Florida Dairy Industry Market and Policy Revie w

William A. ThomasProfessor and Extension Dairy Economist

University of Georgia, Athens, G A

The frequently asked question is how low will milk prices fall in 1999? While there i sconsensus that prices will fall, there are considerable differences in opinions in how low prices wil lget. Why milk prices are falling is basic economics . Record milk prices were experienced in 199 8because of milk production problems coupled with relatively strong commercial sales . A very hotsummer negatively impacted milk production in much of the Southeast, parts of the Southwes tand particularly California in the west . Milk production totaled 157.4 billion pounds for 1998, uponly 0.9% from 1997. This was the net result of 1 .0% less milk cows, and only 1 .9% more milkper cow. Commercial milk sales are estimated to being up 1 .8% to 2 .0% from 1997 .

Milk production started to improve the last two months of 1998 . Compared to a yearearlier, milk production was up 2 .4% for the fourth quarter . At that time Florida's production wa sdown 4.2% . During the first quarter of 1999 production was 3 .3% higher than the first quarter of1998 and Florida showed a complete turn-around and increased 2 .6%. During March the state' sproduction was up 3 .5% . Over the past two months US production increases have been 4% .More favorable weather, relatively cheap feed costs and very favorable milk feed ratio contributedto this strong increase in milk per cow .

Comparing March milk production to a year shows strong production from the southwestto the northwest with production up 15 .1% in Arizona, 10 .6% in California, 7 .9% in Idaho, 7 .3%in New Mexico, 4 .5% in Washington . Production was up 1 .5% in Texas. Each of these states ,except Texas and Washington, had more milk cows than a year ago, and all had improved mil kproduction per cow from earlier months . U.S. production per cow was up just over 4% so far thi syear . The improved milk per cow in California is a major factor in the increase in national milkproduction .

Also milk production in the South continued to show weakness . March production wasdown 4.5% in Kentucky 1 .8% in Virginia . Missouri was down 0 .9% in spite of a 6.4% increasein production per cow . But milk is in excess of fluid needs in the southeast and needs to mov enorth to find manufacturing facilities . With milk seasonal production increasing nationally anduncertainty about cheese prices, this excess milk is being sold at prices below the BFP. Thisincrease in milk production is finding its way into the production of manufactured dairy products .

The increases in milk production, dairy product production and stocks have pushed dair yproduct prices down . On the CME, 40-pound cheddar blocks were $1 .90 per pound. They fell to$1 .25 per pound mid-January and started to rebound some in late January . By the end of April ,40-pound cheddar blocks were at $1 .30 per pound. Cheddar barrels did weaken and were at$1 .24 per pound . The spread between barrels and blocks is close to normal at 4 cents, but th equestion is, will blocks hold at their level over the next few weeks? Not likely . We can expect

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some weakening of cheese prices as the spring flush continues . Dairy futures, the BFP future scontracts, have held steady over the last week . They predict the BFP to dip under $11 .00 in Jun ebut to climb back to $12 .00 by August and to stay there for the rest of the year .

While futures prices have declined sharply from levels early in the year, producers ma ywish to consider buying BFP PUT options to protect against possible further price declines . Withfutures prices at lower levels, the premiums for PUT options are also more reasonable . A BFPabove $11 .00 for May would be a nice surprise . Remember that the May BFP was $10 .88 in 1998and $10 .70 in 1997 . The BFP's for the immediate months ahead are nearing or are slightly abov ethe averages for the past 5 years . But with anticipated relatively low grain and concentrate prices ,while down from recent months, the milk feed-price ratio will still remain favorable to increasemilk production .

The average BFP for 1999 could be around $12 .25 compared to $14 .20 for 1998 an d$12 .05 for 1997. This assumes favorable weather this summer and fall and good crops . Milkproduction for the year is expected to be up more than 2% and commercial sales up less than this ,about 1 .8%, resulting in milk prices averaging less than 1998, but close to the 1997 average .

As of April 30th, the CME BFP April settled at $11 .59 per hundredweight . USDA' sMarch Agricultural Prices Report suggest that March payments in Minnesota and Wisconsi nexceeded the $11 .62 BFP If so, the April BFP could get a $ .20-.25 boost .

Several charts follow that were used in this presentation at the conference .

