KANDIYOHI COUNTY AND CITY OF WILLMAR ECONOMIC DEVELOPMENT COMMISSION (EDC) AGRICULTURE AND RENEWABLE ENERGY DEVELOPMENT (AG) COMMITTEE

MINUTES December 17, 2014

Christianson & Associates, PLLP, Willmar

Present: Arvind Auluck-Wilson, Rollie Boll, Ian Graue, Kevin Halvorson, Dan Lippert, Representative-Elect Tim Miller, Bruce Reuss, John Soderholm and Dan Tepfer

Excused: John Duevel, Jon Folkedahl, Larry Konsterlie, Wally Nelson and Keith Poier Staff: Steve Renquist, Executive Director and Connie Schmoll, Business Development Specialist Presenter: Bob Lefebvre, Minnesota Milk Producers Association Guests: Dr. Doug Allen, Jared Anez, Representative-Elect Dave Baker, Myron Behm, Wade

Gustafson, Jesse Hulcher, Senator Lyle Koenen, Kim Larson and Drew Ryder Chairperson Bruce Reuss called the meeting to order at 7:35 a.m. AGENDA—The agenda was approved as presented. MINUTES

IT WAS MOVED BY Dan Tepfer, SECONDED BY Kevin Halvorson, to approve the November 20, 2014 meeting minutes. MOTION CARRIED.

GUEST SPEAKER—Guest speaker Bob Lefebvre, current Executive Director of the Minnesota Milk Producers Association and Senior Vice President of Industry Relations at the Midwest Dairy Association, was introduced by Connie Schmoll. Lefebvre reviewed Minnesota dairy data and gave an overview of a recent study conducted by the Midwest Dairy Association. The study was primarily focused on the I-29 corridor of the Midwest region, including the states of Minnesota, South Dakota, Iowa and Nebraska. The study was conducted because of the following data and assumptions:

• According to the Minnesota Department of Agriculture, each dairy cow in the state has an economic impact of $25,000.

• The world population is expected to grow to 9 billion by the year 2050. • The economies of countries will improve and there will likely be a spike in animal-based diets. • Dairy consumption will grow. • Dairy production will need to grow. • The U.S. dairy industry is staged to meet the global demand.

Study data is included in the PowerPoint presentation (see attached). In discussion, Lefebvre mentioned that specialty or value-added manufacturing is a best option for the Midwest; whey protein is one of the specialty market options. He also stated that processing plants in the Midwest are currently experiencing unfilled capacities. The current challenge in the dairy industry is human resource capacity, not only for milkers but also for managers, operations managers, scientists and technical operators. In summary, Lefebvre noted that opportunities outweigh challenges in the dairy industry. Leadership is key and broad industry support is critical. All dairy farmers need all dairy farmers. And finally, optimism abounds among those working in the industry. Next steps for the Midwest Dairy Association include developing a regional plan. Lefebvre has been assigned to work on the Dairy Development Plan and overseeing “state teams” involved in development of the plan. When asked about the Minnesota Dairy Research, Training and Consumer Education Facility, Lefebvre reported the University of Minnesota St. Paul campus was selected as the site of the facility. The announcement would be public after a phone meeting scheduled this very day.

Lefebvre stated legislative issues for 2015 include environmental protection and control issues and dairy check-off dollars. ADJOURNMENT—There being no further business, Chairperson Reuss adjourned the meeting at 9:25 a.m. NEXT MEETING—7:30 a.m., Thursday, January 15, 2015, at Christianson & Associates, Willmar.

1

Bob LefebvreExecutive Director, Minnesota Milk Producers Association

SVP, Industry Relations, Midwest Dairy Association

Kandiyohi Economic Development

December 17, 2014

A Path Forward2

“Back to the Future” for Minnesota

2

Year

Number of Milk Cows

(000)Number of Dairy

FarmsProductivityper Cow (lbs)

Pounds of Milk (M lbs)

1992 653 14,000 15,096 9,858

2012 465 4,125 19,508 9,071

2022 653 ?? 19,508 12,700

2022 653 ?? 21,900 14,300

MN Dept. of Ag estimates $25,000 of economic activity generated per dairy cow. Reestablishing the 1992 dairy herd in Minnesota would generate $4.7 billion of incremental economic activity!!In 1982, Minnesota had 903,000 cows…that’s 19.8 billion pounds of milk in 2022!

