Transcript Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota North Central Cheese Industry Association Rochester, MN Oct 16, 2013

Dairy Situation and Outlook in the
I-29 Corridor
Dr. Marin Bozic, University of Minnesota
North Central Cheese Industry Association
Rochester, MN
Oct 16, 2013
Year-On-Year Milk Production Change (%)
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Source: USDA, Milk Production reports, various issues
Income over Feed Costs Margins: 1980-2013
U.S Dairy IOFC Margins, $ / cwt
25
20
15
10
5
0
IOFC Margins
Feed Prices
All-Milk Prices
Source: USDA, various reports and own calculations
Purchased Feed Costs as % of Total Feed Costs
Historical and Forecasted
Income Over Feed Costs Margins
• Forecasted IOFC Margins for 2014 are higher than 75% of historical
IOFC margins since 2000.
Source: USDA, CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University
U.S. All-Milk Price 2014 Outlook
(80% Confidence Interval)
25.00
23.00
21.00
19.00
17.00
15.00
13.00
Source: CME Group, Own Forecasting Model Developed together with John Newton, the Ohio State University
Domestic Sales of Dairy Foods
(Year-To-Date Ending August 11, 2013)
Yogurt: Greek
Cheese: Grated/Crumbled
Cheese: Shreds
Milk: Organic
Yogurt: Total
Milk: Flavored
Cheese: Total
Cheese: Chunk/Loaf
Cheese: Slices
Cheese: String/Stick
Milk: Total
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013
Domestic Sales of Dairy Foods
(Year-To-Date Ending August 11, 2013)
Cheese: Grated/Crumbled
Cheese: Shreds
Milk: Organic
Yogurt: Total
Milk: Flavored
Cheese: Total
Cheese: Chunk/Loaf
Cheese: Slices
Cheese: String/Stick
Milk: Total
-4%
-2%
0%
2%
4%
6%
8%
Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013
Dairy Exports 2013 Year-To-Date Growth
• In July 2013, 17.6% of total milk solids exported.
• Over the last five years, over two thirds of the growth in the U.S.
milk production was exported.
Source: USDA FAS Data, USDEC Global Dairy Market Outlook July 2013, and own calculations
Long-term Outlook on Cheese Consumption
U.S. Per Capita Consumption Growth (lbs)
American
Italian
Total
U.S.
Population
Growth
1970-1980
2.63
2.38
6.16
22.18 mil
1980-1990
1.48
4.53
6.43
22.39 mil
1990-2000
1.56
3.00
4.89
32.54 mil
2000-2010
0.63
2.48
3.04
27.19 mil
2010-2020
??
??
2.00
24.54 mil
• U.S. Population growth and per capita cheese consumption
growth slowing down.
U.S. Fluid Milk Sales (12-months Rolling Average)
Daily Sales (Mil Lbs)
154
152
150
148
146
144
142
140
• Fluid milk story: from per capita decline to total volume decline?
Source: future.aae.wisc.edu, own calculations
Over the next 10 years, U.S. milk production may
grow by 25 billion lbs. Where will we sell that?
• Needed increase in exports (vs
2012):
• Milk Powders: 56%
• Butterfat:
270%
• Cheese:
60%
Cheese (16.5 bil lbs)
Other Domestic (3.5 bil lbs)
Exports (10 bil lbs)
Fluid Milk (-5 bil lbs)
• In order to export products
accounting for 10 billion lbs of
milk in 2023, the U.S. would
need to capture 70% of the
entire forecasted increase in
world’s imported demand for
skim milk powder and even
higher share of additional butter
trade.
Defining the I-29 Dairy Corridor
• Interstate 29 (I-29) is an 745.5 miles long Interstate Highway in the Midwestern
United States. I-29 runs from Kansas City, MO, at a junction with Interstate
35 and Interstate 70 to the Canadian border near Pembina, ND.
Growing Milksheds in the U.S.
A Closer Look at the Upper Midwest
Dairy Situation in
the I-29 Corridor
Dairy Growth in South Dakota
Cow Inventory Growth By County
2000-2013
Grant
Codington
Hamlin
Brookings
Moody
Minnehaha
Total
2,700
500
2,300
5,800
4,600
2,300
18,200
Dairy Growth in Iowa
Cow Inventory Growth By County
2000-2013
Lyon
5,800
Osceola
2,765
Sioux
5,100
Total
13,665
Dairy Growth in Minnesota
Cow Inventory Growth By County
2000-2013
Stevens
15,800
Swift
2,100
Nobles
1,200
Total
19,100
Growth Dynamics in I-29 Corridor
vs. Northeast WI and Central MI
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
(2,000)
(4,000)
2003
2005
2007
I-29
Northeast WI
2009
Central MI
2011
2013
I-29 Corridor Daily Milk Demand (lbs of milk)
Current
Future
Valley Queen Cheese – Milbank, SD
4,000,000
4,000,000
Davisco Foods Intl. – Lake Norden, SD
3,200,000
6,000,000
Agropur – Hull, IA
2,500,000
5,000,000
Bel Brands – Brookings, SD
Total Aggregate Demand
Approximate Cows Needed
750,000
9,700,000
15,750,000
145,000
240,000
Other processing plants in the region include Dean Foods in Siux Falls, SD and Le Mars,
IA, AMPI cheese plant in Sanborn, IA and drying plant in Freeman, SD, and Wells Blue
Bunny in Le Mars, IA.
