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12/11/2014
1
Pennsylvania’s Role
in the Global Dairy Marketplace
Bob Yonkers, Ph.DVice President and Chief Economist
International Dairy Foods Association
1250 H St. NW, Suite 900
Washington, D.C. 20005
byonkers@idfa.org
202-220-3511
PA Center for Dairy Excellence Dec 2014 Slide 2
The U.S. in the Global Dairy Marketplace
The Past
At best, a bit player due to U.S. domestic dairy
policy and trade distorting policies around the world
The Present (and how we got here)
U.S. based dairy firms adapting to the new reality
where what happens in the dairy world outside our
borders impacts us daily
The Future: will dairy markets
Return to the past any time soon, or is the present
the future, or will current trends continue?
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 3
Pretend it is 1980: What did folks then
expect milk production to be in 2014?
Source: USDA/NASS
Total U.S. Farm Milk Production
PA Center for Dairy Excellence Dec 2014 Slide 4
Up until the 1970’s, a status quo mindset
prevailed in the U.S. dairy industry
A ‘large farm’ was anything over 50 cows
USDA reports the number of dairy farms by
herd size
Prior to 1978, the largest category was
herds with 50 or more cows!
In 1978, only 4.3% of all dairy farm
operations had 100 or more milk cows
In 1979, there were 350,000 farms with milk cows
In 1979, Wisconsin produced 21.8 billion lbs,
while California produced 12.6 billion
Source: USDA/NASS
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 5
Up until the 1970’s, a status quo mindset
prevailed in the U.S. dairy industry
Fluid milk processors served relatively local markets,
and mostly relied on local farms for raw milk
Relatively small cheese and butter plants were the
rule, and large plants were the exception
Balancing seasonal variations in supply and demand
was a huge challenge for processors and coops
In 1950, total milk production in May was 60%
greater than in November (12.0 bil. lbs vs. 7.5 bil)
By 1973, May was still 25% greater than November
(the average the past three years is 6.7%)
Source: USDA/NASS
PA Center for Dairy Excellence Dec 2014 Slide 6Source: USDA/NASS
So, what was it like running a dairy company
during the 1950s until about 1970?
Monthly All Milk Price Received by Farmers
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 7
Not much dairy trade
either into or out of the United States
USDA/FAS
PA Center for Dairy Excellence Dec 2014 Slide 8
So what happened in the 1970’s?
The roots of price volatility!
First, cost of producing milk soared
OPEC – energy price spikes
USSR wheat and feed grain crop failures
The U.S. became the world’s breadbasket
Prior to 2007, the early 1970’s was the last time
feed and food costs shifted higher
Began a 30-year period where, on average, the
cost of buying corn and soybeans was less,
often far less, than raising them on your own
dairy farm
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 9
The politics of milk in the 1970’s
Nixon administration wanted to
keep inflation down – no dairy
price support increase in 1972
Dairy industry response – bribe
an old friend, the Secretary of the
Treasury
Coop executive convicted of
making the bribe
Cabinet official acquitted of
receiving the bribe
PA Center for Dairy Excellence Dec 2014 Slide 10
The politics of milk in the 1970’s
So, farm milk prices increase in the early 1970’s due to
higher feed and energy costs
Then, Jimmy Carter runs for president in 1976 vowing
to increase the price of farm milk
1977 Farm Bill increases the dairy price support
program ‘target’ farm milk price, and makes
changes to that price twice a year instead of once
But feed and energy price spikes calm down
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 11
During the 1970’s milk prices rise, first due
to higher input costs and later due to policy
Source: USDA/NASS
Monthly All Milk Price Received by Farmers
PA Center for Dairy Excellence Dec 2014 Slide 12
Higher milk prices due to dairy policy, low
dairy feed costs due to crop policy, lead to:
Source: USDA/NASS
Total U.S. Farm Milk Production
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 13
But, where does all that milk go?
