dairy market outlook for 2016 - kentucky dairy development ......• stronger us dollar • weaker...
TRANSCRIPT
Dairy Market Outlook for 2016
Kenny Burdine
University of Kentucky
Agricultural Economics
Outline for Discussion
• Review of Current Market Conditions
– Production and market drivers
• Trade and trade expectations
• Planning prices for 2016
• Updates on basis and milk price differentials
Overview of Market
• Spring to fall 2014 – one for the books
– Milk prices into upper $20’s, feed prices moving down, strong export levels, first round of MPP-Dairy
• Q4 2014 to present - production expands, exports pressured by prices, stronger $, et al.
• Prices down about $7 per cwt in 2015
MILK CONSUMPTION PER CAPITA
0
50
100
150
200
250
300
Pounds
Data Source: USDA-ERS
Livestock Marketing Information Center
U.S. PER CAPITA CONSUMPTION OF SELECT DAIRY PRODUCTS
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
22.00
Butter Yogurt Cheese
Data Source: USDA-ERS
Livestock Marketing Information Center
+1.1 Percent
2015 = 9.3 Million Head
Data Source: USDA-NASS
Livestock Marketing Information Center
130
140
150
160
170
180
190
200
210
220
8.5
8.7
8.9
9.1
9.3
9.5
9.7
9.9
10.1
10.3
1990 1993 1996 1999 2002 2005 2008 2011 2014
Bil. Pounds
Tho
usa
nd
s
Mil. Head
Tho
usa
nd
s
MILK PRODUCTION vs. MILK COW INVENTORY AVERAGE ANNUAL INVENTORY, U.S.
Inventory Production
US All Milk vs. MPP-Dairy Ration (2002 to present)
MPP-Dairy Margin (2002 to present)
Trade and Trade Drama…
2015 Dairy Exports
• Volume down about 10%, values down about 30%
• Stronger US dollar
• Weaker global economies
• Russian ban on EU products
• China has backed way off
– Whey and powder
Data Source: USDA-FAS, Compiled & Analysis by LMIC
Livestock Marketing Information Center
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Bil. $
US DAIRY INDUSTRY EXPORT VALUES Annual
Live Cattle Milk,Crm&Pwdr Whey Nat Mlk Butter Cheese Casein
What is the TPP?
• Trans-Pacific Partnership – In negotiations several years
– Passed but still has to be ratified
• Broad sweeping trade negotiation – Freer trade, labor and environmental laws, intellectual
property, dispute settlement
– US, Canada, Mexico, Japan, Australia, New Zealand, Malaysia, Peru, Brunei, Chile, Singapore, Vietnam • No China
• ERS estimated potential gains for agriculture
• Dairy a small piece of the big picture, but…
Dairy and the TPP
• Canada – production controls, high tariffs protect domestic dairies
• United States – likely to benefit from greater access – already much dairy to CA and Japan
– US vs CA: maybe some spillover from NAFTA
• Australia / Japan – existing trade agreement likely reducing potential US exports
• New Zealand- 95% of production exported, huge share of NFDM
US All Milk Price (January 2008 to December 2015)
Data Source: USDA-NASS
Livestock Marketing Information Center
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
JAN APR JUL OCT
$ Per Pound
CHEDDAR CHEESE PRICES 500 Pound Block, US, Weekly
Avg. 2010-14 2015 2016
Data Source: USDA-NASS
Livestock Marketing Information Center
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
3.00
JAN APR JUL OCT
$ Per Pound
BUTTER PRICES US, Weekly
Avg. 2010-14 2015 2016
Data Source: USDA-NASS
Livestock Marketing Information Center
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
JAN APR JUL OCT
$ Per Pound
DRY WHEY PRICES US, Weekly
Avg. 2010-14 2015 2016
Data Source: USDA-NASS
Livestock Marketing Information Center
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
JAN APR JUL OCT
$ Per Pound
NONFAT DRY MILK PRICES US, Weekly
Avg. 2010-14 2015 2016
Estimated Quarterly Milk Production
Slowing, but still growing
Estimated Quarterly Milk Production
2016 in Summary
• Milk production likely to grow 1-1.5%
– Primarily productivity gain
• Corn futures suggest small, but steady increase to harvest
• USDA is forecasting lower exports
– Some exports improved in Q4, dairy did not
• Demand and trade likely to determine price path for 2016
Current Class III CME© Milk Futures
Planning Prices for 2016 (KY Mailbox)
1st quarter - $16-18
2nd quarter - $16-18
3rd quarter - $17-19
4th quarter - $18-20
Use these as a place to start your expectations
Updates on KY Basis and Price Differentials
Appalachian Order minus Class III
Southeast Order minus Class III
Milk Classes
• Class I – fluid milk
• Class II – soft products
– Yogurt, ice cream, cottage cheese
• Class III – hard cheeses, whey
• Class IV – butter, dry products
How are minimum prices set?
1. Start with values of dairy product, ie: wholesale cheese price
2. Yield factor - how much cheese should we get from a cwt of milk
3. Make allowance – reasonable processing cost to make the cheese
4. This is done for all products from that class
5. Minimum price is established
More pricing details
• Formulas are set such that Class I and II prices exceed class III and IV prices – Typically I-IV in order of price
• Class III – cheese, dry whey, BF
• Class IV – butter, non-fat dry, BF
• Class II – Advanced class IV + 70 cents
• Class I – Higher of advanced class III or class IV plus class I differential
Note: Advanced prices are released 2 week into prior month*
Federal Milk Marketing Order Class I Pricing Structure
MPP-Dairy vs. LGM Dairy
• Decision tool available from FSA website:
– http://www.fsa.usda.gov/programs-and-services/farm-bill/farm-safety-net/dairy-programs/index
• Examine both programs separately
• Margins are not directly comparable
Milk Price Differences
• Margins offered can’t be compared directly
– Not apples to apples
• MPP-Dairy: US All Milk
• LGM-Dairy: Class III Milk Futures
• US All Milk Price will exceed class III futures
– Includes class I and II milk
• 2011 – 2015: US All Milk exceed class III by $1.57 per cwt
US All Milk minus Class III
Feed Cost Differences • LGM-Diary – corn and SBM futures
– Default – 28 lbs of corn – Default – 4 lbs of SBM – These can be changed!!!!!
• MPP-Dairy – National corn, SBM, and Alfalfa prices – 60.1 lbs of corn – 14.7 lbs of SBM – 27.4 lbs of Alfalfa hay
• Adjust for price differences, match feed quantities, subtract Alfalfa component
• The change is what matters
Nature of the Programs
• LGM-Dairy – futures based
– Available insurable margins evolved with market
– Good times = good opportunities
• MPP-Dairy – a bit more of a throwback
– Countercyclical – margins and premiums fixed through 2018
• LGM-Dairy – attractive in profitable times
• MPP-Dairy – attractive in challenging times
Kenny’s Last 2₵
• Things get worse before they get better
• Prices likely to improve in 2nd half of year
– I expect $2-$3 of improvement
• MPP-Dairy and LGM-Dairy are new safety net
– Margin “insurance” oriented
• Less worried about feed?
– Use lower end of LGM feed quantity range
– Go straight to milk board
Contact Information
Kenny Burdine
University of Kentucky
Agricultural Economics
(859) 257-7273