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From Farm To Table: Milk Supply Economics
Dr. Marin BozicMilk SymposiumSt Paul, MNJuly 20, 2017
Agenda For Today2
2
34
5
1
Price Discovery
Milk Supply Dynamics
Federal Milk Orders
Conclusions
Giving Context to Fluid Milk Consumption Trends
Milk Production Growth Fueled by Increased Demand for Processed Dairy Products (Cheese, Butter, Powders)
3
Source: Dr. Bob Yonkers, IDFA based on USDA, NASS and ERS
Fluid Milk Sales Declining4
3,500
3,700
3,900
4,100
4,300
4,500
4,700
4,900
5,100
20
00
20
01
20
03
20
04
20
06
20
07
20
09
20
10
20
12
20
13
20
15
20
16
Source: USDA AMS – Estimated Fluid Milk Sales Report, various issues
Q1 Sales Bil lbs
2000 14.1
2003 14.0
2006 13.9
2009 14.0
2012 13.5
2015 12.6
2017 12.3
Butterfat No Longer an Enemy5
Milkfat Demand Surging Across All Products6
Source: DMI Monthly Snapshot
Are Organic Consumers Different? 7
Whole Milk, 38%
Organic
Whole Milk, 35%Conventional
Whole Milk
Reduced Fat (2%)
Lowfat (1%)
Skim
Conventional Milk Sales in 2016: 46.5 billion, decrease of 464 million lbs over 2015.Organic Milk Sales in 2016: 2.57 billion, increase of 164 million lbs over 2015.
Which Dairy Beverage Categories are Prospering?8
Source: DMI Monthly Snapshot
Non-Dairy Alternative Beverages9
Source: DMI Monthly Snapshot
Consolidation of Dairy Farms10
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Nu
mb
er o
f D
airy
Far
ms
Technological Progress Favors Size11
0%
5%
10%
15%
20%
25%
30%
35%
40%
Perc
ent
of
US
Dai
ry H
erd
100-200 200-500 500-1000 1000-2000 2000+
1000-2000:2007 / 16.1%
2000+:34.7% and Rising
500-1000:2005 / 14.3%
100-200:1997 / 20%
200-500:2000 / 18%
Milk Production Growing in Areas Far From Population Centers
12
Source: Mark Stephenson, UW-Madison
U.S. Milk Cows Are Most Productive in the World13
Cow Productivity Gains Outpace U.S. Population Growth Rate14
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
5-Yr CAGR Yield Per Cow US Population Growth
Dairy Herd Size Stabilized when Exports Took Off15
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
8,500
9,000
9,500
10,000
10,500
11,000
11,500
1980 1985 1990 1995 2000 2005 2010 2015
Exp
ort
s as
% o
f U
.S. M
ilk S
olid
s
Tho
usa
nd
s
Average number of milk cows in the U.S. U.S. Dairy Exports as % of U.S. Milk Solids
Domestic SNF Demand in 202516
Conservative(10-YrTrend)
Optimistic(Above Trend)
Realistic(Long-Term
Trend)
Population Growth 0.8% 0.8% 0.8%
Per Capita Growth -0.1% 0.3% 0.0%
Total CAGR 0.7% 1.1% 0.8%
SNF U.S. Demand in 2015 15,583 15,583 15,583
SNF U.S. Demand in 2025 16,774 17,458 16,943
Additional Milk Needed 13,387 21,071 15,282
Domestic Butterfat Demand in 202517
Conservative(Below 20-Yr
Trend)
Optimistic(At 3-YrTrend)
Realistic(10-Yr Trend)
Population Growth 0.8% 0.8% 0.8%
Per Capita Growth 0.5% 0.9% 0.6%
Total CAGR 1.3% 1.7% 1.4%
Butterfat U.S. Demand in 2015
7,583 7,583 7,583
Butterfat U.S. Demand in 2025
8,667 9,018 8,753
Additional Milk Needed 28,514 37,756 30,794
Milk Production Growing in Areas Far From Population Centers
18
$0.00
$0.50
$1.00
$1.50
$2.00
$2.501
96
1
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
$/g
allo
n
Inelastic Supply meets Inelastic Demand19
Farm Share of Retail Dollar20
0% 15% 30% 45% 60%
OrangesPotatoes
Ice CreamLemons
Orange JuiceWheat Flour
Iceberg LettuceSugarPork
TomatoesCheddar Cheese
StrawberriesBeef
Whole Milk
Retail Prices are Sticky21
2009
2014
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
30% 40% 50% 60% 70%
Fam
Val
ue
of
Bev
erag
e M
ilk
Farm Share of Retail Dollar
Price Discovery: How Much is Milk Worth? 22
The Pool: producers are paid based on their milk components and pool-level utilization of milk
23
Federal Milk Marketing Orders Map24
Source: Progressive Dairyman
Class I Utilization Percentage of Milk in Federal Milk Orders 25
0%
10%
20%
30%
40%
50%
60%
70%1
94
7
19
54
19
61
19
68
19
75
19
82
19
89
19
96
20
03
20
10
YearClass I Util. %
1956 62.5%
1966 65.7%
1976 54.9%
1986 43.2%
1996 43.5%
2006 37.6%
2016 30.7%
Source: USDA AMS Dairy Program (2016) Measures of Growth in Federal Milk Marketing Orders.
