Dairy situation and outlook Wisconsin Agricultural Bankers Association Wisconsin Dells, WI April 5, 2017 Dr. Marin Bozic
Global Milk output has stayed below year ago since June 2 EU + US + NZ +AU Milk Production YOY Milk Production Changes, 2016 Billion lbs. 55 54 53 Million lbs. 3500 3000 1.6% 52 2500 51 50 2000 3.2% 49 48 1500 47 1000 46 45 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 500 0 0.2% 2015 2016 30 Day Months US EU Oceania EU and Oceania contraction has outstripped US growth 2H in 2016 US continues to grow, Oceania and EU supply is recovering Blimling put it best: How much less of too much is still too much?
Milk contraction may be weakening 3 World milk contraction has been easing since Oct Forecasters are calling for annual global growth in 2017
Global Milk Production Outlook 4 25000 Annual Change in Milk Production YOY Change, Million lbs. 20000 15000 10000 5000 0 5000 2009 2010 2011 2012 2013 2014 2015 2016 2017 Global MP Top5_Ann.Δ United States EU 28 Oceania NZ s milk production used to be the most important fundamental to watch As it s milk production controls expired, EU s importance grew EU support programs are supporting output and prolonging price weakness
US Milk Production Growth in 2016 5 US annual milk production grew 1.6% YOY in 2016; Q4 grew by 2.5%YOY Intense growth in New York and Michigan exceeded processing capacity CA continued to shrink during the final stretch of its every 500 years drought
US Milk Production Growth in Feb grew 2.3% YOY 6 Drought defeating rain led to mud and mastitis in Feb NE and ME milk growth will strain the supply chain during flush Enormous Growth in TX and NM follows new capacity expansion US milk production growth has a lot of momentum Texas and New Mexico growth is tremendous! 2% YOY annual milk production is expected this year *Figures are leap year adjusted
Goodbye California Drought! 7 Texas and New Mexico growth is tremendous! 2% YOY annual milk production is expected this year
Oversupply in Northeast & Mideast led to Dumping 8 Aggressive milk production growth has been combined with a reduction of processing capacity and Fluid milk consumption This year milk dumping is expected to exceed 2016
Mexican Currency Reacts to US Election Results 9 $0.060 Mexican Peso Exchange Rate $0.055 $0.050 $0.045
Trump Effect: NFDM weakens on tough talk on Mexico 10 $1.08 $1.06 $1.04 $1.02 $1.00 $0.98 $0.96 $0.94 $0.92 Intra day CME NFDM Prices Inauguration Day Order to scrap TPP Order to build The Wall Floats idea for 20% tariffs on Mexican imports $0.90 12/6/16 12/13/16 12/20/16 12/28/16 1/5/17 1/12/17 1/20/17 1/27/17 2/3/17 The price decline probably isn t all attributed to politics World milk production is rebounding and export demand sees it s a buyer s market Still, the border politics a major talking point in the US NFDM market right now
Trump Effect: NFDM weakens on tough talk on Mexico 11 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 US Dairy Commodity Markets Butter Barrel NFDM Whey Futures $0.00 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Extreme butter volatility has paused for over a month Cheese spot prices have buckled under the weight of supply while futures hold Recent cheese price strength isn t reflecting fundamentals trader behavior? Powder futures markets have soured
Butter and Nonfat Dry Milk Not Converging Any More 12
US NFDM Prices Seldom Top World Prices 13 $1.40 CME, GDT, DDB Prices and Futures $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 EU Quotas end CME, NZX, EEX Futures Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 CME GDT DDB Since EU quotas lifted, US has been globally expensive just once US NFDM futures are more optimistic the NZX and EEX Is this justified?
US NFDM Prices Seldom Top World Prices 14 Chinese demand is expected to be up 20% YOY in 2017
US has been eager to win export share in NFDM 15 Global NFDM & SMP Prices $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 CME Dutch GDT Nearby Global Dry Whey Prices $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Central Mostly Western Mostly Dutch US prices have generally been the global bargain EU + US milk flush = more powder production that needs to be exported Lower US prices roused strong exports Exports tightened supply and rose prices US is now likely losing export interest
Cheese prices are nearing the export trigger 16 Global Cheddar Prices $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 US is looking export competitive CME Blocks GDT Cheddar Nearby $2.50 Global 80% Butter Prices $2.30 $2.10 $1.90 $1.70 US prices are discouraging exports EU prices have been catching up $1.50 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 CME GDT AMF Nearby Dutch
NFDM and Whey exports have been elevated 17 160 Dairy Exports 140 120 100 MM lbs. 80 60 40 20 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Non-Fat Dry Milk Whey Butter & Milkfat Cheddar (Harmonized 10) Among US dairy exports NFDM and whey are the most important Butter and cheese exports represent a tiny fraction of domestic demand
US Exports are Critical for US dairy demand 18 Each week export demand absorbs a day s volume of US milk production When global milk production rises, exporters like the US must compete for export share, which pressures prices lower Data Source: USDEC
O Canada! 19 Over the last 10 years Grassland Dairy Products Inc. has invested in new equipment, new markets Part of that business model has been a long term sale of milk products into the Canadian market. Unfortunately, we have been recently notified that as of April 1, 2017 the new Canadian dairy regulations long term sale is being eliminated. As a consequence of this severe loss, Grassland is now forced to cut back on our milk intake volumes on a very short notice We regret to inform you that effective May 1, 2017, Grassland Dairy Products Inc. will no longer be able to accept your milk supply.