A Path Forward3

7 Global Predictions*

1. World population will grow exponentially.

2. The economies of emerging countries will greatly improve.

3. Animal-based diets will increase with this growing prosperity.

4. Global dairy consumption will grow along with other animal based proteins.

5. The US dairy industry is best able to meet this global demand for dairy products.

6. Dairy production will grow by 30 billion pounds over the next 10 years, produced from fewer cows than we have today.

7. There will be a growing debate in the US between the merits of feeding a hungry world with plant vs. animal based diets.

*Sources: FAO/United Nations, USDA, USDEC/Bain Study, Rabobank

A Path Forward4

Changes in National Milk Production

Source: Dr. Mark Stephenson,University of Wisconsin, Madison

A Path Forward5

Changes in Midwest Milk Production

Source: Dr. Mark Stephenson,University of Wisconsin, Madison

A Path ForwardChallenges and Opportunities for the

Midwest Dairy Industry

A Path Forward7

Midwest Attributes:

• Plentiful land, water, and feed conductive to dairy production

• Profitability of dairy farms based on home-grown feed

• Competitive milk prices relative to other parts of the country

• A diversified, competitive processing base with unfilled

capacity

• Capital resource availability

• Business-friendly states

• A strong dairy heritage

A Path Forward8

Midwest Challenges:

• Appreciation of land values

• Other profitable ag options competing for capital investment

• Relatively high farm milk prices discouraging “greenfield”

processing investment

• Freight costs both in meeting domestic and global market

demand sectors due to geographical location

A Path Forward9

Midwest Opportunities:

• Specialty or value-added manufacturing is the best option for

the Midwest

• Increasing dairy exports from coastal dairy-producing regions

may open up additional domestic demand to be filled from the

Midwest

• The region’s dairy infrastructure is in place, ready for

enhanced dairy leadership

• There are strong pockets of current growth

A Path Forward10

What We “Herd”

In Response:

A Path Forward11

Individual Processor Meetings:

1. AMPI – March 21

2. First District – March 21

3. Land O’Lakes – March 25

4. Davisco – March 26

5. Swiss Valley – March 26

6. Agropur – May 27

7. Valley Queen – April 14

8. Bongards – April 16

9. DFA – April 18

10.Foremost Foods – April 22

A Path Forward12

Processor Feedback

• Freight

• Regulatory

• Small producer models

• Current/future

product mix

• Secondary processing

• Technology

• Domestic value-added

opportunities

• State dairy leadership

• Promotion of

economic impact of

dairy

• Capital requirements

• Infrastructure support

A Path Forward13

Producer Focus Groups:

30+ Producer Leaders

• Sioux Falls, SD April 1, 2014

• Rochester, MN April 2, 2014

• St. Cloud, MN April 3, 2014

A Path Forward14

Producer Feedback

• Labor

• Small producer models

• On-farm processing models

• Capacity vs. pay price

• Publicly promote viability of industry

• Land availability and price

• New dairy production models

• Protect social “license” to operate

• Infrastructure support

A Path Forward15

Consensus on

Priorities

Market Assessment

Social License to Operate

Dairy Development

A Path Forward16

Market Assessment

• Midwest dairy viability (“industry” audience)

• Economic impact of dairy (“public” audience)

• Current/future product mix

• Transportation

• Secondary processing

• Domestic value-added opportunities

• Global value-added opportunities

A Path Forward17

Social License to Operate

• Sustainability

• Traceability

• Food safety

• Animal well-being

• Message development

• Social media

• Spokesperson training

• Crisis preparedness

• Thought leader influence

A Path Forward18

Dairy Development

• Labor

• On-farm processing/all levels

• Land availability/price

• New production models/all levels

• Availability of capital

• Infrastructure support

• Technology

• Leadership

• Regulatory

A Path Forward19

Dairy Economic Advisory Council

Approved

RecommendationsJune 9, 2014

A Path Forward20

DEAC-Approved Recommendations

1. Pursue a “growth and prosperity”

strategy, targeting individual state

growth rates at a minimum of

maintaining share of the US milk

supply while paying producers a

nationally competitive milk price.

A Path Forward21

DEAC-Approved Recommendations

2. Start or enhance state dairy economic

development plans engaging all

relevant dairy stakeholder groups.