Source: USDA/FSA
Dairy Price Support Program Outlays
PA Center for Dairy Excellence Dec 2014 Slide 14
Domestic policy begins to change in the
1980s, and the dairy industry starts to adjust
The slow ebb of government influence on milk
prices, growing influence of market forces
Dairy Price Support Program ‘target’ farm milk
price drops from $13.26/cwt in 1981
to $10.10 in 1990
Large farms which purchase all or nearly all their
feed inputs spread around the country
Large, one product dairy plants become common
Smaller plants with high costs exit
Regional shifts in milk production accelerate
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 15
Farm milk prices higher on average, but note
the increase in price volatility
Source: USDA/NASS
Monthly All Milk Price Received by Farmers
PA Center for Dairy Excellence Dec 2014 Slide 16
The late 1980’s period was the first global
marketplace trial for the U.S. dairy industry
The collapse of USSR’s control over eastern Europe
Drop in dairy production in those countries as
well as in the USSR itself
Increase in global trade in dairy products,
especially skim milk powder (SMP)
Thanks to the mountains of powder bought under
the dairy price support program from 1980 to 1986,
the U.S. has what the world needs
Market prices for nonfat dry milk rise from
$0.73/lb in summer 1988 to $1.60 in fall 1989
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 17
U.S. dairy exports reach new highs in the
late 1980’s, but export boom is short lived
USDA/FAS
PA Center for Dairy Excellence Dec 2014 Slide 18
But, what goes up must come down
Eastern Europe quickly finds that SMP is easy to
make and can be sold internationally easily
Global market for SMP replaces the USSR as
both a market for their products and a source
of hard currency
Instead of staying in the global market, the U.S.
falls back on policy intervention
Raises the nonfat dry milk support price from
$0.7275 in 1988 to $1.0340 in 1993
Starts up the Dairy Export Incentive Program to
subsidize dairy exports in 1991
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 19
What was the rest of the dairy world doing
during these decades?
European Union dairy policy both encouraged dairy
production and dairy exports
Set high domestic market prices to encourage more
milk production, eventually curbed with quotas
When more milk was brought forth, enacted a
variable export levy to subsidize dairy exports
For example, in 2002/2003 an EU trading company
could buy made-in-the-EU butter for $3,100 per
metric ton and sell it internationally for $1,300
The EU would give the company a variable levy
payment of $1,800 to ease their pain
PA Center for Dairy Excellence Dec 2014 Slide 20
What was the rest of the dairy world doing
during these decades?
More recently the EU has reformed its agricultural
policies as more ‘poorer’ countries joined
First was the re-unification of Germany in the
early 1990’s (bringing the former East Germany
into the EU)
In 2004 added Czech Republic, Cyprus, Estonia,
Latvia, Lithuania, Hungary, Malta, Poland,
Slovenia and Slovakia
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 21
What was the rest of the dairy world doing
during these decades?
New Zealand eliminated all support for commodity
agriculture instantaneously in 1984
This began the rise of NZ dairy trade, as
resources shifted from beef and sheep to dairy
Climate well suited to pasture-based dairying
Beginning in 1983 Canada instituted a quota system
With strict WTO trade rules, Canada has little
ability to compete for dairy export markets
Australia phased out much of its dairy support
policy beginning in 2000
PA Center for Dairy Excellence Dec 2014 Slide 22
However, the big changes in world dairy
markets were on the demand side
Multi-country trade agreements under the General
Agreement on Tariffs and Trade (GATT) began in 1949
However, food and agricultural commodities were
not included until implementation of the Uruguay
Round Agreement beginning in 1995, including the
creation of the World Trade Organization (WTO)
WTO phase-in of restrictions on trade distorting
policies for food and ag between 1995 and 2000
Reduced barriers to imports of agricultural
commodities and food products, both in terms of
lowering import tariffs and discouraging
pseudoscience-based import bans
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 23
Milk production continues to grow at a
relatively steady pace from 1990 to 2003
USDA/NASS
Total U.S. Farm Milk Production
PA Center for Dairy Excellence Dec 2014 Slide 24
Price support program returns to spending
about $500 million per year on average
USDA/FSA
Dairy Price Support Program Outlays
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 25
Increased exports due to export subsidies
(DEIP), more imports due to the WTO
USDA/FAS
PA Center for Dairy Excellence Dec 2014 Slide 26
However, milk price volatility increases
USDA/NASS
Monthly All Milk Price Received by Farmers
12/11/2014
14
This is a very important point!
Note that prior to 2004, the U.S. dairy
industry was not a big player in the global
marketplace, either via exports or imports
(as a percent of our domestic production,
about the same as prior periods)
The milk price volatility experienced between
1991 and 2003 came from domestic policy
reforms, not the international marketplace!