How much does ‘beverage milk’ contribute to farmer’s milk check?
26
$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70$0.80
Average Producer Price Differential, Central FMMO
Due to declining share of milk that is processed into beverage milk, producer price differentials are diminishing over time.
When ‘realized’ manufacturing value of milk ends up being much higher than ‘anticipated’ manufacturing value of milk charged to fluid milk processors, then residual value of the pool is negative and producer price differential is also negative.
Federal Milk Orders: The Institution We Love to Hate27
Externalities of School Milk Programs28
• Dairy processors who innovate to increase consumption of milk in schools do not capture the full benefit of their activities.
• School milk innovations increase the percentage of population who will drink milk as adults.
• Dairy producers will benefit from increased future consumption even if the dairy processor which innovated may not capture that market in the future.
• In economics, this is called a positive externality. R&D should be subsidized by the dairy industry or innovators should be rewarded for their innovation beyond what they capture through direct additional profit from sales.
• Dairy check-off is one way to support R&D. Can Federal Milk Orders help?
Idea 1: Innovation Credits 29
• Processors who wish to make a sizeable investment likely to increase both current and future nationwide fluid milk sales can apply for investment credits that can be used to partially offset capital expenses of new product lines.
• Can be used to either reduce risk of new innovations or return on investment for large capital expenses.
• The concept of ‘credits’ is well established in Federal Milk Orders. • In Appalachian and Southeast FOs, funds are accumulated into
transportation credit balancing fund by assessments on Class I producer receipts. During months when milk supply is lower than local demand handlers may request transportation credit payments from the fund to offset the additional costs of securing long distance loads of supplemental milk.
Dumped Milk versus Total Producer Milk
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%
Dump Milk as a Percentage of Total Producer Receipts, Northeast Federal Order
prepared by A.M. Novakovic, Cornell University 30
Idea 2: Multiple Classes for Beverage Milk: 1a, 1b, 1c.31
• Class 1a: School Milk In Demand-Enhancing Packaging: school milk marketed in packaging that is known to be stimulative of school milk utilization can be classified as “Class 1a” milk and charged 50% of the regular Class I differential (over manufacturing milk).
• Class 1b: High-protein Fluid Milk Products: Processors who market milk with high protein content would be allowed to pay to the pool somewhat lower price for skim milk if the volume of raw skim milk intake in the plant is e.g. more than 15% higher than the volume of skim share of their beverage milk.
• Class 1c: Donated Fluid Milk Products: Fluid milk donated to food banks should be pooled at the lowest-price class.
Idea 3: Forward Contracting for Class I products32
• Forward contracts between a buyer and a seller are typically fixed-price arrangements where buyer promises to pay, and seller agrees to receive a fixed price for the product to be delivered at a future point in time.
• Since Class 1 handlers have to participate in the federal milk order pools, a different kind of forward contract would be necessary:
➢ dairy processor agrees to pay a fixed price for Class I milk➢ Milk supplier (farm, coop) agrees to receive that fixed price for
the milk supplied and compensate the dairy processor for their net obligations to the pool if positive. If Class I handler is allowed to draw from the pool (roughly speaking, when Class I price is below Class III milk price) then draw is passed on to the milk supplier.
Think this is Un-American?33
From Farm To Table: Milk Supply Economics
Dr. Marin Bozic
Department of Applied
Economics
University of Minnesota-Twin
Cities
317c Ruttan Hall
1994 Buford Avenue
St Paul, MN 55108
Photo Credits:
Mara at Blue Diamond Dairy
© Sadie Frericks, 2010