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Percent Change in SE Cows & Productio nJan-Mar 1998-99

Production Cows

AL -4.6 -3 . 6

AR -20 .7 -11 . 8

Fl. 2.6 4.2

GA -1 .7 -6 .3

KY 3.7 -5.6

LA 4.7 -3 . 1

MS -6A -9 .3

MO -0.2 -6 . 3

NC -4.5 -5.2

Sc -1.0 -4.0

TN -5.5 -8 .0

VA -1 .5 -2 . 4

US 3 .3 -0 .4

Southeast Mllk Production as a Percent of AnnualAverag e

1995-199 8

US & Southeast Milk PMudion. 190,98

teaa on 40 00,00 0100014 .0001300013 .00 012$0 012,00 01Ua

sums

lame s

1•o

1 .3000

lasso

kn.nu nn 1300100//

1M Ins 139 1

Daily Milk Production as a Percent ofAnnual Average

1995-1998

Florida Daily Milk Production as a Percen tof Annual Average

1995-1998

, ,

.1

rw

,w . .w.

%.. .~.e. ,February

AP i

,N .

Wood

,e.. e« .~ .. 0, bN

Set. Yerm[aa.v. .,.

J.

Aug. Oda. 0.€..A..

tan

trots1a %

1ma

110%

25

FLORIDA CLASS I MILK PRODUCTION & SALE S

1998, Orders 6, 12, & 1 3Millions

3000

250 0

200 0

1500

1000

0Total Fluid Sales

FL Productio n

Thomas : 99outlook -7 Source: USDA . Atlanta MA

500

Other Source s

Florida Class I SalesFlorida and Non-Florida Plants,199 8

Thomas : 99outlook-8 Source: Atlanta MA

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HIGHLIGHTS OF THE FEDERAL ORDER REFOR MFINAL RULE '

Consolidation - 31 orders merged into 11 .Only minor changes made in southern order sfrom the initial proposal .

Classification - four classes are proposed :► Class I still contains fluid milk products ,

including eggnog (from Class II).► Class II still contains soft manufactured

products .► Class III contains most cheese, includin g

cream cheese .► Class IV replaces Class III -A and would

include butter, nonfat dry milk, and whol emilk powder.

Class I Pricing - The rule recognizes thatthe value of milk differs by location . The Class Iprice surface relies on an mathematical mode lrather than the current differentials. It is market-oriented and will rely on the market to generatehigher prices to attract sufficient milk to market .The final rule was based on Cornell University &USDA models. This price surface is somewha tflatter the current. It is basically Option 1B with40 cents added to all differentials .

Comparisons of Class I Differentials

City Final Current Diff .Atlanta 2.90 3.08 -.18Charleston 3.10 3.23 -.13Charlotte 2.55 3.08 -.53Baton Rouge 2.85 3.65 -.80Birmingham 2.70 3.08 -.38Greenville 2.55 3.08 -.53Jackson 2.85 3.28 -.43Little Rock 2.35 2.77 -.42Memphis 2.85 2.77 -.42Miami 4.75 4.17 +.57Mobile 3.30 3.58 -.28Nashville 2.05 2.55 -.50New Orleans 3.05 3.65 - .60Springfield 1 .70 2.19 -.49Tampa 4.20 3.88 4.32

Basic Formula Price - In seven of the 1 1orders, milk will be priced on the basis ofbutterfat, protein, and nonfat solids components .In four markets (SE, FL, App, & Az-LV) milk wil lbe priced on the basis of skim milk and butterfat .Separate product price formulas will replace thecurrent BFP and butterfat differential, includin gthree butterfat prices and four skim prices .Each Class price is a formula based on the priceof manufactured dairy products as estimated i nsurveys conducted by the National Agricultura lStatistics Service (NASS) . Competitive payprices will no longer be used. One criteria fo rthis process was that manufacturing milk priceswould not be very different from the current BFPand that the pricing mechanism be madesimpler . Class III prices are estimated toaverage 47 cents/cwt less than the BFP . TheClass IV price will average 4 cents less than theIII-A and the Class II one cent more.

Prices Announced On The 5 0 Of TheFollowing Month (April prices announced i nMay 5th )• Class IV Skim based on NASS nonfat dry

milk prices .► Class III Skim based on NASS cheese and

dry whey prices . Will now include bot hbarrels and blocks and weighted by sales .

