Dairy Situation and Outlook Wisconsin Bankers Association Wisconsin Dells, WI April 11, 2017 Dr. Marin Bozic Global milk production growth slowing down 2 WBA Agricultural Bankers Conference 1
Strong growth in Southwest 3 Butter vs Powder 4 Source: Dr. John Newton, AFBF WBA Agricultural Bankers Conference 2
Structural Changes in Dairy Markets Post 2015 5 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Butter Cheese Dry Whey $0.00 The Value of Milk 6 Source: Dr. John Newton, AFBF WBA Agricultural Bankers Conference 3
Butter: Rising Production & Stocks 7 Jan to Feb stocks growth was highest ever. End of Feb stocks record high at 277 mil lbs. End of Jan stocks at 54 days of use second highest. Feb production 4.7% higher than year ago. but global prices are supportive 8 Dutch Dairy Board: $2.63/lb GlobalDairyTrade: $2.45/lb DMN Western Europe: $2.66/lb WBA Agricultural Bankers Conference 4
U.S. catching up to E.U. in milk solids tests 9 U.S. vs E.U. Butterfat Test Trends Pounds of butterfat per cwt, February 4.20 4.10 4.00 3.90 3.80 3.70 3.60 3.50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 United States European Union A look at regional differences in milk solids tests 10 Butterfat Test, February 2018 New Zealand South Dakota European Union Minnesota Iowa Idaho Illinois Wisconsin United States New York Indiana Michigan Florida 4.09 4.02 4.01 4.00 3.97 3.96 3.93 3.91 3.85 3.76 3.69 4.26 4.96 3.00 3.30 3.60 3.90 4.20 4.50 4.80 5.10 WBA Agricultural Bankers Conference 5
Most butter is sold forward 11 Turbulence in the cheese markets 12 WBA Agricultural Bankers Conference 6
Prices are below last few years 13 U.S. Cheese is Globally Competitive 14 WBA Agricultural Bankers Conference 7
but stocks are elevated 15 Export volumes up 14% YTD, value up 2% 16 Source: USDEC WBA Agricultural Bankers Conference 8
Mexico down, MENA, Canada and China up 17 Source: USDEC Annual Growth Rates of Per Capita Consumption for Dairy Products Developing Countries 18 ANNUAL PER CAPITA GROWTH RATE 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Fresh dairy products Cheese Butter Skim milk powder Whole milk powder Developing 2007-16 Developing 2017-26 WBA Agricultural Bankers Conference 9
Future of NAFTA? 19 Dairy Exports From United States (Mil USD) Total Trade Flows Between NAFTA Members Future of NAFTA? 20 WBA Agricultural Bankers Conference 10
World according to Kiwis 21 Source: Dr. John Newton, AFBF World according to Europeans 22 Source: Dr. John Newton, AFBF WBA Agricultural Bankers Conference 11
World according to U.S. 23 Source: Dr. John Newton, AFBF Short Term Market Outlook 24 NDPSR Barrel NDPSR Whey NDPSR Butter NDPSR NFDM Class III Class IV Jan-18 1.52 0.28 2.20 0.70 14.00 13.13 Feb-18 1.47 0.25 2.11 0.71 13.40 12.87 Mar-18 1.55 0.25 2.18 0.70 14.22 13.04 Apr-18 1.54 0.27 2.25 0.70 14.25 13.39 May-18 1.54 0.27 2.21 0.71 14.19 13.34 Jun-18 1.57 0.27 2.25 0.71 14.51 13.50 Jul-18 1.60 0.29 2.28 0.73 14.92 13.73 Aug-18 1.62 0.29 2.31 0.76 15.08 14.15 Sep-18 1.65 0.31 2.32 0.77 15.56 14.32 Oct-18 1.69 0.31 2.34 0.80 15.89 14.61 Nov-18 1.71 0.33 2.29 0.81 16.21 14.54 Dec-18 1.70 0.31 2.25 0.85 16.00 14.64 1.60 0.29 2.25 0.75 14.85 13.77 2017 2018 Cheese 1.63 1.60 Dry Whey 0.44 0.29 Class III 16.17 14.85 Butter 2.33 2.25 NFDM 0.86 0.75 Class IV 15.15 13.77 WBA Agricultural Bankers Conference 12
Milk Price Premiums in Wisconsin 25 Milk Price Premiums in Minnesota 26 WBA Agricultural Bankers Conference 13
Milk Price Premiums in Michigan 27 Consolidation will continue in Europe 28 WBA Agricultural Bankers Conference 14
Farm Structure Status in 2016 29 17 % of world milking animals in >100 classes 224,000 Business farms in 2016 Family farms have 21% of world dairy animals Households dominate with 63% of dairy animals Source: IFCN Dairy Herd Composition in 2016 30 Source: IFCN WBA Agricultural Bankers Conference 15
Economies of Scale 31 Source: Dr. John Newton, AFBF Leading Indicator for Future Dairy Herd Growth? 32 February 2018: Coverage: 10 States Covered. Permits: 3 New 9 Modified or Reissued Change: Animal Units: 118,840 Milking Cows: 32,610 March 2018: Coverage: 11 States Covered. Permits: 1 New 12 Modified or Reissued Change: Animal Units: 1,608 Milking Cows: 571 WBA Agricultural Bankers Conference 16
Leading Indicator for Future Dairy Herd Growth? 33 February 2018: Coverage: 10 States Covered. Permits: 3 New 9 Modified or Reissued Change: Animal Units: 118,840 Milking Cows: 32,610 March 2018: Coverage: 11 States Covered. Permits: 1 New 12 Modified or Reissued Change: Animal Units: 1,608 Milking Cows: 571 FMMO Map Might Need More Color Soon 34 WBA Agricultural Bankers Conference 17
