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1 Commercial Agriculture An Analysis of a Missouri Dairy Stabilization Program d Commercial Agriculture. Missouri Extension program Commercial Agriculture University Extension S 1 02 Animal Sciences Research Center University of Missouri Columbia, Missouri 65211
2 L At--1DREW M. NOVAKOVIC IMPACT OF A MISSOURI DAIRY STABILIZATION PROGRAM L by Ken Bailey Myron Bennett Sylvia Timko February 14, 1992 L L *Bailey and Bennett are Dairy Extension Economist and Professor Emeritus, respectively, both with the Commercial Agriculture Program. Timko is a Graduate Research Assistant. All are with the Department of Agricultural Economics, University of Missouri-Columbia.
3 IMPACT OF A MISSOURI DAIRY STABILIZATION PROGRAM Ken Bailey, Myron Bennett, and Sylvia Timko Commercial Agriculture Program University of Missouri This report provides a short-term (2-years) analysis of the impact that a Dairy Stabilization Program would have on Missouri dairy producers and consumers. This report is an objective analysis of the shortterm impacts of this bill and does not represent an endorsement by the University of Missouri. Missouri Senator Mike Lybyer introduced Senate Bill No. 473 which would create a special fund, called the "Missouri Dairy Stabilization Fund." This fund would be disbursed to Missouri dairy farmers on a monthly basis when market prices fall below a "target price" level that is related to the average cost of producing milk in Missouri. Income for Missouri dairy farmers dropped in 1991 due primarily to lower milk prices. o Milk prices fell from $14.07 per cwt in 1990 (according to MIR records) to an estimated $12.04 in o o A wet spring and a dry summer lowered hay and silage production and quality. Farmers will face higher feed costs in both 1991 and Higher beef prices for cull animals helped offset the higher feed costs. The outlook for 1992 using the Commercial Agriculture Dairy Model is for very little rise in the price of milk. The U.S. average all-milk price is forecast to rise from $12.24 in 1991 to $12.35 in L o o o Any rise in the price of milk due to market strength will be met by higher milk production. Missouri dairy producers who have a debt to asset ratio of 20 percent or less will likely cash flow in 1992, but profits will be slim. Producers who have more than a 20 percent debt load likely will have difficulty cash flowing without more credit. Our analysis of Missouri Senate Bill No. 473 does not assume the repeal of the "Unfair Milk Practices Act." It indicates that the stabilization bill would be funded by a assessment that would ultimately be passed on to Missouri consumers of dairy products. This would translate into a higher retail milk price of not greater than 5-6 cents per gallon. The proposed bill would create a fund of approximately $19-$21 million per year. The "target price" would be set in relation to an objective forecast of the average cost of producing milk in the State of Missouri. We forecast the productio_n costs to be $12.93 per cwt in 1992 and $13.07 in Assuming a discount rate of 10 percent, that would set a target price of $11.64 per cwt in 1992 and $11.77 in We predict an average payout from the fund (on all milk marketed) to be 62 cents per cwt in 1992 and 70 cents per cwt in 1993.
4 Il\tIPACT OF A MISSOURI DAIRY STABILIZATION PROGRAM L The objective of this report is to analyze the impact that a Dairy Stabilization Program would have on Missouri dairy farmers and consumers. Missouri Senator Mike Lybyer, Chairman of the Agriculture and Rural Business Development Committee, introduced Senate Bill No This bill contains a section that would create a special fund, called the "Missouri Dairy Stabilization Fund." This fund would be disbursed to Missouri dairy farmers on a monthly basis when market prices fall below a target price determined by the Missouri Department of Agriculture. The objective of such a fund would be to stabilize cash flow and raise income for Missouri dairy producers. Background The price of milk that Missouri dairy producers receive is determined at the national level, not within the state borders. Three general factors that affect the national price of milk include: (1) U.S. market conditions (2) The Federal Price Support Program (3) The Federal Milk Marketing Order System The farm price is basically a blend or average of two prices. The first price is the wholesale price of milk used in the manufacture of dairy products such as butter, cheese, nonfat dry milk, etc. This price is reported each month by the U. S. Department of Agriculture (USDA) and is called the Minnesota-Wisconsin price of manufacturing grade milk, or simply the "M-W." Under the Federal Order System, the M-W is equal to the Class III price. The other price used in the calculation of the farm price is the wholesale price of fluid milk. Fluid milk has a greater market value than milk used for manufacturing purposes. Under the Federal Milk Marketing order system, this price is called the Class I price and is defined for each Order as the M W plus a Class I fluid price differential. For Springfield, Missouri, the Class I differential is $2.19 for every hundred pounds of milk (cwt). The area Federal Market Administrator weights the Class I and Class III prices according to how much milk is consumed in any month as a fluid product, and how much is consumed as a manufactured dairy product. 