Setting the Stage with Dairy Outlook Mark Stephenson Director of - - PDF document

5/8/14 ¡ 1 ¡

Setting the Stage with Dairy Outlook

Mark Stephenson Director of Dairy Policy Analysis

Have You Ever Heard the Phrase…

3M— Money Makes Milk 5M— More Money Makes More Milk 7M— Much More Money Makes Much More Milk Or does it?

Attributed to Don Kullmann of Prairie Farms Dairy Cooperative

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We’ve Never Been Here Before

$10.00 $12.00 $14.00 $16.00 $18.00 $20.00 $22.00 $24.00 $26.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

All Milk Price

It’s Also About Costs…

$4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

MPP Ration

5/8/14 ¡ 3 ¡

$2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

IOFC Margin

The Margin Looks Good for Now

This Hurt!

• 8.00
• 6.00
• 4.00
• 2.00

0.00 2.00 4.00 6.00 8.00 10.00 12.00 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14

Average Daily Change in Production from Year Earlier

CA WI

Business Models Differ

This Hurt!

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Not Everyone Agrees, but it Looks Like Cycles to Us. Another Model Suggests…

Selected Variables

40 36.25 32.5 28.75 25 21.25 17.5 13.75 10 2013-01 2013-07 2014-01 2014-07 2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07 2019-01 2019-07 2020-01 Date $/cwt All Milk Price : Baseline

• Model started in 2011 and forecast forward.
• Suggested about a $23 Class III peak in 2nd half of 2013.
• Followed by slide to about $14 in 1st half of 2016.

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Ultimate Authority

After review, it was determined that Bob put

• ne through the

uprights.

How Do I Forecast?

I take input from our best known measurements

• NASS, AMS, CME, BLS, NOAA, CNIEL, GDT, others

I assemble data into supply & utilization balance sheet I consider what the mathematical models indicate I listen to what others are saying I assemble and weight into my own mental model

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Rolling Average Daily Fluid Milk Sales

140 142 144 146 148 150 152 154 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Millions of Pounds

Rolling Average Daily Yogurt Production

4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1000s of Pounds

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Per Capita Cheese Consumption

5 10 15 20 25 30 35 40 1 9 7 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8 2 1 2 1 2 Pounds

Milk Equivalent Domestic Per Capita Consumption

500 520 540 560 580 600 620 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Pounds

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Phil Plourd Makes a Case World Population

Data: World Bank

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Gross Domestic Product

Data: World Bank, Current US Dollars

Per Capita GDP with North America

Data: World Bank, Current US Dollars

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Per Capita GDP

Data: World Bank, Current US Dollars

What Can Prosperity Buy?

East Asia has had about a 5 times increase in per capita

GDP over the last decade.

East Asia is no longer concerned about adequate

calories

East Asia wants to upgrade the “quality” of its diet with

more animal proteins.

Tom Hertel suggests that for the first time in history

increases in prosperity are driving increased food demand more than increases than population.

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Quarterly China Imports from U.S.

Source: USDEC, GTIS

World Weather Makes a Difference.

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U.S. Dairy Trade as a Percentage of Milk Production

2 4 6 8 10 12 14 16 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Percent of Milk Production Exports Imports

Demand Expectations

I expect domestic demand to be alright—modest growth

but nothing special

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Consumer Confidence

20 40 60 80 100 120 140 160 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Consumer Confidence Present Expectations

Demand Expectations

I expect domestic demand to be alright—modest growth

but nothing special

I expect U.S. export demand to expand, but probably

not at the same rate as last year.

• New Zealand and European Union have much

improved weather for production.

• China’s demand is still growing but showing signs of

slowing the pace.

• Already see price decline on GDT.
• U.S. product prices will have to align.

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U.S. versus World Prices Average Daily Milk Per Cow

56 57 58 59 60 61 62 63 64 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Pounds per Cow per Day 2011 2012 2013 2014

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Number of Cows

9100 9120 9140 9160 9180 9200 9220 9240 9260 9280 9300 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1000s of Cows 2011 2012 2013 2014

Percent Change in Milk Production

• 1.00%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 2012 2013 2014

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This is Still a Big Unknown

Location of Dairy Cows—2011. One Dot = 1,500 Cows.

Produced by Mark Stephenson University of Wisconsin

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Uncertainties

Domestic Economy. Not all indicators are pointing in

the same direction.

Export Sales. Could be stronger than I am forecasting.

• Weather. Will the El Niño be enough.

Farm Bill. Signed into law on Feb 7. We understand

the major pieces but there are still many details for USDA to decide before implementation. How will producers react?

Observations…

• Farms have all the signal they need to tell them the market

wants more milk.

• They’ve been slow to respond, but they are holding back

cows from culling and there will soon be adequate heifers in the pipeline (even given beef prices).

• They want to restore balance sheets quickly, but have been

burned in the past. Western operations may not be as credit-worthy as in previous years.

• I’m forecasting milk prices to decline from this high point

but still average

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My Conclusions…

We are at the peak of our milk price cycle now We will decline significantly (All Milk price of low $19

by December)

The 2014 average milk price will still be $2.50 above

2013 average

2015 average will look a lot more like 2013 2016???

Questions?