The Importanceof the World Dairy Market

to U.S. Dairy Farmers

Peter Vitaliano

Vice President, Economic Policy and Market Research

National Milk Producers Federation

Export Market Participation Important to U.S. Dairy Farmers

• Exports now represent a major segment of the commercial market for U.S.-produced milk, and it is the fastest growing market.

3.7%

4.5% 4.4%5.0% 5.2%

5.5%5.1%

5.7%

7.6%

8.3%

9.3%9.8%

11.0%

9.3%

12.5%

2.7% 2.9%

3.6%3.9% 4.0% 4.2% 4.2% 4.4% 4.5% 4.6% 4.4% 4.5%

4.0%

3.4%2.9%

0%

2%

4%

6%

8%

10%

12%

14%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

To

tal M

ilk S

olid

s,

% o

f U

.S.

Pro

du

cti

on

2010: January- September

U.S. DAIRY TRADE BALANCE, 1996-2010 ytd

ExportsImports

Export Market Participation Important to U.S. Dairy Farmers

• The U.S. domestic market is a large, but mature market for dairy product sales

• The export market is growing at a rate at least eight times faster than overall growth in domestic sales

164 167 168 171 171

15.5 17.0 19.4 15.221.0

0

20

40

60

80

100

120

140

160

180

200

2006 2007 2008 2009 2010

Bill

ion

po

un

ds, m

ilk e

qu

ival

ent

Source: USDA

U.S. Commercial Dairy Product Sales: Domestic and Export

U.S. Domestic SalesU.S. Commercial Exports

1.1% growth per year

8.8% growth per year

U.S. Dairy Sales, 2008-2009

USDA World Agricultural Supply and Demand Estimates (WASDE)

2008 2009 2009/08 2009/08

Milk equivalent, total solids basis, bil. lb. %

U.S. Domestic Sales 168.2 170.5 2.3 1.4%

U.S. Commercial Exports 19.4 15.2 -4.2 -21.6%

Total U.S. Sales 187.7 185.8 -1.9 -1.0%

Export Markets Impact on Income

• The large drop in U.S. dairy exports in 2009 was the direct cause of the worst financial crisis the U.S. dairy industry has suffered in decades, if not ever

• But, it was not caused by a drop in world demand

• In fact, total world dairy imports by all other countries in 2009 were well above 2008 imports on a volume basis

2009 World Market Growth

• 2009 dairy import volumes grew in all major product categories:– Butter: up 7%– Cheese: up 2%– Skim milk powder: up 9%– Whey and lactose: up 18%– Whole milk powder: up 9%– All products, milk equiv.: up 7%

What Caused the 2009 U.S. Dairy Crisis?

• Competing exporters aggressively cut prices to maintain export sales and avoid building inventories.

$10.50 $10.50

$15.30

$19.70

$12.40

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

2005 2006 2007 2008 2009

Dolla

rs p

er C

wt.

of M

ilk, F

OB

U.S.

Value of Total World Dairy Imports/Cwt. of Milk, fob US

What Caused the 2009 U.S. Dairy Crisis?

• U.S. dairy exports did not compete aggressively in this lower-price world dairy market environment, and the U.S. suffered a major loss in export sales and a considerable drop in international market share.

0

500

1,000

1,500

2,000

2,500

2007 2008 2009

Mill

ion

Po

un

ds

, Milk

Eq

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ale

nt,

tsb

.MONTHLY TOTAL U.S. DAIRY EXPORTS, 2007-2009

2009 Export Market Shares

World Market Export Shares Change: 2009/20082007 2008 2009 (%) (tms)

New Zealand 23.1% 20.6% 26.8% 6.3% 38%

European Union 25.4% 25.6% 25.9% 0.3% 7%

United States 15.1% 17.2% 13.7% -3.4% -15%

Australia 7.7% 7.6% 8.0% 0.5% 12%

Argentina 2.8% 3.0% 3.5% 0.5% 22%

All Other 25.8% 26.1% 22.1% -4.1% -11%

Total 100.0% 100.0% 100.0%

Exports Drop, Inventories Build

• In 2009, the EU, New Zealand and Australia increased their exports by sharply lowering prices and avoided burdensome product inventory buildups.

• The U.S. did not.

0

1,000

2,000

3,000

4,000

5,000

6,000

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Mill

ion

Po

un

ds

, Milk

Eq

uiv

ale

nt,

tsb

.Potential Stock Accumulation, Aug. 2008 - Dec. 2009

Argentina

Australia

EU-27

New Zealand

United States

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

En

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sCOMMERCIAL STOCKS, TOTAL NATURAL CHEESE, 2000-2010

Effect of Exports on Milk Prices

• Even at the lower world prices of 2009, the world market as a whole would have returned more to U.S. dairy farmers than the domestic market did.

$10.50 $10.50

$15.30

$19.70

$12.40

$14.70

$12.15

$18.35

$18.25

$11.65

$0

$5

$10

$15

$20

$25

2005 2006 2007 2008 2009

Dol

lars

per

Cw

t. of

Milk

World Mfg. Product Returns, fob US, & FO Class I Mover

World Mfg. Value, fob USUS FO Class I Mover, @ avg. test

Effect of Exports on Milk Prices

During August 2009 – July 2010:

New Zealand (Fonterra) payout:$14.40/cwt.

U.S. Class I mover: $13.80/cwt.

Maintaining U.S. Exports is Critical

Due to a combination of:• current U.S. dairy policies• domestically-focused product standards• generally low priority of export marketing

U.S. dairy products are commonly “last in – first out” of world export markets.

Maintaining U.S. Exports is Critical

“Last In” = U.S. dairy farmers gain the least when world prices are strong

“First Out” = U.S. dairy farmers lose the most when world prices drop

When Exports Drop So Do Prices

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. Ex

po

rts

as

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f P

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n

U.S. AND WORLD PRICES - Butter

Exports/ProductionWorld Price - U.S. basisUSDA - NASS PriceCCC Purchase Price

When Exports Drop So Do Prices

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Jun-05

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U.S. AND WORLD PRICES - Cheddar Cheese

Exports/ProductionWorld Price - U.S. basisUSDA - NASS PriceCCC Purchase Price

Conclusion:

• The biggest threat to the milk price received by every dairy farmer in the United States is interruption of the commercial flow of U.S.-produced dairy products into the export markets

• The ¢wt Export Assistance program is the only mechanism currently available to U.S. dairy farmers to address this threat in the future.

¢wt and 2010 U.S. Exports

31%

25%

66.5

34.7

0

10

20

30

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60

70

0%

10%

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30%

40%

Cheese Butter & AMF

Mill

ion

Po

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Sh

are

of t

ota

l U.S

. Ex

po

rts

2010 CWT Exports, Volume & Share of Total

Share of U.S. Exports

CWT Exports

¢wt Impact on Milk Prices

¢wt export assistance has generated a substantial increase in producer prices:

Scott Brown: $0.17/cwt in 2010

Roger Cryan: $0.18/cwt in 2010

¢wt Export AssistanceReturn on Investment

Revenue generated per dollar invested in Export Assistance• Bids accepted 2003 through September 30, 2010• Includes product scheduled to ship in 2010

Dollars Spent

Pounds of Product

Revenue Generated

Return per $1 Invested

2010 $18,207,524 73,601,339 $375,025,026 $20.60

Since 2003

$90,608,076 247,531,216 $1,407,008,039 $15.53

For more information on the

¢wt Export Assistance programgo to www.cwt.coop.