Business Environment in South Dakota
• Pre-permitted sites
• Low taxes
• Governor and Sec. of
Agriculture actively
involved in
promoting the state
• Consensus between
producers,
processors and
government that SD
wants to double the
milk production
100 mile radius of Agropur in Hull, IA
23
Back to the Future in Southern SD
In 1960:
53,570 cows
In 2012:
23,997 cows
Source: Agropur
Cutting Through the Red Tape in NE
Source: Nebraska Department of Agriculture
I-29 from Producers Perspective: Milk Price
2008-2012 Average
Milk Revenues
State
$ Mil
Wisconsin
$12.505
Minnesota
$12.496
Michigan
$12.261
PNW
$11.955
W Texas
$11.783
3,000 cows; 24,000 lbs/cow
Source: Blimling and Associates
Corn Yield
Land Price Increase Since 2005
(x Times)
Source: Blimling and Associates
Upper Midwest from Lenders Perspective
• The game has clearly changed for dairy
• What we think we know:
• Banks no longer fund new dairy construction without a
land base, increasing the upfront capital needs
• 100 acres not enough; need land to grow some feed
• Minimum collateral levels have also increased – need
cows and cash (or an outside investor)
• Successful 300 cow dairy will not be extended credit to
move to 3,000 cows
• Will take 20 years to grow the herd and slowly add on
• This seems to answer the “who grows” question
(not locals)
Source: Blimling and Associates
Upper Midwest from Lenders Perspective
2004 (I-29, Michigan, Wisconsin)
Item
Quantity
Cost/Unit
Investment
Dairy
3,000
$4,000
12,000,000
Land
100
$3,000
300,000
Cows
1,500
$1,250
1,875,000
Total Investment
14,175,000
Source: Blimling and Associates
2012 I-29 Corridor
Item
Quantity
Cost/Unit
Investment
Dairy
3,000
$4,000
12,000,000
Land
500
$12,000
6,000,000
Cows
1,500
$1,250
1,875,000
Total Investment
19,875,000
2012 Michigan & Wisconsin
Item
Quantity
Cost/Unit
Investment
Dairy
3,000
$4,000
12,000,000
Land
500
$5,000
2,500,000
Cows
1,500
$1,250
1,875,000
Total Investment
16,375,000
Source: Blimling and Associates
Importance of Risk Management / Federal Policy
Coverage Level
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
Fees &
Premiums
$
1,000.00
$ 16,070.73
$ 37,205.75
$ 81,877.94
$ 155,350.87
$ 229,804.51
$ 442,254.43
$ 600,862.01
$ 938,411
Expected
Indemnity
$ 198,819
$ 364,747
$ 599,050
$ 887,684
$1,212,759
$1,568,854
$1,952,756
$2,362,024
$2,794,101
DMSP Penalty
$
$
$
$
$
$
$
$
$
583,925
583,925
583,925
583,925
583,925
583,925
583,925
583,925
583,925
Net Revenue
$ (386,106)
$ (235,248)
$ (22,080)
$ 221,881
$ 473,483
$ 755,124
$ 926,576
$1,177,236
$1,271,764
Expected Returns to participation in the Dairy Producer Margin Protection
Program and Dairy Market Stabilization Program in 2009. 6,000 cow dairy at
24,000 lbs/cow. Sign-up date assumed to be January 15.
Source: Own Calculations
U.S. Alfalfa Hay Acreage
U.S. Corn Basis Map (Early 2013)
I-29 from a Processor’s Perspective
• Assume a 3 M per day plant running 340 days
• Easiest “solution” is to buy co-op milk indexed to the
respective class price
• Conversations with processors suggest the following
premiums
• Michigan: $1.50 - $1.75
• I-29: $1.70+
• Idaho: $0.25 - $0.50
•
($16.3 M at $1.60)
($17.3 M at $1.70)
($ 3.5 M at $0.35)
Some other thoughts
• At smaller volumes the spread means less
• Freight expense will matter when comparing the West
• State incentives can also close the gap
Summing Up
• Where does this all take us?
• Economics of I-29 expansion seem complex. A lot depends on
dairy development efforts (processors, state officials,
university extension), but ultimately costs have to pencil out
for investments to trickle in.
• The 2013 farm bill, if passed, could remove a lot of risk (both
DSA and DFA in their current form are potentially an overkill,
though the devil is in the details), possibly spurring a new wave
of dairy expansions across the country. We need to be ready to
exploit this opportunity before milk prices decline as a result of
new and very generous safety net.
Dairy Situation and Outlook in the I-29 Corridor
presented at the North Central Cheese
Industry Association,
October 16, 2013.
Dr. Marin Bozic
[email protected]
Department of Applied Economics
University of Minnesota-Twin Cities
317c Ruttan Hall
1994 Buford Avenue
St Paul, MN 55108
Thank you for your help:
Duane Banderob and Katie Behnke,
Blimling and Associates
Tim Czmowski and Deeann Bylsma,
Agropur
Roger Scheibe, SD Dairy Producers
Willow Holoubek, A-FAN, Nebraska
Research supported by a grant by the
Minnesota Milk Producers Association