How much milk is it? 20 Volumes of milk equivalent dairy exported to Canada as ultra filtered milk (millions of lbs) 2016 Average Monthly Average Daily Number of cows equivalent Total 510.6 42.6 1.4 22,030 Grassland 278.2 23.2 0.8 12,001 Cayuga Ingredients 172.3 14.4 0.5 7,435 O AT KA Milk Products 22.6 1.9 0.1 976 Darigold 30.4 2.5 0.1 1,310 AMPI 7.1 0.6 0.0 308 Source: Matt Gould, Dairy & Food Market Analyst
Why EU SMP stocks might not matter for some time 21 MIllion lbs. 900 800 700 600 500 400 300 200 100 Stocks Volume Age of Stocks Current US stocks level EU Gov t SMP Stocks Drawdown Scenario 25 20 15 10 5 Average Age of Stocks in Months 0 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 The EU gov t is holding 770 MM lbs. of SMP off the market That is enough inventory to satisfy 9 months of US export demand! Levels will likely be static or increase until prices are north of $1.05 By next year the much of the SMP will have exceeded its shelf life Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 0
Please eat more cheese! 22 Million lbs. 1300 1250 1200 US Total Cheese Stocks 1150 1100 1050 1000 950 6% YOY 900 US CS T.Cheese_M Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 2016 2015 Jan to Feb stocks growth was 2 nd highest ever Retail demand has subsided as production has risen so far this year
Colossal demand absorbed immense supply 23 Million lbs. 350 300 250 200 150 100 50 0 20% YOY US Butter Stocks Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 2016 2015 Colossal Q4 demand absorbed immense supply Now demand is weak and colossal supply is building at a record pace Futures are shrugging at these numbers how much is too much?
Whey supply tightened quickly as exports swelled 24 100 Total Dry Whey Stocks 90 80 Million lbs. 70 60 50 40 30 20% YOY 20 US DP_Stocks Whey Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 2015 2016 Whey stocks have declined considerably with strong export demand Much of the export volume has gone to China
WPI production growth is taking capacity from WPC 34 25 50% Whey Protein Utilization 40% 30% 20% 10% Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 Dry Whey WPC 34 WPC 80 WPI
NFDM Stocks flattish YOY 26 300 US NFDM Stocks 250 Million lbs. 200 150 100 1% YOY 50 US DP_Stocks NFDM Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 2015 2016 US powder prices have been export competitive, just under EU prices High exports have kept stocks from billowing despite stronger production
Milk Production Growth Outlook 27 25000 Annual Change in Milk Production YOY Change, Million lbs. 20000 15000 10000 5000 0 5000 2009 2010 2011 2012 2013 2014 2015 2016 2017 Global MP Top5_Ann.Δ United States EU 28 Oceania US milk production is expected to grow +2% in 2017 EU 2H growth offsets 1H contraction Oceania will grow YOY, not quite recovering the contraction in 2016
$1.00 $1.20 $1.40 $1.60 $1.80 $2.00 $2.20 $2.40 $2.60 CME Barrel Short Term Market Outlook: 28 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 NDPSR NFDM $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 NDPSR Dry Whey $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 CME Butter
Short Term Market Outlook 29 CME Barrel NDPSR Whey CME Butter NDPSR NFDM Class III Class IV Jan 17 1.56 0.44 2.24 1.02 16.24 16.09 Feb 17 1.62 0.49 2.15 0.99 17.16 15.46 Mar 17 1.41 0.52 2.14 0.85 15.18 14.27 Apr 17 1.45 0.49 2.10 0.87 15.28 14.19 May 17 1.50 0.46 2.15 0.85 15.51 14.22 Jun 17 1.65 0.45 2.15 0.88 16.71 14.48 Jul 17 1.68 0.45 2.15 0.90 17.04 14.65 Aug 17 1.72 0.46 2.15 0.92 17.45 14.83 Sep 17 1.73 0.47 2.20 0.95 17.49 15.29 Oct 17 1.74 0.47 2.20 0.95 17.65 15.29 Nov 17 1.73 0.48 2.15 0.95 17.55 15.08 Dec 17 1.69 0.48 2.05 1.00 17.14 15.09 1.62 0.47 2.15 0.93 16.70 14.91 2017 2016 CME Barrel 1.62 1.56 NDPSR Whey 0.47 0.29 Class III 16.70 14.68 CME Butter 2.14 2.09 NDPSR NFDM 0.93 0.83 Class IV 14.86 13.69
