Transcript Dairy marketing James Dunn Pennsylvania State University

Dairy marketing
James Dunn
Pennsylvania State University
Overview
• 9.3 million cows in U.S.
• 10,100 liters/cow – 22,258 lbs.
• Number of Dairy Farms 51,481 in 2012
(avg 179 cows)
• About 7,400 in PA (20,157 lbs./cow/yr)
• Population of USA – 321 mil.
$/cwt.
Class III Milk Price and Support Price
1977-present
$24
$20
$16
$12
$8
Class III
Support
$4
$0
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Class III Milk Price
25
Class III
average
futures
20
$/cwt.
15
10
5
0
2005
2006
Source: USDA
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
PA All-Milk Price & Milk Margin
30
27
24
21
$/cwt.
18
15
12
9
6
3
Feed Cost
PA all milk price
Milk margin
0
Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15
PA Feed Cost/cwt. Milk
Jan 2006 - present
12
10
$/cwt.
8
6
Feed Cost
avg
4
2
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Milk markets are very regulated
Except New Zealand, everyone is regulated
for prices
Policies vary
Some work better than others
Goals of policy important
Common Policy Instruments
• Classified pricing – different price according to
use
• Price supports – artificially keep price high
• Quotas – restrict production – not here, but often
discussed and in Farm Bill talks
• Export subsidies
• Import restrictions
• Minimum retail prices – PA Milk Marketing
Board
• Maximum retail prices
• Component prices – price depends on butterfat
United States
•
•
•
•
•
Classified pricing & pooling – 4 classes
Support prices – not supportive
Tariffs & import quotas
Some export subsidies
Component pricing – butterfat, protein,
bacteria, other solids
Example October 2015 Central PA
Item
weight
price
Class I
37.6%
$20.76
Class II
23.2%
$16.44
Class III
24.8%
$15.46
Class IV
14.0%
$16.43
Weighted
avg price
$17.75
(39.1 cents/lt.)
Classified Pricing
• Distortion depends on price difference –
Canada is very distorting
• Most cost paid by milk drinkers
• Raise prices for inelastic demand
Price Discrimination
30
PD'
25
P*
Pc'
20
Dc
15
DD
10
5
0
1
2
3
4
5
6
QD' QD=Qc Qc'
7
8
9
Price supports
• Without supply control very expensive
• With surplus must have subsidized exports
which hurts farmers elsewhere
• Dairy Cliff
Price Supports
• Buy products at the equivalent of support
price $9.40/cwt. (21.3 cents/kg.)
• Three products cheese, butter, nonfat dry
milk
• Tilt is how prices of various products are
adjusted to keep purchases moderate –
usually NFDM too high
• Now gone – haven’t been supportive for
years
Production quotas
•
•
•
•
Very distorting - Canada
Cheap for government
Keeps farms from expanding
Proposed new regulations have supply
controls
Export Subsidies
• Expensive
• Hurt farmers elsewhere
• GATT doesn’t allow
Component pricing
• Helps efficiency
• Improves quality
• Very good if tied to markets
Import protection
• Necessary with price supports
• GATT problems
Spatial Price differentials
•
•
•
•
•
Assumes deficit milk hauled from Midwest
Adds premium to Class I Midwest price
About $1.69/cwt. in PA (Mt. Holly Springs)
Less in western PA
More in Southeastern PA
$/cwt.
PA All Milk Price
28
26
24
22
20
18
16
2011
2012
2013
2014
2015
forecast 2015
14
12
10
Jan
Source: USDA
Mar
May
Jul
Sep
Nov
Fluid Processors
• Dean Foods – result of merger between
Suiza and Dean – largest player in fluid
market – about 35%
• No national brand – lots of local brands
• Dean has most of Boston market –– 80% ?
Farm and Retail Milk Price
$/gal
2000-2015
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
farm
retail
margin
0.00
2000
2001
2002
Data: USDA
2003
2004
2005
2006
2007
year
2008
2009
2010
2011
2013
2014
2015
Index of Farm and Retail Milk Prices
Jan 2000 - Jul 2015
225
200
175
150
125
100
75
farm
retail
50
Jan 2000 = 100
25
0
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Why Are Farm Numbers
Consolidating?

Production efficiency

Rate of return on capital

Economies of scale

Investment strategies

Retirements

Rising affluence in society

Management, skill levels!

True in all of agriculture
Percent of Dairy Farms by Size and Region
Region
1-49
50-99
100-199 200-499
500+
Northeast
44%
37%
13%
4%
1%
Upper
Midwest
48%
39%
9%
3%
1%
California
15%
3%
9%
29%
44%
US
50%
30%
12%
5%
3%
Percent of Milk Produced by
Farm Size and Region
Region
1-49
50-99
100-199 200-499
500+
Northeast
12%
30%
28%
18%
12%
Upper
Midwest
California
21%
37%
18%
16%
9%
0%
0%
2%
19%
78%
U.S.
10%
19%
17%
18%
36%
Milk/Cow, Population, & Cows
1990-2013
3
1990=1
2.5
2
milk/cow
population
cows
dairy farms
cows per farm
1.5
1
0.5
0
1990
1995
2000
2005
2010
Productivity and Farm Consolidation
•
•
•
•
•
•
Productivity advances relentlessly
Fewer cows are needed
Farms get bigger
100 year trend
Some farmers are always struggling
Need to have some jobs outside of
agriculture available
Trade Policy
• Dairy Export Enhancement Program
– Designed to keep products competitive where
we have EU competition
• Import restrictions – can’t hold prices up
with lots of cheap imports
• NAFTA – supposed to get access to Mexico
and Canada – slow coming
Exporters of Dairy Products
1995-2008
2008
1995
Others
22%
Others
13%
EU
31%
AUST
9%
EU
46%
AUST
9%
US
10%
US
10%
NZ
22%
NZ
28%
US Dairy Exports
1967-2014
4,500
4,000
2009 dollars
3,500
Mil $
3,000
2,500
2,000
1,500
1,000
500
1997
1999
Source: USDA, BLS
2001
2003
2005
2007
2009
Deflated by PPI Dairy
2011
2013
US Dairy Trade
2000-15
$700
imports
exports
$600
$500
Mil
$400
$300
$200
$100
$0
2000
2002
Source: USDA
2004
2006
2008
2010
2012
2014
Net Dairy Exports and All Milk Price
2007-15
26
450
400
24
350
22
300
250
18
200
avg. net exports
avg. US all milk price
avg. net exports
avg. US all milk price
16
14
150
100
50
12
10
0
12 month moving average
-50
2007
2008
2009
Source: USDA
2010
2011
2012
2013
2014
2015
mil $
$/cwt
20
Exchange Rates
Relative to US Dollar
2009-Present
January 2009=1
1.25
Australia
New Zealand
Euro
low number means US products
are more competitive
1
0.75
0.5
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Concluding comments
• Milk pricing is complex
• Government very involved
• Prices are still about supply & demand