AED Economics 426 Introduction

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AED Economics 426 - Introduction

• Welcome to Todays Presentation
• Todays topic A General Overview on the U.S.
  Dairy Industry
• Reading 1 Manchester / Blayney
• Reading 2 LaDue, et.al.
• What are our Learning objectives?
• Lets get started

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The Structure of U.S. Dairy

• An Overview of the Milk Production Sector
• Milk composition
• geographical location
• trend in the number of milk cows
• trend for the yield per cow, productivity
• trend in milk price, feed cost and gross margin
• Income from the sale of milk on dairy farms

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The Composition of Milk

• 100 accounting
• 12.37 s of Total Solids
• Milkfat average test 3.67 s
• Protein average test 3.2 s
• Lactose average test 4.8 s
• Ash average composition 0.7 s
• 87.63 s of Water
• Milkfat is 30 of the total solids.

• Solids-Not Fat (SNF)

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Milk Supply Demand Summary (mf basis)
2002
2003
2004e
Milk Cows U.S.
9,095
8,945
9,141
1,000s
Milk / cow
18,573
18,700
19,128
Total Milk-B Lbs.
170.1
171.1
169.8
Marketings- B Lbs.
168.5
168.8
169.8
Bullish for Milk Price!
Beg. Stocks- B Lbs.
7.0
8.9
7.3
Imports- B Lbs.
4.8
4.4
4.6
Total Supply- B Lbs.
180.3
182.1
181.7
End Stocks- B Lbs.
8.9
7.3
4.1
Net removals- B Lbs -mf
0.2
1.2
0.4
Net removals- B Lbs -snf
(5.8)
(8.6)
(5.6)
Commercial
171.2
173.6
177.2
Disappearance
Source USDA/ERS LDP
Source CsT / OSUE
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The Dairy Belt in 2003
2030 Counties
1,734 counties California Marketings
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Where do we fit in ?
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U.S. Milk Production by County

• May 1997
• 50 of milk marketing coming from 88 counties in
  the U.S.

• May 2003
• 50 of milk marketing coming from 74 counties in
  the U.S.

• 820 U.S. counties increased milk shipments from
  May 1998 to May 2003.
• 1,406 U.S. counties decreased milk shipments from
  May 1998 to May 2003.

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Milk Production Growth is in the West
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Milk Production Decline is in the East
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Deficit vs. Surplus

• East deficit of 2.8b/m exceeds West surplus of
  2.0b/m
• West Share (38mp)
• 38 Cheese
• 41 Butter
• 76 NFDM
• 21 Ice Cream

Source FMMO 32 Marketing Service Bulletins /
2002 data.
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20 State Cows and Yields Turn Down finally
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Milk Cows no longer the adjuster
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U.S. Cow Numbers Show Decline..
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Milk Yield Long-term Trend
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Where are we headed longer term ?

• Region Milk Production Trends 1980, 2000, 2020
• Cows, Yields, Production
• Production Shares
• Regional Trends in U.S. Milk Production" by
  Jesse and Shuelte, Univ. Wisc. 74.

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Historical Regional Production Shares
Source Regional Trends in US Milk Production,
Jesse and Shuelke, Uwisc, MPBP 74.
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Regional Share Projections
Source Regional Trends in US Milk Production,
Jesse and Shuelke, Uwisc, MPBP 74.
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Big West vs. Big East
West 47
UMW 23
NC 16
NE 11
12 States combined have 77 US production.
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Structure of Dairy Markets

• Milk / Dairy Product Markets
• Bulk raw milk supply to manufactures of
• Bulk natural cheese
• Manufactures of processed cheese
• Packagers of natural cheese cut and wrap
• Processes of natural cheese shredded / grated
• Food Service fast food chains / pizza burgers
• Manufacturers of other foods frozen pizza /
  cheesecake / macaroni cheese / salad dressings

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Structure of Dairy Markets

• Bulk Butter
• Packaged Fluid Milk products
• Frozen Desserts
• Ingredients
• dry milk, condensed milk
• whey products
• used in dairy products / nondairy foods / animal
  feeds

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Corporate Dairy Americawww.dairyfoods.com/
select Dairy 100