Percent of Milk Enrolled in the Dairy Margin Protection Program at Catastrophic and Buy Up Levels: 2015 to 2017 30 100% 12% 2% 75% 39% 50% 25% 61% 88% 98% 0% 2015 2016 2017 $4.00 Catastrophic Coverage Buy Up Coverage
Dairy-RP Expected Revenue Avg. CME Futures at Hedging Class III $16.26 Class IV $15.94 Farmer s Choice 75% 25% Blend Price $16.18 Estimate of State Milk per Cow Expected Milk Production During Quarter (per cow) 5,806 Lbs Blend Price $16.18 Revenue Guarantee: $939 cow
Dairy-RP 2009 to 2016 Prevents catastrophic losses and reduces volatility Milk Price $24 $22 $20 $18 $16 $14 $12 $10 $8 Indemnity Without Dairy-RP: $16.27/cwt With Dairy-RP: $16.67/cwt Premiums
Dairy Growth Coming Back to Upper Midwest 33 2005 vs. 2015 Source: The McCully Group
Milk Price Basis in Wisconsin 34 $3.50 Milk Price Basis (All Milk Class III Milk) $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00
Milk Price Premiums in Wisconsin 35 $2.50 Gross Milk Price Premiums (All Milk Class III Milk) (Value of Excess Components + PPD + SCC Adjustments) $2.00 $1.50 $1.00 $0.50 $0.00
Milk Price Premiums in Michigan 36 $1.50 Gross Milk Price Premiums (All Milk Class III Milk) (Value of Excess Components + PPD + SCC Adjustments) $1.00 $0.50 $0.00 $0.50 $1.00 $1.50
Cow Productivity Gains Outpace U.S. Population Growth Rate 37 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 5 Yr CAGR Yield Per Cow US Population Growth
Milk Supply Growth Due To Productivity Gains 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Calculated as 3 year moving average of 38 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mil. Lbs
Dairy Herd Size Stabilized when Exports Took Off 39 Thousands 11,500 11,000 10,500 10,000 9,500 9,000 8,500 1980 1985 1990 1995 2000 2005 2010 2015 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Exports as % of U.S. Milk Solids Average number of milk cows in the U.S. U.S. Dairy Exports as % of U.S. Milk Solids
Per capita production of frozen dairy products peaked in 1994 and has trended downward since. 40 Lbs/person/year 35 30 25 20 15 10 5 0 1975 1980 1985 1990 1995 2000 2005 2010 Regular Hard Ice Cream Reduced Fat Ice Cream Sherbet Other Frozen
Per capita consumption of fluid milk products has been on a downward trend for decades 41 Lbs/person/year 300 250 200 150 100 50 0 1975 1985 1995 2005 2015 Whole White Reduced Fat Lowfat Skim Flavored
Yogurt is the only cultured product with per capita consumption growth in recent years 42 Lbs/person/year 25 20 15 10 5 0 1975 1980 1985 1990 1995 2000 2005 2010 Yogurt Sour Cream Cottage Cheese
Per capita consumption of cheese continues to grow 43 40 lbs/person/year 35 30 25 20 15 10 5 0 1975 1980 1985 1990 1995 2000 2005 2010 American Mozzarella Other Natural Process Cheese Solids
Per Capita Consumption of Other than American Cheese is Rising Faster than American 44 (pounds consumed per person per year) 20 18 16 14 12 10 8 6 4 2 0 1970 1979 1980 1989 1990 1999 2000 2009 2010 2015 American Cheese Other than American
New Demand For Cheese Capacity By 2025 45 Mil lbs additional annual production needed 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Domestic SNF Demand in 2025 46 Conservative (10 Yr Trend) Optimistic (Above Trend) Realistic (Long Term Trend) Population Growth 0.8% 0.8% 0.8% Per Capita Growth 0.1% 0.3% 0.0% Total CAGR 0.7% 1.1% 0.8% SNF U.S. Demand in 2015 15,583 15,583 15,583 SNF U.S. Demand in 2025 16,774 17,458 16,943 Additional Milk Needed 13,387 21,071 15,282
Domestic Butterfat Demand in 2025 47 Conservative (Below 20 Yr Trend) Optimistic (At 3 Yr Trend) Realistic (10 Yr Trend) Population Growth 0.8% 0.8% 0.8% Per Capita Growth 0.5% 0.9% 0.6% Total CAGR 1.3% 1.7% 1.4% Butterfat U.S. Demand in 2015 Butterfat U.S. Demand in 2025 7,583 7,583 7,583 8,667 9,018 8,753 Additional Milk Needed 28,514 37,756 30,794