The Changing Landscape of Dairy: A Regional Outlook. Mark Stephenson Director of Dairy Policy Analysis

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1 The Changing Landscape of Dairy: A Regional Outlook Mark Stephenson Director of Dairy Policy Analysis

2 Millions of Pounds Let s remember when 32,000 30,000 28,000 Wisconsin Annual Milk Production It s the milk price! 26,000 24,000 22,000 20,000 18,000 16,000 14,000 It was a structural problem! 12,

3 Millions of Pounds California happened! 49,000 44,000 39,000 34,000 29,000 24,000 19,000 14,000 9,000 4, Wisconsin Annual Milk Production California Annual Milk Production

4 Where is the milk?

5 Where are the people?

6 Where is milk needed? 41 billion lbs net deficit.

7 Change in Milk Intensity.

8 Heat Index Temp & Humidity

9 Northern States Making More Milk? 0.67% Change in Milk Production 2016 compared to % 3.79% -1.35% -3.29% -1.05% 1.36% -1.34% 3.25% 4.64% -1.56% 6.06% 3.92% 2.13% 6.08% 2.18%0.71% 7.93% 3.77% 4.72% -0.92% -0.92% 6.08% 3.03% 2.97% 1.06% -3.94% 7.12% 0.25% 0.26% 2.66% -2.34%-3.05% -4.96% 4.69% 0.59% -2.71% -2.42% -2.13% -6.2% -3.89% % -4.21% 4.55% %-8.91% % 1.84% -3.06%

10 Observations Milk is growing in some regions and taxing plant capacity (Western disease) puts downward pressure on milk prices Milk is declining in some regions leaving behind excess capacity might stimulate milk premiums longer term

11 Pounds per Cow Improved efficiency 25,000 Annual U.S. Milk Production per Cow 20,000 15,000 10,000 5,

12 Consider trends in top four states 70 Milk per Cow per Day Wisconsin California New York Idaho

13 Average Temperature, April

14 Average Temperature, July

15 History of Global Surface Temperature Since 1880

16 Temperature Extremes

17 Observations What happens when trends collide? High-yielding dairy cows like cooler climates Climate is changing Warmer Cooler Dryer Wetter Regional milk production patterns change and so must food systems.

18 Location & Volume of Dairy Plants

19 Location & Volume of Dairy Plants

20 Who are your customers? We can build a plant, but Plants are expensive! Where do we put it? What products do we produce? Who are your customers? How do you get the products to them? Raw milk is expensive to move!

21 Premiums in the Upper Midwest

22 We discovered customers in other countries

23 $US per hundredweight Farm milk prices in selected countries Canada EU US 10 Australia NZ Source: Dairy Australia

24 Importance of Trade

25 More Observations Trade has been good for the U.S. dairy industry. Exports have supported a level of growth that we couldn t otherwise have had. The Wisconsin shift toward specialty cheeses has crowded out many imports. There are some downsides to the U.S. role in world dairy trade Greater susceptibility to price volatility Milk and dairy products can back up into stocks during a downturn.

26 1000s Pounds U.S. American Cheese Stocks 900,000 American Cheese Stocks 850, , , , , , ,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

27 Dairy Trade with Canada Canada has a tightly controlled supply management system. Quota is about $30,000 per cow currently. This keeps farm milk prices more stable and quite a bit higher than other countries. (in 2016, WI All Milk price averaged $16.74 while Canada s averaged $23.48) A quota system requires tightly controlled trade High tariffs and import quotas negotiated in 1987 WTO Dairy not included in NAFTA agreement with U.S. Milk Protein Isolates (MPIs) didn t exist in 1987 and have become possible with new processing technology. Since they weren t specified in trade restrictions, they don t have an import quota or tariff. We slipped a puck past the goalie much like MPCs for the U.S. back in the early 1990s.

28 1,000s of U.S. Dollars Sales of MPI to Canada $12,000 Value of U.S. Exports of Milk Protein Isolates to Canada $10,000 $8,000 $6,000 $4,000 $2,000 $

29 Dairy Trade with Canada MPI sales had grown to more than $100 million a year with about half from two plants in New York and half from a plant here in Wisconsin (another small volume from an Idaho plant) Canadian cheese processors have markets for more product and want milk for additional sales. Canada has a classified pricing and pooling scheme like the U.S. They have created a new ingredients class to produce MPIs domestically that will be priced at world prices which effectively halted U.S. sales.

30 Location & Volume of Dairy Plants

31 USDSS Conceptual Model

32 US Milk Supply Locations Aggregated county regions

33 US Plant Locations

34 US Demand Locations

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37 Class I Price Surface

38 Class III Price Surface

39 In Summary It feels like tensions in the U.S. dairy sector Trends in productivity are pushing against trends in climate Strong milk production increases in the Northeastern quadrant of states declines in the West and Southeast Plant capacity may be an issue, but a bigger factor is probably who the customer is for the product Changes in how much milk is produced and where are expressed as changes in milk prices. Exports move the U.S. price up and down Regional shifts change the pattern of prices

40 Questions