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

5/8/14 ¡ Setting the Stage with Dairy Outlook Mark Stephenson Director of Dairy Policy Analysis Have You Ever Heard the Phrase… � 3 M — M oney M akes M ilk � 5 M — M ore M oney M akes M ore M ilk � 7 M — M uch M ore M oney M akes M uch M ore M ilk � Or does it? Attributed to Don Kullmann of Prairie Farms Dairy Cooperative 1 ¡

$10.00 $12.00 $14.00 $16.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 $22.00 $24.00 $26.00 We’ve Never Been Here Before Jan-00 Jan-00 Jul-00 Jul-00 Jan-01 Jan-01 Jul-01 It’s Also About Costs… Jul-01 Jan-02 Jan-02 Jul-02 Jul-02 Jan-03 Jan-03 Jul-03 Jul-03 Jan-04 Jan-04 Jul-04 Jul-04 Jan-05 Jan-05 All Milk Price Jul-05 Jul-05 MPP Ration Jan-06 Jan-06 Jul-06 Jul-06 Jan-07 Jan-07 Jul-07 Jul-07 Jan-08 Jan-08 Jul-08 Jul-08 Jan-09 Jan-09 Jul-09 Jul-09 Jan-10 Jan-10 Jul-10 Jul-10 Jan-11 Jan-11 Jul-11 Jul-11 Jan-12 Jan-12 Jul-12 Jul-12 Jan-13 Jan-13 Jul-13 Jul-13 Jan-14 Jan-14 5/8/14 ¡ 2 ¡

10.00 12.00 -8.00 -6.00 -4.00 -2.00 $10.00 $12.00 0.00 2.00 4.00 6.00 8.00 $14.00 $16.00 The Margin Looks Good for Now $2.00 $4.00 $6.00 $8.00 Jan-00 Jan-00 Aug-00 Jul-00 Mar-01 Jan-01 Business Models Differ Oct-01 Jul-01 Average Daily Change in Production from Year Earlier Jan-02 May-02 Jul-02 Dec-02 Jan-03 Jul-03 Jul-03 Feb-04 WI CA Jan-04 Sep-04 Jul-04 This Hurt! This Hurt! Apr-05 Jan-05 IOFC Margin Jul-05 Nov-05 Jan-06 Jun-06 Jul-06 Jan-07 Jan-07 Aug-07 Jul-07 Mar-08 Jan-08 Oct-08 Jul-08 Jan-09 May-09 Jul-09 Dec-09 Jan-10 Jul-10 Jul-10 Feb-11 Jan-11 Sep-11 Jul-11 Apr-12 Jan-12 Jul-12 Nov-12 Jan-13 Jun-13 Jul-13 Jan-14 Jan-14 5/8/14 ¡ 3 ¡

5/8/14 ¡ Not Everyone Agrees, but it Looks Like Cycles to Us. Another Model Suggests… Selected Variables 40 36.25 - Model started in 2011 and forecast forward. 32.5 - Suggested about a $23 Class III peak in 2 nd half of 2013. - Followed by slide to about $14 in 1 st half of 2016. 28.75 $/cwt 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 All Milk Price : Baseline 4 ¡

5/8/14 ¡ Ultimate Authority After review, it was determined that Bob put one 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 5 ¡

5/8/14 ¡ Rolling Average Daily Fluid Milk Sales 154 152 150 Millions of Pounds 148 146 144 142 140 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Rolling Average Daily Yogurt Production 14,000 13,000 12,000 11,000 1000s of Pounds 10,000 9,000 8,000 7,000 6,000 5,000 4,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 6 ¡

Pounds 500 520 540 560 580 600 620 Pounds Per Capita Cheese Consumption 1975 10 15 20 25 30 35 40 0 5 1 1976 9 7 0 1977 1 9 1978 7 Milk Equivalent Domestic 2 Per Capita Consumption 1979 1 9 7 1980 4 1 1981 9 7 6 1982 1 9 1983 7 8 1984 1 9 8 0 1985 1 9 1986 8 2 1987 1 9 1988 8 4 1989 1 9 8 6 1990 1 1991 9 8 8 1992 1 9 9 1993 0 1 1994 9 9 2 1995 1 9 1996 9 4 1997 1 9 9 1998 6 1 1999 9 9 8 2000 2 0 2001 0 0 2002 2 0 0 2003 2 2 2004 0 0 4 2005 2 0 2006 0 6 2 2007 0 0 8 2008 2 2009 0 1 0 2010 2 0 2011 1 2 2012 5/8/14 ¡ 7 ¡

5/8/14 ¡ Phil Plourd Makes a Case World Population Data: World Bank 8 ¡

5/8/14 ¡ Gross Domestic Product Data: World Bank, Current US Dollars Per Capita GDP with North America Data: World Bank, Current US Dollars 9 ¡

5/8/14 ¡ 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. 10 ¡

5/8/14 ¡ Quarterly China Imports from U.S. Source: USDEC, GTIS World Weather Makes a Difference. 11 ¡

5/8/14 ¡ U.S. Dairy Trade as a Percentage of Milk Production 16 14 Exports Imports Percent of Milk Production 12 10 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Demand Expectations � I expect domestic demand to be alright—modest growth but nothing special 12 ¡

5/8/14 ¡ Consumer Confidence 160 140 120 100 80 60 Consumer Confidence Present 40 Expectations 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 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. � 13 ¡

5/8/14 ¡ U.S. versus World Prices Average Daily Milk Per Cow 64 63 62 Pounds per Cow per Day 61 60 2011 59 2012 2013 58 2014 57 56 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 14 ¡

5/8/14 ¡ Number of Cows 9300 9280 9260 9240 1000s of Cows 9220 9200 9180 2011 9160 2012 9140 2013 2014 9120 9100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Percent Change in Milk Production 5.00% 2011 2012 4.00% 2013 2014 3.00% 2.00% 1.00% 0.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -1.00% 15 ¡

5/8/14 ¡ This is Still a Big Unknown Location of Dairy Cows—2011. One Dot = 1,500 Cows. Produced by Mark Stephenson University of Wisconsin 16 ¡

5/8/14 ¡ 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 17 ¡

5/8/14 ¡ 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? 18 ¡