Pennsylvania’s Role in the Global Dairy Marketplacecenterfordairyexcellence.org/wp-content/uploads/2014/05/Yonkers...The U.S. in the Global Dairy Marketplace The Past At best, a

12/11/2014

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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

[email protected]

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?

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Pretend it is 1980: What did folks then

expect milk production to be in 2014?

Source: USDA/NASS

Total U.S. Farm Milk Production


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

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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

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Not much dairy trade

either into or out of the United States

USDA/FAS


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

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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


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

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During the 1970’s milk prices rise, first due

to higher input costs and later due to policy

Source: USDA/NASS



Higher milk prices due to dairy policy, low

dairy feed costs due to crop policy, lead to:

Source: USDA/NASS


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But, where does all that milk go?

Source: USDA/FSA

Dairy Price Support Program Outlays


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

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Farm milk prices higher on average, but note

the increase in price volatility

Source: USDA/NASS



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

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U.S. dairy exports reach new highs in the

late 1980’s, but export boom is short lived

USDA/FAS


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

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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




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

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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


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

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Milk production continues to grow at a

relatively steady pace from 1990 to 2003

USDA/NASS



Price support program returns to spending

about $500 million per year on average

USDA/FSA


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Increased exports due to export subsidies

(DEIP), more imports due to the WTO

USDA/FAS


However, milk price volatility increases

USDA/NASS


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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!


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

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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


U.S. dairy exports have exploded since

2003 while dairy imports are down

USDA/FAS

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Thanks to global markets, there is a home

for ever increasing U.S. farm milk production

USDA/NASS


The Dairy Price Support Program no longer

has to be the end use of that milk

USDA/FSA


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Thanks to global markets, farm milk prices

are much higher on average

USDA/NASS


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

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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


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

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Forecasts agree that global demand for U.S.

dairy products will keep milk prices high

Source: USDA, CBO, FAPRI, UN/FAO


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

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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




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

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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

[email protected]

202-220-3511

Pennsylvania’s Role in the Global Dairy Marketplacecenterfordairyexcellence.org/wp-content/uploads/2014/05/Yonkers...The U.S. in the Global Dairy Marketplace The Past At best, a

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