The Midwest Role in World Dairy Trade 54th Annual Rural Energy Conference
Mark Stephenson, Ph.D.
Director of Dairy Policy Analysis
University of Wisconsin, Madison
A Tale of Three States
Millions of Pounds of Milk
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1905
1908
1911
1914
1917
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
New York
Wisconsin
California
Milk per Cow
0
5000
10000
15000
20000
25000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
U.S. lbs/cow
Milk per cow
Milk per cow has grown at roughly 2% per year.
About half of yield efficiencies is attributable to genetic gains and half to management
Population growth has been roughly 1% per year.
Yield growth has outpaced demand
Implies fewer cows are needed
Number of Cows & Yield
0
5000
10000
15000
20000
25000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Cow Loss
Most farms have not reduced cow numbers
Indeed, new technologies, like the bulk tank,
artificial insemination, TMRs and rBST have
encouraged farms to explore returns to scale.
We have been losing farms to adapt to
increased efficiencies
Number of Dairy Farms
0
50000
100000
150000
200000
250000
300000
350000
400000
1980 1985 1990 1995 2000 2005 2010
U.S. Dairy Farms
Growth is in the Large Herds
0
25000
50000
75000
100000
125000
150000
175000
200000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2000+ Head
1000-1999 Head
500-999 Head
200-499 Head
100-199 Head
50-99 Head
30-49 Head
1-29 Head
Change in Milk Intensity.
Traditional
20 Billion Surplus
Intensive
35 Billion
Surplus Having
Problems
43 Billion
Deficit
California Net Production
-5000
0
5000
10000
15000
20000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
U.S. Role in World Markets
0
5
10
15
20
25
30
35
40
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$U
S p
er
hu
nd
red
we
igh
t
US
NZ
EU 27
Canada
Australia
Source:DairyAustralia
“Rents” Will Be Capitalized
In countries like New Zealand, land is most
binding constraint.
In Canada, quota is most binding constraint
In countries like the United States, cows have
been a binding constraint.
Canadian Quota Value
Current Canadian Quota value is from
$25,000 to $33,000 per kg butterfat
That is about $25,000 to $30,000 per cow
Dairy Farm Business Models
Milk price is similar across countries competing
for world trade
Total costs of production is similar across
countries competing for world trade
Cost structure is quite different
Production Risk v.s. Price Risk
New Zealand
Large fixed costs in land assets
Lose money when price falls below total cost of production
Price has to drop a long way before there is any change in production strategy
More production risk in this business model
United States
High variable costs in feed and labor
Lose money when price falls below total cost of production
Price may fall below variable cost of production and can cause cessation of production or operating below capacity
More price risk in this business model
Fixed&
Variable&
Different U.S. Business Models
“Traditional” Dairy Farm
Own enough land to grow
forages house and milk
cows and spread
manure.
Smaller average number
of cows per farm.
Somewhat larger average
milk price.
Lower variable costs—
higher fixed costs of
production.
“Western-Style” Dairy Farm
Own enough land to
store feed and house
and milk cows, grow
some feed.
Larger average number
of cows per farm.
Somewhat smaller
average milk price.
Higher variable costs—
lower fixed costs of
production.
Fixed&
Variable&
Some Observations…
We are experiencing a blending of business models Larger farms to capture economies of scale in traditional dairy regions
of the U.S.
Highly specialized dairy farms purchasing a land base to handle
manure and grow at least forage needs
Longer distance transportation of milk and dairy products and longer
shelf life of products
Still trying to determine our role in export markets
Drought in the west is a major problem but the real
issue is more fundamental
Observation…
Western U.S. producers are really balancing the
milk supplies in response to our milk price
volatility.
Balancing is lots of fun on the up-side
Balancing is no fun on the down-side
Estimates are that dairy farms may have lost as
much as 30% equity in 2009.
California dairy producers are getting clobbered
again this year.
Milk Pricing in a Global Context…
Some U.S. farms are seeking higher fixed but
lower variable cost production strategies
Some U.S. farms will need to be better
prepared to turn off production in down phase
Dairy farms need to use more risk
management tools
Midwest has a nicely balanced role to play in
world dairy trade
We sell a lot of whey products and increasingly
cheese
Concluding Observations…
Wisconsin has superior agronomic resources
for milk production
The “traditional” dairy business model may be
superior in times of volatile prices
There are still economies of scale to explore
Achieving those economies will be a challenge
in Wisconsin while retaining the “traditional”
business model