• Large Dairy Companies
• Eight (8) companies were the major players from
  the 1920s through the 1970s
• Beatrice / Borden / Land OLakes / Kraft /
  Carnation
• The 1980s were a time a acquisitions and mergers
  for corporate dairy
• 2002 Top Companies (plants-sales)
• Dean Foods(113-8.1b) / Kraft Foods(18-4.1b) /
  LOL(12-2.9b) / Saputo(47-2.5b) /
  Schreiber(16-2.3b) / NDH(32-2.1b) /
  Kroger(18-1.9b) / DFA(27-1.5b) / Leprino(10-1.5b)

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The Bulk Milk Market

• Bulk milk / cheese / butter / ingredients
• represent commodities
• Cooperatives
• account for about 31 of all agricultural
  products marketed by cooperatives
• dairy cooperatives trend
• 1980 435 / 163,500 / 77 of milk marketed
• 1995 241 / 117,313 / 86 of milk marketed
• 1998 many mergers taking place

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Structure of Fluid Milk Processing

• Three Important Market Segememts
• Large dairy companies
• Supermarket Chains
• The Rest
• Technology and Scale Economies served to change
  the industry over the last 100 years
• Glass bottle 1890s Pasteurization 1920s
• Classified Pricing 1930s Paper /Plastic

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Number and Average Size of Commercial Fluid
Processors
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The Present Competitive Situation for Package Milk

• A shift of power from dealers to retailers
• Individual home buyers replaced by retail buyers
• Packaged milk went from a convenience/service
  product to a price product
• 1998 67 of unit sales private/store label or
  generic

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Organization of the Cheese Sector

• Milk Supply
• Cheese manufacturing
• Cheese converters
• Cheese marketers
• Wholesale distribution
• Retailing

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Key Facts of the U.S. Cheese Industry

• Historical location factors
• large quantities of grade B milk available
• excess supplies of grade A milk available
• Wisconsin / Minnesota / NY / Pennsylvania
• Current location factors
• Western states milk production expansion
• low cost of milk production and rapid expansion
• Idaho / New Mexico / Washington

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Cheese Marketing Contracts

• 90 of natural cheese is sold under long-term
  contract
• mostly between manufacturers (cooperatives) and
  large companies
• commit all of a specified portion of a plants
  output to sale at a specified price for a
  specified period of time
• most contracts specify the NCE price plus premiums

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Cheese Markets Wholesale

• American Cheese
• 70 produced by large cooperatives
• Italian Cheese
• 74 produced by proprietary companies
• Natural Cheese
• 50 goes into the ingredient market

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Cheese Market Whos On First?

• Kraft(2) 75 of all cheese is sold at retail
• 60 is purchased from others
• 45 of all retail cheese sales belong to Kraft
• Leprino(9) largest producer of mozzarella
• Ohio Cheese Companies
• Great Lakes Cheese(23)
• Brewster Cheese(83)

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The Butter Market

• Technology and Economies of Scale
• Introduction of the continuous churn 1960s
• decline of separate manufacturing / printing
• Butter Plants became larger / more efficient
• 1975 366 plants
• 1992 131 plants
• (in 32 plants butter was primary product)
• 1995 109 plants
• 1998 83 plants

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The Butter Market Cooperatives

• Cooperatives have played the largest role in
  manufacture / marketing / distribution
• Cooperatives distributed major share
• 65 percent of total U.S. production
• 48 plants w/average output of 18.4 million s
• 83 proprietary plants w/average output of 5.8
  million s

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The Butter Market Pricing

• Pre 1917 Pricing established on the Elgin Board
  of Trade by a quotation committee
• the Elgin Board of Trade ended in 1917.
• After 1917 Pricing established in the spot call
  market on the Chicago Mercantile Exchange
• Grade AA butter traded on Fridays on the CME spot
  butter market
• Grade AA butter now trades M/W/F on the CME spot
  butter market

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How We Use the Milk Supply
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What Are We Drinking ?
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Cheese Consumption
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What about other products?
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Commercial Disappearance in all products (milkfat
basis)
Source USDA/ERS/AMS
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Balancing Production and Use