2012 Agricultural Outlook Update Dairy Outlook: Indiana Perspectives

Mike Schutz and Nicole Olynk Purdue University

Outline

• Looking back – Strong rebound in milk prices – But, continued tight margins • What’s going on today? US and Indiana • The Dairy Policy Debate(s) • 2012 Price Outlook Purdue University is an Equal Opportunity/Equal Access institution.

Modified

Where are we today?

Source:http://future.aae.wisc.edu/ Purdue University is an Equal Opportunity/Equal Access institution.

Purdue University is an Equal Opportunity/Equal Access institution.

Source:http://future.aae.wisc.edu/

2000 1950 1900 1850 1800 1750 1700 1650 1600 1550 1500

Production per Cow in US

2006 2007 2008 2009 2010 2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Production per Cow in Indiana

2006 2007 2008 2009 2010 2011 1850 1800 1750 1700 1650 1600 1550 1500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

State Trends

Grade A Herds Grade B Herds

Farms

Cows

Milk Production

Production/cow

June 1997

1875 1104

2979

140K

186M

1380

June 2000

1668 786

2454

148K

198M

1400

June 2006

1392 324

1716

166K

277M

1670

June 2010

1346 306

1652

168K

285M

1695

June 2011

1317 262

1579

170K

291M

1710

Change

- 30% - 76%

- 47%

+21%

+57%

+24% (Dairy Program, IBOAH & Indiana Ag. Statistics)

Slaughter Dairy Cows Managing US Herd Size?

2005 2006 2007 2008 2009 2010 With tight margins and high cull cow values … what next???

2011 290 270 250 230 210 190 170 150 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Purdue University is an Equal Opportunity/Equal Access institution.

Is 2 the new 3?

Balance Point?

25 20 15 $ 10 5 0

Milk Price vs Feed Costs

16% Ration Cost/cwt Milk Price/cwt

Purdue University is an Equal Opportunity/Equal Access institution.

Source:http://future.aae.wisc.edu/

Purdue University is an Equal Opportunity/Equal Access institution.

Butter in Cold Storage

2006 2007 2008 2009 2010 2011 300 250 200 150 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2,4 2,2 2,0 1,8 1,6 1,4 1,2 1,0

NASS US Butter Price

Butter Price

Total Natural Cheese in Storage

2006 2007 2008 2009 2010 2011 1 100 000 1 050 000 1 000 000 950 000 900 000 850 000 800 000 750 000 700 000 650 000 600 000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2,4 2,2 2,0 1,8 1,6 1,4 1,2 1,0

NASS US Cheese Price

Cheddar Block Price Cheddar Barrel Price

Purdue University is an Equal Opportunity/Equal Access institution.

Milk Price

Milk Class Prices

25 23 21

$

19 17 Class I Class II Class III 15 13 11 9

2004 2005 2006 2007 2008

Class IV

2009 2010 2011 2012

25 23 21

$

19 17

Milk Class Prices (8/18/2011)

Class I Class IV USDA Low Class II CME Class III PSU Forecast 15 13 11 9

2004 2005 2006 2007 2008

Class III USDA High

2009 2010 2011 2012

Purdue University is an Equal Opportunity/Equal Access institution.

Source:http://future.aae.wisc.edu/

December 2011 Futures (as of 8/16/11)

• 80% chance between $14.60 and $20.94

RRecall: – December 2010: 80% chance between $12.51 and $16.75 ($13.48 Dec. 2010) Source: Jim Hilker's Market Outlook & Probabilistic Price Forecasts for Grain & Livestock; Michigan State University, https://www.msu.edu/~hilker/

March 2012 Futures (as of 8/16/11)

• 80% chance between $13.11 and $21.12 Source: Jim Hilker's Market Outlook & Probabilistic Price Forecasts for Grain & Livestock; Michigan State University, https://www.msu.edu/~hilker/

An Industry Divided, Policy-wise

•

Foundation for the Future (FFTF) by National Milk Producers Federation

.

– Dairy Market Stabilization (Supply management) – Margin Protection (Gov. funded margin insurance) – Federal Order Reform – Strongly opposed by IDFA; DPAC; MN Milk Producers Assn.; WI Dairy Buisiness Assn.; CA Dairies, Inc.; Southeastern dairy orgs.; and others.

– Introduced by Colin Peterson (D-MN) and co-sponsored by Mike Simpson (R-ID).

An Industry Divided, Policy-wise

•

Debate over Somatic Cell Count limits

– Reduction to 400K required for EU exports – Proposal lost 26-25 at NCIMS (regional differences) – Some very early discussion in IN … BOAH rule?

– Kroger single sourcing milk at 250,000 • Do you need regulation when you have “Politics via the market”?

Milk Price Outlook

• On one hand … – Fat basis exports rise in 2011 (over 2010) but soften in 2012 – Historically high feed costs expected – Increased milk production • Larger US herd size – but – feed prices should slow growth in milk/cow – Increased production in Oceania expected – Weakening international demand … Slower growth in exports

Milk Price Outlook

• And on the other hand … – Feed prices and recent weather impacting output • Especially butterfat  Tight butter inventories • Higher proportion late lactation cows in winter/spring – Near record high milk prices – Cheese inventories relatively high – but – recent movements should lessen downward pressure on prices – Theoretically … high cow cull prices providing incentives to reduce herd size/cow numbers ?

In Summary … We’re Fragile

• Policy???

• Domestic demand? Economic conditions?

– Home consumption versus eating out • Export markets • FEED COSTS … will squeeze margins in 2012 – It isn’t just grains … forage prices are moving upward too!

Doug Leman named Executive Director of Indiana Professional Dairy Producers

[email protected]

Purdue University is an Equal Opportunity/Equal Access institution.

Mike Schutz [email protected] Nicole Olynk [email protected] 32

Historical US Dairy Heifer Inventory

Heifers for Milk Replacement over 500 lbs.

14000 12000 10000 8000 6000 4000 2000 0 US Milk Cows 500 Lb. Dairy Heifers Percentage 50 48 46 44 42 40 38 36 34 32 30 Year

Source: USDA NASS.

14

Wisconsin Income over Total Variable Costs by Production Level

0 -2 4 2 12 10 8 6 18000 Lbs.

22000 Lbs.

26000 Lbs.

30000 Lbs.

Ken Bolton, UW Center for Dairy Profitability