Potential Impacts From the Growth of New Mexico Dairies

By

Terry L. CrawfordUSDA-ERS

at

“Dairy Fair”At ENMU-Roswell, New Mexico

August 7, 2000

Key Factors to Consider

• Changes in the U. S. Dairy Industry

• Changes in the South West Dairy Industry

• New Mexico prospects

• Impacts on New Mexico resources

• Planning for growth

Changes in U.S. Dairy Industry

• FMMO Reform

• Scheduled Removal of Price Supports

• NAFTA reductions in trade barriers with Mexico

• Technology

• Growth European type of Cheese Consumption

Federal Milk Marketing Order Reform

The Classified Pricing System

• Class I =Class III + a regional differential

• Class II=Class III + a national differential

• Class III (market clearing price)

• Class III-A (market clearing price)

• Fluid milk products

• soft products (ice cream, yogurt)

• Cheese and butter

• Nonfat dry milk

What did Congress direct USDA to do?

• Required:– Consolidate the present order system into no

less than 10 and no more than 14 orders

What did Congress direct USDA to do?

• Allowed:– California may join the order system– Change in Class I price surface– Use utilization rates and multiple basing points

in establishing Class I differentials– Use component pricing in establishing one or

more Basic Formula Price (BFP)

What has AMS done?

• Consolidated the 31 orders into 11 orders

• Proposed 4 options on the price surface

• Changed the Classified pricing system

• Proposed uniform regulations ( these are different in each order)

U.S. Cattle Inventory

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1970 1975 1980 1985 1990 1995 2000

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Total cattle Milk Cows Beef Cows

U.S. Milk Production

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60,000

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100,000

120,000

140,000

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180,000

1970 1975 1980 1985 1990 1995 2000

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U.S. Dairy Trade

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1970 1975 1980 1985 1990 1995

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Imports Exports

U.S.Milk Equivalent Consumption, Fat Basis

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1975 1980 1985 1990 1995

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Total, Milk fat basis Fluid

CPI All Dairy Products, 1984=100

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1970 1975 1980 1985 1990 1995

Years

Ind

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Milk Prices

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12.00

14.00

16.00

18.00

1970 1975 1980 1985 1990 1995 2000

Year

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All Milk Manufact.

Dairy Cows and Output per Cow

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4,000

6,000

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14,000

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18,000

20,000

1975 1980 1985 1990 1995Year

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No. of Cows Milk per Cow

Changes in the South Western Dairy Industry

• Texas production growth slows

• Texas environmental issues

• Increasing Texas Demand/Supply imbalance provides opening for NM production.

• Near term lower prices due US production response to previous higher prices.

New Mexico Prospects

• Has the resources to support 50 to 100% more dairy cows, if developed carefully.

• Increasing environmental limitations.

• Critical location decisions for both plants and dairies.

• If growth continues at the pace of the Ninties, could match Texas output in 5 to 6 years becoming the 7th largest dairy state.

NM Growth Scenario

• For the past 10 years NM has added an average of 16,000 milk cows per year.

• If NM only averages 10,000 cows per year and Texas and Washington continue to grow at current rates, NM will match Texas in 5 to 6 years, and surpass Washington and Michigan.

NM Growth Scenario Continued

• Cows will increase from 246,000 in June, 2000 to 290,000 in 2005 or 2006.

• Milk production will increase from 4.7 billion pounds in 1999 to nearly 6 billion lbs. in 2005/6; even as the rate production growth slows down.

• Will need 22 to 32 new dairies, 2 to 3 new cheese plants the size of F&A or Lovington.

NM Milk Cows & Production

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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NM Growth Scenario Continued

• Most of the added milk will need to be used by manufacturing because of limited fluid market growth.

• This will cause lower blend prices as manufacturing utilization increases for the Southwest FMMO.

• Or markets in Mexico need to be developed for fluid or manufactured products.