Suggested Lead coalitions:

• DEAC

• Dairy Iowa

• “Repurposed” Minnesota Dairy Leaders Roundtable

• North Dakota Dairy Coalition

• South Dakota Dairy Drive

• Grow Nebraska Dairy

A Path Forward22

DEAC-Approved Recommendations

3. Identify pre-competitive domestic and

global value-added product marketing

challenges/opportunities and product

development needs.

Suggested Lead Coalition:

• Midwest Dairy Foods Research Center

A Path Forward23

DEAC-Approved Recommendations

4. Implement a regional “social license”

plan to protect producer and

processor’s freedom to operate and

enhance their ability to thrive and

grow.

Suggested Lead Coalition:

• Midwest Dairy Association

A Path Forward24

Since June 9th

DEAC Meeting:

• Multiple industry presentations

• National and Regional Ag-Media Coverage

• August 4th Webinar:

• 8 State Sites

• 100+ State Government, Land Grant University, Ag-

Industry and Dairy Producer Leaders Participated

• Multiple DEAC Subgroup Planning Sessions

• Market Assessment Plan/Lead: Kevin Stiles

• “Social License to Operate” Plan/Lead: Kathleen Cuddy

• Dairy Development Plan/Lead: Bob Lefebvre

• “State Teams” Plan/Lead: Bob Lefebvre

A Path Forward25

Summary

• Opportunities outweigh challenges

• Leadership is key

• Broad industry support is critical

• All dairy farmers need all dairy farmers

• Optimism abounds

A Path Forward26

Next Steps

• Develop Regional Plan

• Market Assessment… 5 Sections

–Cheese Demand and Trends

–How Midwest Fits into Global Economy

– Investments in New Technology

–Products Other Than Cheese

– Identify Gaps and Opportunities

A Path Forward27

Next Steps

• Freedom to Operate… Follow the DMI

Plan (National Dairy Checkoff plan)

–Move thought leaders to advocacy

–Engage other dairy stakeholders

–Proactive communications through multiple channels

A Path Forward28

Next Steps

• Dairy Development… 4 Outcomes

–State Individual Growth Goals

– Inventory of Current Assets

– Identify Gaps and Opportunities

–Action Steps for 2015

A Path Forward29

Minnesota Dairy Summit

• February 9, 2015 at University of Minnesota

• Emcee: Gene Hugoson

• Welcome: U of MN president Eric Kaler

• Three Deans Panel

• Why Dairy? Why MN? – Dr. Marin Bozic

• Three Commissioner Panel

• Breakouts and Outcomes

–MN Dairy Growth Goal

–2015 Action Plan

A Path Forward30

Thank

You!

A Path ForwardChallenges and Opportunities for the

Midwest Dairy Industry

Appendix –

A Path Forward32

Duane Banderob,

Managing Director

A Path Forward33

Set Up

• A changing industry – both here and abroad – have

forced a reexamination of how the Midwest fits in

the global dairy market

• Current research provides an analytical foundation

and assessment of the Midwest

• A “scorecard” between the Midwest and other regions

• Section I. Opportunity Facing the Midwest

• Section II. Midwest Resource Availability and Use

• Section III. Producer Perspective

• Section IV. Processor Perspective

• Section V. Conclusions/Solutions

A Path Forward34

Base Assumptions

• Defining the Midwest

• To begin this endeavor, the Phase I analysis covers the

five-state “I-29 corridor” region including Minnesota,

North Dakota, South Dakota, Iowa and Nebraska

• Some conclusions will extend into other states, but we

recognize that each milk shed is unique and those not

covered initially can be folded into subsequent efforts

• The “Small Producer”

• Likewise there is a range of profitable dairy models

across the Midwest

• For ease, the analysis compares new large-scale

operations across regions…here again more work may

be needed in Phase II

A Path Forward35

Global Opportunities

• Demand for dairy products continues to grow with an

expanding population and rising incomes

• Developing nations will account for the bulk of this growth

Note: Trade data sourced from Global Trade Information Service, Inc (GTIS)

A Path Forward36

Strong Expectations

• World population will grow to 7.5 million (+500 million) by 2020

• 1.2 billion people are expected to join the middle class

• Rising incomes translate into increased consumption

A Path Forward37

• Rapid increase in global

trade since 2009:

• SMP: +10.8% CAGR

• WMP: +5.8% CAGR

• Cheese: +7.7% CAGR

• The exception: Butter with

1.1% CAGR

• Driven by:

