb
Actual
Futures
$2.00
$1.80
$1.60
$1.40
$1.20
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Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
$1.00
US Dairy Products – Whey
Situation and Outlook
•
Sweet dry whey powder production
has dropped below 2011 levels as
more manufacturers switch to
higher protein whey products (e.g.
WPC 80)
•
Dry whey powder stocks have
followed production trends and are
below year ago levels
Lower animal numbers in the US
over the next 18 months will likely
decrease the demand for whey for
animal feed use
•
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US Dairy Products – Whey
Situation and Outlook
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WPC production in 2012 is above
levels seen the last few years as
plants have moved to higher
value/higher protein whey products
The co-products of WPC production
are lactose, which has seen strong
demand and very high prices due to
SMP standardization, and milk
permeate which is also seeing
higher demand
Despite only small gains in
production, WPC stocks moved
sharply higher in the 2nd quarter as
exports dropped
With lower milk and cheese
production expected in the 2nd half
of 2012 and into 2013, WPC
production and stocks will likely fall
WPC stocks graph
US Dairy Products – Whey
Situation and Outlook
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Whey powder exports have recovered
from early year lows and are 3%
below year-ago levels for 2012
Nearly 2/3rd of whey production is
exported; China remains the major
customer for US whey products
WPC exports have also recovered
from early year lows and are above
2011 levels
Longer term, US whey product
exports are expected to post
continued growth in the future as
its uses expand
US Dairy Products – Whey
Situation and Outlook
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$0.80
Dry Whey Powder Prices
Actual
Futures
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
$0.10
$1.70 $/Lb
WPC 34 Prices
Actual
Forecast
$1.50
$1.30
$1.10
$0.90
$0.70
$0.50
$0.30
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
• US whey product prices hit
levels in late 2011 and early
2012 that negatively impacted
exports as the gap between US
and European prices widened
• With US prices falling back, the
export interest has returned
• Whey product prices are
expected to post moderate
increases for the balance of
2012
• Prices in 2013 are expected to
remain near late 2012 levels
with some potential easing in
the 2nd half of 2013
$0.90 $/Lb
US Farm Bill Update
• Every 5 years, the US Congress develops agricultural policy through a Farm
Bill encompassing production agriculture, but with around 80% of
spending going to supplemental feeding programs
• The dairy package of the Farm Bill consists of the following:
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Elimination of support price program for dairy products (dates from 1949)
Elimination of MILC/deficiency payments to offset low milk prices
Establishes a farm margin insurance program based on milk and feed prices
If the margin insurance program is chosen, the dairy producer participates in a
growth management program in order to balance supply and demand
• Elimination of the support price program is a fundamental change for the
US dairy industry
• Election year politics make the outlook uncertain
– Passage before November election is unlikely
– Likely short-term extension with attempt to pass in “lame duck” session in late
2012, but more likely in early 2013
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US Dairy Industry News
Exports have become important to the US dairy industry and firms/plants are
making changes to produce more products for the export markets
• New milk powder plants
– Dairy Farmers of America (Nevada) – WMP plant start-up in 2013
– Continental (Michigan) – start-up in 2012
– Grassland (Wisconsin) – expanded MPC and other milk powder capacity in
2011; significant expansion in milk powder capacity in 2013-14
• New/expanded cheese plants
– Leprino (CO) – start-up in late 2011 with mozzarella production
– Increased interest in new cheese styles with focus on export markets
– More focus on whey generated from cheese plants with increased investment
on whey processing
• New infrastructure
– Glanbia investing $14 million (US) in a new Cheese Innovation Center that will
provide research and development support
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Summary – Short Term Outlook
• The severe summer drought has significantly lowered crop output. As a
result, corn and soybean prices have rallied to record-high levels.
• These record-high grain prices translate to record-high feed prices for
dairy farms, thereby causing financial losses on farms (negative margins).
• Dairy farms have quickly reacted to the high feed price situation by
increasing herd culling and adjusting feed rations.
• With dairy herds getting smaller due to culling, milk production is falling
quickly, accelerated by very high temperatures in key milk producing
regions.
• The loss of dairy cows will negatively impact medium-term milk supplies.
• The outlook for dairy product prices is higher for the rest of 2012 and
likely sustaining high price levels through 2013.
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Summary – Long Term Outlook
• The US dairy industry continues to grow and evolve
• Farms are getting larger and are forward integrating in the supply chain,
thereby better identifying customer needs for new products
• The cheese industry is growing with increasing focus on specialty cheeses
and cheese styles for export (e.g. Gouda)
• Probably the most significant change is happening at milk powder
producers as they are shifting from NFDM to producing SMP and WMP
• Further development of risk management tools allow customers to
establish longer-term prices from their suppliers
• US dairy companies have embarked on a strategy developed in 2009 to
become a consistent exporter to the global dairy market
• That study identified the US as best situated to meet the growing demand
for dairy products in the future given the potential for supply growth
along with an infrastructure that supports growth
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