• Class IV & III butterfat based on NAS Sbutter price survey.

► Class II butterfat equal to Class IV & II Ibutterfat plus $.007 per pound as a Class I Idifferentia l

Prices announced in Advance on the 236' ofthe previous month (April prices announced o nMarch 23'") Class l price will be announced 7days in advance.• Class II Skim is the Class IV skim formula ,

using the survey prices for the most recen ttwo weeks available (this will usually be th efirst two weeks of the previous month), plu s70¢ per cwt.

► Class I Skim is the higher of the Class Ill orClass IV skim price formula, using the survey

' William A. Thomas, Extension Economist, The University of Georgia College of Agriculture &Environmental Sciences, based on information from FO #7 Market Administrator, April 15, 1999.

27

prices for the most recent two week estimate ,plus the Class I differential .

a Class I butterfat is the Class III/IV butterfatformula, using the survey prices for the mostrecent two weeks, plus the Class Idifferential .

Shrinkage modified and each plant will gofrom lowest valued class for that month to thehighest value for individual plant .

Identical Provisions - Many provisions aremade identical for all orders . They arecontained in the General Provisions which appl yto all the proposed marketing orders. Theproposed changes establish :o Standardized definitions .o Modem order language .o Uniform reporting and classification

standards .▪ Uniform pricing methods .▪ Unit pooling in all markets ( new to FL )o Allocation procedures (similar to curren t

ones) .

Southern Provisions - Each order still hasprovision unique to specific orders .▪ Transportation Credits are retained in the

Appalachian & Southeast Order.• Producer Payments in the Appalachian and

S

Southeast Orders, with partial payments at 90 %of previous month's uniform price and datesmoved up for Appalachian order. The Floridaorder will have three payments, with partia lpayments at 85 percent of the previous month' suniform price, adjusted for location .o Plant pooling requirements remain simila r

to the present orders.° Supply plants are required to ship eac h

month. There are no provisions fo rautomatic pooling in the southeaster nmarkets .

a Market performance by a cooperativeassociation is required in order to qualifythe cooperative's balancing plants locate din the marketing area .

o Producer association with the market -existing'touch-base° requirements anddiversion limitations are left substantiall yintact . MA has some discretionary authorit yto set requirements

Voting - producers will vote on the 1 1proposed orders in a up-or-down vote . A two-thirds vote is required. Co-ops will be allowed toblock vote. The exact time of the vote has no tbeen set but probably in August The ne worders are scheduled to go into effect October 1 ,1999 .

CONSOLIDATEDFEDERAL MILK MARKETING ORDER AREA S

Agwbn,Mariwug Snot.D oty Program*

DIFFERENCES IN SIADING MERELY WRVET ODIFFERENTNTEEErNEEN MMYETING AREAS

Impact on Florida Orders

Class I differential +.32*Class I price mover (+ .20x85%) +.17Class II price (+.Olx 7%) +.00 1Class III price (-.47x7%) -.03Consolidation .00

Net Impact +.46

* This is not an average, only a example using Tampa pric e

Thomas: 99outlook -25

Remember:

• The real impact is determined byimpact on Net Price - includin gPremiums

• Premiums are determined by cost ofalternate supplies - not the cost of loca lsupply

• Fl order price may go up but if price i nsupply areas go down everyone has aproblem.

Thomas: 99outlook -26

2 9

COMPARISON OF DALLAS & ATLANT APRICES

ATLANTA DALLA S

CURRENT DIFF $3 .08 $3 .1 6

+ PREMIUM 1 .15 0.25

NET PRICE 4.23 3.41 0.82

FINAL DIFF 2.90 2.10

PREMIUM 0.27 0.25

NET PRICE 3.17 2.35 0.82

Needed price _1,06decline

Thomas : 99outlook -2 7

COMPARISON OF ATLANTA & TAMP APRICES

TAMPA ATLANTA

CURRENT DIFF $3 .88 $3.08

+ PREMIUM 2.19 1 .1 5

NET PRICE 6.07 4 .23 1 .84

FINAL DIFF 4.20 2 .9 0

PREMIUM 0.81 0 .2 7

NET PRICE 5.01 3 .17 1 .84Needed price _1,06decline

Thomas : 99outlook -28

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