• East Asia

• Southeast Asia

• Middle East and North

Africa

• South America

• Russia and others from

Former Soviet Union

Global Trade Increasing

A Path Forward38

• Output needs to grow to

keep pace with demand

• US growth expected to

continue

• EU projected to grow with

removal of quota

• South America will grow,

but demand will likely

absorb the extra

• India and China are both

focused on growing milk

supplies, but demand is

rising at a faster pace

• Growth in New Zealand is

expected to slow

Global Milk Production

A Path Forward39

• In 2013, accounted for:

• 33% SMP/NDM exports

• 19% cheese exports

• 16% butter exports

• 1% WMP exports

• Between 2009 and 2013:

• SMP/NDM: 22% CAGR

• Cheese: 30% CAGR

• Butter: 38% CAGR

• WMP: 19% CAGR

US As A Global Supplier

A Path Forward40

• Top US markets:

• Mexico (25% of exports)

• South Korea (15%)

• Japan (10%)

• All growing at CAGR of +15%

• Exports to East Asia and

South America growing

• But, largely not from

Midwest plants

Major Cheese Markets

A Path Forward41

A Look At The World

US Cheese and Milk Powder Exports (2013)

Thousand Metric Tons; GTIS

A Path Forward42

Opportunities for the Midwest

• For most commodity products, freight costs and

higher milk prices make it too expensive to export

from the Midwest

• Primary opportunity to backfill domestic demand as

coasts turn international

• Specialty products can work from the Midwest

• But, a value-add approach will likely require just a

small volume of milk

A Path Forward43

Midwest Dairy Industry

• Industry looks drastically different than 40 years ago

• Today milk output of 17 billion pounds (off 6%) and just

834,000 cows (down 1.9 million head)

Key

> 25,000

15,000-24,999

7,500-14,999

2,500-7,4991-2,499

1972 Cow Inventory 2012 Cow Inventory

A Path Forward44

Bright Spots

• Production decline reversed in 2004 – output in the region is up

15% since that time

• Expansion in central Minnesota and along the I-29 corridor is

offsetting losses elsewhere

A Path Forward45

• Growth in the Midwest

stalled following 2009

• This slow down in dairy

investment was not

national

• Limited growth in the

Midwest seems tied to

increased land prices

(requiring more

collateral for dairy

expansion) and higher

relative returns to other

enterprises

Growth Beyond the Midwest

A Path Forward46

Livestock Trends

• Interesting to see what has happened across sectors – hog and

beef populations continue to grow

• In some ways, the dairy industry has been particularly hard hit

A Path Forward47

• Milk production about

the same as 1992 with

30% fewer cows

• At today’s yields, 1.2

million cows increases

output by about 8 billion

pounds of milk

• While the land has

supported this many

cows before, getting

there seems like a

daunting task

Back to the Future

1992 Cows 1,232,000

1992 Milk Per Cow 14,402

1992 Production 17,743,000,000

2012 Cows 834,000

2012 Milk Per Cow 20,390

2012 Production 17,005,000,000

Production of 1992 Cow

Numbers at 2012 Yields25,120,095,923

Pounds; USDA

Back to the Future

A Path Forward48

• Additional cows

would provide an

economic boost to

the region

• Create jobs on farms,

in processing, and in

support industries

• Prompt significant

investment in

processing capacity

• Induce spending in the

community that

supports businesses far

removed from the

dairy

Broad Economic Impact

A Path Forward49

• Historically, the Midwest offers one of the highest milk prices

of the manufacturing milk sheds

• 2013 a bit different, as Class IV markets pulled pay prices

higher in other markets (Michigan, Colorado)