Impacts on New Mexico resources

• An additional 50,000 milk cows will require:– 75,000 to 100,000 acres of production of hay

and silage.– 25-35 large dairies and 700 workers– 2 to 3 plants equivalent to at least half of

LePrino’s plant size and employment– Plus import of grain and concentrate from other

regions.

Planning for growth

• Environmental consequences

• Water use for cows and forage

• Development of community college level programs of study for dairy herd management and food technologists to supply dairies and plants with a trained supply of workers

• Capital acquisition and tax structure

Additional Slides If Needed

Federal Milk Marketing Order Reform

• “Milk “ says USDA’s Chief Economist Keith Collins, “can give you a headache.” -Wall Street Journal

What is the Federal Milk Marketing Order System?

• FMMO’s were established in the late 1930’s– Farmers had few outlets for their milk– Poor roads– There was little or no refrigeration– Milk moved in 10 gallon cans– The concerns at the time were “market power”

and “equity”

What do FMMO’s do?

• FMMO’s set monthly minimum prices paid by first handlers of milk, by use.

• Handlers are required to pay these minimum prices into a “pool”

• A weighted average (blend) price, based on use, is paid to farmers from this “pool”

• FMMO’s align prices to encourage the movement of Milk

Milk pricing optionsOptions Phase in

PeriodBase Price atMinneapolis MN

Price Surface Number of Classes

1-A No $1.60 Based on Cornell Modelanalysis as changed byAMS price surfacecommittee

Class I (fluid), Class II(soft products),Class III (cheese), andClass IV (butter andnonfat dry milk)

1-B No $1.20 Based on Cornell Modelanalysis without changesby AMS price surfacecommittee. The pricesurface is flatter than 1-A.

Class I (fluid), Class II(soft products),Class III (cheese), andClass IV (butter andnonfat dry milk)

Final Rule No $1.60 Based on Cornell Modelanalysis without changesby AMS price surfacecommittee. The pricesurface is flatter than 1-A.

Class I (fluid), Class II(soft products),Class III (cheese), andClass IV (butter andnonfat dry milk)

Classified pricing changes under the Federal Milk Marketing Order Reform

New proposal Old system

Class I price = Class I price =Class III price (national price) + Basic Formula Price (national price) +Class I differential (order specific) Class I differential (order specific)

Class II price= Class II price=Class IV price (national price) + Basic Formula Price +$0.70 (national) $0.30 (national)

Class III price (national)= Basic Formula Price (national)=formula based on Minnesota-Wisconsin Grade B pricebutter, cheese, and whey prices updated by butter and cheese price formula

Class IV price (national)= Class III-A (national)=formula based on butter and formula based on nonfat dry milk prices and nonfat dry milk prices the butter fat differential

What are the economic impacts of order reform

• Change in the utilization rates-effect of consolidation– Merged orders may change the utilization rates of

different classes

• Intra-order zone pricing-effect of consolidation– within orders locations (plants) have different

blend prices, based on distance from the main demand point

Intraorder pricing

Order Difference inClass Idifferential fromNY

Class I utilization Difference fromNY blend price

Boston $0.10 50% $0.05

New York $0.00 50% $0.00

Baltimore -$0.10 50% -$0.05

AfterConsolidationBoston $0.10 50% $0.10(+$0.05)

New York $0.00 50% $0.00

Baltimore -$0.10 50% -$0.10 (-$0.05)

Class I differentials-effect of the price surface

• The basic economic principle behind the FMMO’s is price discrimination– Fluid milk has the most inelastic demand and is

assigned the highest price in the system.– Manufacturing milk is more elastic therefore

additional milk is moved onto this market.– The higher the Class I differentials, the higher

farmer income and the higher consumer costs

Discriminatory pricing

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Formula pricing input markets and price discrimination

• Class I and II prices are based on fixed differentials added to the Class III and IV prices.

• Class III and IV prices are formula driven based on output prices

• Rule 1 of price discrimination:– allow at least one market to clear