PA Center for Dairy Excellence Dec 2014 Slide 28
Domestic and trade policy reforms are
primary drivers of market changes since 2003
Making domestic dairy policies more market oriented
has reduced the role governments play in markets
EU no longer buys and holds stocks of dairy
products due to the high cost of doing so
US dairy product price support program no longer
effective due to the high cost of program changes
Liberalization of world trade policies created new
trade opportunities for all goods and services
Reduced tariffs and other barriers to free-er trade
Economic growth in developing countries has led
to increased demand for more food trade
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 29
Meanwhile, traditional dairy exporting
countries have problems
EU cannot support the newer (economically poorer)
member countries like they could the original, more
prosperous member countries
Farm milk production quota system ends in 2015
Frequent, multi-year droughts in Australia following
significantly reduced government dairy support has
reduced milk production and lowered dairy exports
New Zealand’s dairy farming system is based on
pasture and there is little more land for expansion
Cost of importing dairy feed is a barrier to growth
PA Center for Dairy Excellence Dec 2014 Slide 30
U.S. dairy exports have exploded since
2003 while dairy imports are down
USDA/FAS
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 31
Thanks to global markets, there is a home
for ever increasing U.S. farm milk production
USDA/NASS
PA Center for Dairy Excellence Dec 2014 Slide 32
The Dairy Price Support Program no longer
has to be the end use of that milk
USDA/FSA
Dairy Price Support Program Outlays
12/11/2014
17
PA Center for Dairy Excellence Dec 2014 Slide 33
Thanks to global markets, farm milk prices
are much higher on average
USDA/NASS
PA Center for Dairy Excellence Dec 2014 Slide 34
Where would the U.S. dairy industry be without
the export growth of the past 10 years?
In 2003, the U.S. produced 170.3 billion pounds of milk
U.S. dairy exports accounted for 9.7 billion pounds
Which means 160.6 billion pounds were used to
serve our domestic dairy demand
In 2013, the U.S. produced 201.2 billion pounds of milk
U.S. dairy exports accounted for 31.2 billion pounds
Which means 170 billion pounds were used
domestically
Just shy of 70% of all the milk production growth since
2003 entered the export market!
Source: USDEC and USDA/NASS
12/11/2014
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Remember, milk price volatility was
around BEFORE the U.S. became a
major player in global dairy markets
Since 2003, milk price volatility has
remained as the U.S. has grown to be a
major dairy exporting country, but U.S. farm
milk prices have not only increased, but the
trend is clearly upward
PA Center for Dairy Excellence Dec 2014 Slide 36
The Future: Economic and population
growth in developing countries continues
Everyone talks about China, but other Asian countries
are experiencing economic growth and looking for
greater agricultural commodity and food imports
Africa may be the new ‘China’ in terms of growth of
dairy imports in the future, as policy and economic
system reforms increase household incomes
These regions of the world do not have the arable
land base to feed their growing populations, let alone
meet the demand for higher value-added foods due to
growing household incomes
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 37
Forecasts agree that global demand for U.S.
dairy products will keep milk prices high
Source: USDA, CBO, FAPRI, UN/FAO
PA Center for Dairy Excellence Dec 2014 Slide 38
Summary: Why is the U.S. a major player
in the global marketplace today?
In the U.S. and around the world, governments have
moved toward more market-oriented domestic policies
for agricultural commodities and food in general, and
dairy in particular
International trade agreements have reduced the
ability of countries to protect their domestic industries
from competition from other country’s industries
Economic growth around the world, but especially in
developing countries, has increased the demand for
food and agricultural commodity trade
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 39
What about Pennsylvania: Five Things to
consider to remain competitive going forward
1. Stay close to population centers
Okay, that one may sound easy, but being physically
close may not always be the point – see Thing 5 below
2. Don’t forget its an entire supply chain
Every part is important to your competitiveness, from
farm inputs to farmers to processors to end users to
ultimate consumers domestic or abroad
What are you doing to maintain/develop capacity of
your dairy infrastructure – vets, consultants, haulers
Attract the best and brightest to your dairy industry
and make sure they have a reason to stay
PA Center for Dairy Excellence Dec 2014 Slide 40
What about Pennsylvania: Five Things to
consider to remain competitive going forward
3. Use modern communication methods,
and use them correctly
How may of you have ever heard of Don Schindler?Senior Vice President, Digital Initiatives at Dairy Management Inc.
(Digital Strategist, Executive Social Media Trainer)
Get him here to do a social media training workshop
ASAP and force people from all segments of the
Pennsylvania dairy supply chain to attend!
4. Get involved
With whatever organization you are associated with
that makes the most sense for each issue
12/11/2014
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PA Center for Dairy Excellence Dec 2014 Slide 41
What about Pennsylvania: Five Things to
consider to remain competitive going forward
5. A corollary to Thing 4: use that involvement to keep
others from regulating you into being less competitive
EU PDO’s in TTIP
How many of you know what that means?
You should be very angry at Canada and South Africa
Japan looking to get a sweet deal in the TPP
This one will get me in trouble:
The last thing Pennsylvania needs is for
California to join the Federal Order system!
Pennsylvania’s Role
in the Global Dairy Marketplace
Bob Yonkers, Ph.DVice President and Chief Economist
International Dairy Foods Association
1250 H St. NW, Suite 900
Washington, D.C. 20005
byonkers@idfa.org
202-220-3511
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