Relative Milk Price

2003 2008 2013

I-29 Corridor $13.43 $19.89 $20.38

Colorado $12.44 $18.39 $20.24

Idaho $11.53 $17.07 $19.20

Michigan $12.62 $19.18 $20.46

New Mexico $12.03 $17.56 $18.79

Wisconsin $12.89 $18.93 $20.31

All Milk Price

A Path Forward50

Feed Costs

• Compared to South Dakota: MN/WI +$0.25; MI +$0.50; CO

+$0.90, ID +$1.25 per hundredweight

• Economic analysis vs. real-life practice: most producers

transfer at cost

A Path Forward51

Pulling It All Together

• While the Midwest faces higher capital requirements,

it benefits from high milk prices and low feed costs

• Over a 20-year period, a net present value analysis shows

an edge over both Michigan and Idaho

• The size of the advantage varies with milk prices

• Model only true if relative pricing relationships hold

• Still, upfront costs matter because if producers cannot

get a large enough loan, they may go elsewhere

I-29 Corridor Advantage Over: Michigan Idaho

Scenario 1: Higher Class III 0.52$ 1.23$

Scenario 2: Higher Class IV 0.15$ 0.88$

Dollars Per Hundredweight

20-Year Net Present Value Analysis

A Path Forward52

• High producer milk prices translate into high processor

premiums, especially in a market with such low Class I

utilization

• Michigan has a $0.70/cwt advantage, Colorado more than

$1.00/cwt

• Similar spread across classes

• For a cheese maker, while about the same as Wisconsin,

finished good freight adds another $0.30/cwt in cost

Processor Milk Price

All Milk Class III Over Class III PPD Implied Premium

I-29 Corridor $20.38 $17.99 $2.39 $0.21 $2.19

Colorado $20.24 $17.99 $2.25 $1.28 $0.97

Michigan $20.46 $17.99 $2.47 $1.01 $1.46

Wisconsin $20.31 $17.99 $2.32 $0.26 $2.06

2013 Milk Prices and Implied Premiums

A Path Forward53

Business Climate

• On most all accounts, the I-29 states compare well to

others in terms of business climate

• Midwest: SD: 8th; IA: 12th; MN: 16th

• Other major milk sheds: ID: 19th; WI: 27th; MI: 41st

• All Midwest states also have highly ranked economies

and score in the top half for regulatory environment

• South Dakota scores particularly well in terms of tax

environment, while Minnesota is highly taxed

• Governmental incentives vary by state…with many

examples of support for dairy construction/expansion

• SD commitment key in winning new plants

A Path Forward54

Key Findings

• Midwest farmers enjoy many profitable options for

their capital

• Not universal in key milk producing regions

• Pulls dollars and resources away from cows

• Land prices and lending requirements can make

Midwest dairy expansions particularly challenging

• Land purchase now encouraged with a dairy loan, and

land costs more than double other regions

• Capital requirements for a new Midwest dairy have

doubled in the past decade…other regions have not

seen similar inflationary pressures

A Path Forward55

Key Findings

• Environmental burdens vary, but some Midwest

states are easier to navigate than others

• Dairy friendless certainly a factor in attracting new

investment

• Midwest farm-gate milk prices are typically higher

than in other milk sheds

• Upfront costs not withstanding, the region is one of

the most profitable areas for dairy producers

• Prices paid by manufacturers are also some of the

highest in the country

• A critical factor for attracting new investment

• Makes commodity focused investment a challenge

A Path Forward56

Takeaways

• The Midwest is considered one of the best milk

markets for dairy producers

• Local producers fearful that rapid expansion could

degrade milk price; capital requirements and other

alternatives stymie local investment

• External producers face a different decision

criteria…even at a lower milk price it might still be

the best alternative

• New dairy investment likely to be disproportionately

skewed to non-Midwest entrants

A Path Forward57

Takeaways

• Continued processing investment is needed to

sustain industry viability

• A milk market 10 or 20 years from now depends on

processing investments made in the next 5 years

• Two paths forward: reduce milk production as older

assets taken off line; or, invest in capacity to sustain

current or even larger market

A Path Forward58

Takeaways

• Specialty or value-add manufacturers appear best

suited for the Midwest

• Large commodity plants have passed on the region

• Specialty plants thrive and are growing

• The Midwest will remain at a disadvantage when

serving export markets

• Geography benefits the western US processor

• Still, the Midwest is well positioned to meet growing

domestic demand

• To effectively serve the world market, there will need

to be a focus on making the right mix of products at

the right specification

A Path Forward59

• Back in 2000, Idaho and

New Mexico accounted

for 7.4% of US output

• By 2013, had grown to

take a 10.7% share

• But – as measured by

cow numbers –

investment has certainly

slowed

Why This Matters Now

A Path Forward60

• Once the defacto growth

engine of the US

industry, challenges are

mounting in the Golden

State

• Water, environmental

regulations, land

resources and business

climate all have

contributed to a material

slowdown

California: A Similar Tale

A Path Forward61

• The “market” has

changed dramatically,

playing now to the

Midwest’s strengths

• There are opportunities

in the market waiting to

be exploited

• Other “Midwest” states

and regions already

capitalizing on the

opportunity

What Does It All Mean?