Dairy Situation and Outlook in the I-29 Corridor Dr. Marin Bozic, University of Minnesota

Dairy Situation and Outlook in the I-29 Corridor

Dr. Marin Bozic, University of Minnesota

North Central Cheese Industry AssociationRochester, MN Oct 16, 2013

Year-On-Year Milk Production Change (%)

Jan-09

Apr-09Jul-0

9Oct-

09Jan-10

Apr-10Jul-1

0Oct-

10Jan-11

Apr-11Jul-1

1Oct-

11Jan-12

Apr-12Jul-1

2Oct-

12Jan-13

Apr-13Jul-1

3-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Source: USDA, Milk Production reports, various issues

1 21 41 61 81101

121141

161181

201221

241261

281301

321341

361381

4010

5

10

15

20

25

IOFC Margins Feed Prices All-Milk Prices

U.S

Dai

ry IO

FC M

argi

ns, $

/ cw

t

Source: USDA, various reports and own calculations

Income over Feed Costs Margins: 1980-2013

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

Sep Oct Nov

Dec

Jan '1

4Fe

bMar Apr

May Jun JulAug

Sep

13.00

15.00

17.00

19.00

21.00

23.00

25.00

U.S. All-Milk Price 2014 Outlook (80% Confidence Interval)

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)

Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013

Milk: TotalCheese: String/Stick

Cheese: SlicesCheese: Chunk/Loaf

Cheese: TotalMilk: Flavored

Yogurt: TotalMilk: Organic

Cheese: ShredsCheese: Grated/Crumbled

Yogurt: Greek

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Domestic Sales of Dairy Foods (Year-To-Date Ending August 11, 2013)

Source: DMI, Multi-Outlet Retail Milk, Cheese and Yogurt Sales Snapshots, August, 2013

Milk: TotalCheese: String/Stick

Cheese: SlicesCheese: Chunk/Loaf

Cheese: TotalMilk: Flavored

Yogurt: TotalMilk: Organic

Cheese: ShredsCheese: Grated/Crumbled

-4% -2% 0% 2% 4% 6% 8%

• 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.

Dairy Exports 2013 Year-To-Date Growth

Source: USDA FAS Data, USDEC Global Dairy Market Outlook July 2013, and own calculations

Long-term Outlook on Cheese Consumption

• U.S. Population growth and per capita cheese consumption growth slowing down.

U.S. Per Capita Consumption Growth (lbs) U.S. Population

GrowthAmerican Italian Total

1970-1980 2.63 2.38 6.16 22.18 mil1980-1990 1.48 4.53 6.43 22.39 mil1990-2000 1.56 3.00 4.89 32.54 mil2000-2010 0.63 2.48 3.04 27.19 mil2010-2020 ?? ?? 2.00 24.54 mil

Source: future.aae.wisc.edu, own calculations

20012002

20032004

20052006

20072008

20092010

20112012

2013140

142

144

146

148

150

152

154

Daily

Sal

es (M

il Lb

s)

• Fluid milk story: from per capita decline to total volume decline?

U.S. Fluid Milk Sales (12-months Rolling Average)

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%

• 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.

Cheese (16.5 bil lbs)Other Domestic (3.5 bil lbs)Exports (10 bil lbs)Fluid Milk (-5 bil lbs)

• 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.

Defining the I-29 Dairy Corridor

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 County2000-2013

Grant 2,700Codington 500Hamlin 2,300Brookings 5,800Moody 4,600Minnehaha 2,300Total 18,200

Dairy Growth in Iowa

Cow Inventory Growth By County2000-2013

Lyon 5,800Osceola 2,765Sioux 5,100Total 13,665

Dairy Growth in Minnesota

Cow Inventory Growth By County2000-2013

Stevens 15,800Swift 2,100Nobles 1,200Total 19,100

Growth Dynamics in I-29 Corridor vs. Northeast WI and Central MI

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

I-29 Northeast WI Central MI

I-29 Corridor Daily Milk Demand (lbs of milk)

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.

Current Future

Valley Queen Cheese – Milbank, SD 4,000,000 4,000,000Davisco Foods Intl. – Lake Norden, SD 3,200,000 6,000,000Agropur – Hull, IA 2,500,000 5,000,000Bel Brands – Brookings, SD 750,000Total Aggregate Demand 9,700,000 15,750,000

Approximate Cows Needed 145,000 240,000

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

Source: Agropur

Back to the Future in Southern SD

In 1960:53,570 cows

In 2012:23,997 cows

Source: Nebraska Department of Agriculture

Cutting Through the Red Tape in NE

Source: Blimling and Associates

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

Corn Yield Land Price Increase Since 2005 (x Times)

Source: Blimling and Associates

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 12,000,000Land 100 $3,000 300,000Cows 1,500 $1,250 1,875,000

Total Investment 14,175,000

Source: Blimling and Associates

2012 Michigan & Wisconsin

Item Quantity Cost/Unit Investment

Dairy 3,000 $4,000 12,000,000Land 500 $5,000 2,500,000Cows 1,500 $1,250 1,875,000

Total Investment 16,375,000

2012 I-29 Corridor

Item Quantity Cost/Unit Investment

Dairy 3,000 $4,000 12,000,000Land 500 $12,000 6,000,000Cows 1,500 $1,250 1,875,000

Total Investment 19,875,000

Source: Own Calculations

Importance of Risk Management / Federal Policy

Coverage Level Fees & Premiums

Expected Indemnity DMSP Penalty Net Revenue

$4.00 $ 1,000.00 $ 198,819 $ 583,925 $ (386,106)$4.50 $ 16,070.73 $ 364,747 $ 583,925 $ (235,248)$5.00 $ 37,205.75 $ 599,050 $ 583,925 $ (22,080)$5.50 $ 81,877.94 $ 887,684 $ 583,925 $ 221,881 $6.00 $ 155,350.87 $1,212,759 $ 583,925 $ 473,483 $6.50 $ 229,804.51 $1,568,854 $ 583,925 $ 755,124 $7.00 $ 442,254.43 $1,952,756 $ 583,925 $ 926,576 $7.50 $ 600,862.01 $2,362,024 $ 583,925 $1,177,236 $8.00 $ 938,411 $2,794,101 $ 583,925 $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.

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 ($16.3 M at $1.60)• I-29: $1.70+ ($17.3 M at $1.70)• Idaho: $0.25 - $0.50 ($ 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 Bozicmbozic@umn.eduDepartment of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108

Thank you for your help:Duane Banderob and Katie Behnke, Blimling and AssociatesTim Czmowski and Deeann Bylsma, AgropurRoger Scheibe, SD Dairy ProducersWillow Holoubek, A-FAN, Nebraska

Research supported by a grant by the Minnesota Milk Producers Association