Four years ago 35 Four years ago 36 WBA Agricultural Bankers Conference 18
What happened in 2014? 37 MPP Dairy Margins reach all time high in October 2014 at $15.62/cwt. 2014 average is $13.31/cwt. September December available for coverage, but virtually all producers who enrolled for MPP started it in 2015. Market conditions: strong exports, strong imports from China boost world markets. What happened in 2015? 38 MPP Dairy Margins average $8.30/cwt, payments issued for 8 out of 12 months, but only for $7.50 or $8.00 coverage levels. Net indemnities negative for all levels. Market conditions: EU abolishes milk production quotas, European production increases strongly. Exports retreat, US milk production grows. Most producers finish the year in red. WBA Agricultural Bankers Conference 19
What happened in 2016? 39 MPP Dairy Margins continue to deteriorate. Average margin for the year projected at $8.09/cwt. May June margins at $5.76, payment triggered for $6.00 and higher coverage levels. Market conditions: EU milk production still growing strongly. Exports sluggish. US production continues to grow in most states. Most dairies below break even milk prices. MPP Dairy Can it be salvaged? 40 Source: Dr. John Newton, AFBF WBA Agricultural Bankers Conference 20
Why didn t it work? 41 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 2005-2008 2009-2014 2015-2017 Milk Price Corn Price Alfalfa Price Soymeal Price Margin Margins were not as low since 2015 as in 2009 2013 42 Coverage Level Percentage of Months with Margins below Coverage Levels 2000 2017 2009 2013 2015 2017 4.00 5.1% 18.3% 0.0% 4.50 6.0% 21.7% 0.0% 5.00 7.0% 25.0% 0.0% 5.50 8.4% 30.0% 0.0% 6.00 14.0% 38.3% 5.7% 6.50 16.3% 41.7% 5.7% 7.00 20.9% 43.3% 8.6% 7.50 29.3% 53.3% 17.1% 8.00 41.4% 63.3% 34.2% WBA Agricultural Bankers Conference 21
so MPP Dairy ended up being too expensive 43 Implied MPP-Dairy Subsidy: 1 - Premium & Fees / Expected Payment 100% -100% -300% -500% -700% -900% -1100% -1300% $6.00 $8.00 $10.00 $12.00 Expected Annual Margins (2008-2016) $8.00 $7.50 $7.00 $6.50 $6.00 MPP Dairy Enrollment by Herd Size: 2015 44 % Of All Enrolled Farms, By Dairy Herd Category 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 1-50 51-100 101-200 201-500 501-1000 WBA Agricultural Bankers Conference 22
thus producers gave up 45 100% % of US Milk Production 75% 50% 25% 26% 42% 9% 1% 66% 63% 0% 2015 2016 2017 $4.00 Catastrophic Coverage Buy-Up Coverage Policy Reforms 46 MPP-Dairy Premiums $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 Old Tier 1 $0.47 $0.30 $0.21 $0.09 $0.05 $0.04 $0.02 $0.01 $- New Tier 1 $0.14 $0.08 $0.06 $0.04 $0.01 $0.00 $- $- $- Old Tier 1 New Tier 1 WBA Agricultural Bankers Conference 23
Projected MPP Indemnities in 2018 (as of 4/6/2018) 47 Typical Optimal MPP Dairy Choices Under New Premiums 48 Optimal Coverage Percentage 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Optimal Coverage Level Coverage Percentage Coverage Level WBA Agricultural Bankers Conference 24
MPP Dairy will be helpful this year 49 LGM Dairy: No More Subsidy Caps 50 Cannot be combined with MPP Dairy Questionable what will happen with LGM Dairy policies in 2018, for producers wishing to switch to MPP WBA Agricultural Bankers Conference 25
LGM Dairy: No More Subsidy Caps 51 Dairy Revenue Protection: The KISS Principle 52 Problems we wanted to solve: 1) Research shows that hedging distant months is what leads to effective risk protection. but CME distant months are not liquid, and LGM only offers up to 11 months out. 2) Research shows effective risk management should be done continuously, but many LGM users would buy 10-month strip once. Quarterly coverage seemed more appropriate. 3) With rising butterfat and protein tests in milk, there is a need to offer component-based risk management. 4) Milk per Cow Yield was not a risk factor one could insure under any of the current programs. DRP was approved on February 13, 2018. We are working around the clock to bring it to market as soon as possible. WBA Agricultural Bankers Conference 26
I would love to share more details, but 53 Empty Maps 54 Many cultures drew world maps long before modern age....but unfamiliar areas were simply left out, or filled with imaginary monsters and wonders. These maps had no empty spaces. They have the impression of a familiarity with the entire world.... The empty maps were a psychological and ideological breakthrough, a clear admission that Europeans were ignorant of large part of the world. WBA Agricultural Bankers Conference 27
Thank You! Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 WBA Agricultural Bankers Conference 28