1 A Class II price for soft manufactured dairy products such as yogurt and cottage cheese is also used, but accounts for the smallest percent of use. The price support program and the federal order system work together to determine the price of milk at the farm gate. The price support system is designed to prevent the M-W from falling below an established support level. The support is currently $ per cwt. If the M-W starts heading toward this level, the government agrees to purchase unlimited quantities of manufactured dairy products, such as butter, cheese, and nonfat dry milk, from the market place. This action shores up the wholesale price of manufacturing grade milk. When this price is supported, so is the farm or blend price. Government purchases of dairy products are typically higher in the spring months when milk I A Class II price for soft manufactured dairy products such as yogurt and cottage cheese is also used, but accounts for the smallest percent of use. 1
5 production peaks. It does not take much of a surplus to depress milk prices. Later in the year, when children return to school and consumers begin purchasing dairy products for the holiday season, demand increases relative to available supplies. As a result, the M -W begins to rise, as does the farm price of milk. Some minimum level of a spring surplus of milk is actually required if we are to have enough milk to meet fluid needs all year around. A number of important changes have taken place with regard to federal dairy legislation in the last 10 years. The milk support price was indexed to the level of inflation in the second half of the 1970s. As a result, the support price increased and peaked at $13.49 per cwt in October of 1981 (see figure 1). This rise led to higher milk production and government purchases of dairy products under the price support program (see figure 2). A number of measures were taken starting in 1983 to curb this higher production level and limit federal outlays for the dairy program. A dairy diversion program was enacted and became effective in Producers were paid to lower their milk production from a base level. That program worked in 1984, but milk production increased the following year when the diversion program was no longer effective (see figure 3). A whole-herd buyout program was introduced with the 1985 Farm Bill. The intent of the program was to reduce the number of milk cows on farms and thereby permanently reduce milk production. While cow numbers did decline in 1986 and 1987 (see figure 4), milk production eventually increased through higher yields per cow. Another change that was introduced. with the 1981 and 1985 Farm Bills was to lower the support price when government purchases of dairy products exceeded a certain level. As a result, the support price of milk declined to $ per cwt by 1990 (see figure 1). The effect of the lower support price was to introduce greater volatility in milk prices. This was unprecedented to the dairy industry. Milk prices rose in 1989 and 1990 due to the after affects of the whole-herd buyout program and the 1988 drought which reduced milk production. At the same time, demand for milk and dairy products grew. As a result, milk prices climbed to the $13-$15 range. Normally such a sharp rise in prices would be avoided under the dairy price support program which was also intended to stabilize consumer prices. This would be accomplished by selling back government stocks to the market. Thus, the government would purchase dairy products in the spring, and sell part of them back to the market in the fall. In 1989 and 1990, however, the government quickly ran out of surplus dairy products, particularly cheese and nonfat dry milk (figure 2). A lower support price did indeed reduce the burdensome level of surplus government stocks of dairy products, but also reduced consumer and producer protection from greater volatility in dairy prices. Milk prices plummeted to support levels in the fall of 1990 and remained there until April of This caused financial hardship for many dairy farmers who then turned to Congress to revise the dairy title to the 1990 Farm Bill. What was considered was a support price increase to $11.10 in exchange for a voluntary, producer-financed diversion program. This was called a "supply management" approach. Because of a tight federal budget, outlays for the dairy program, reduced from $3 billion in fiscal year 1986 to $500-$600 million a year under the 1990 Farm Bill, could not be increased. Producers 2
6 Figure 1. The All-Milk and the Support Price r , , , , , -~ ~ ~ "- "'C c:::::.e t "- Q) Q. ~ 8.00 ca o Cl _ ; L-9~70~-' l-19--L- L--...J ' J ' l..--l i- 8-2 '------'------'-1----'98-6-'----'-----'-19--'-9-0-'--' Source: USDA, Dairy Situation and Outlook Figure 2. USDA Purchases of Dairy Products 2,500, , , ,.----,...---!ill Cheese Nonfat 2, f J- ~'tt1'.. ~ C/) "'C 1, '--- o a.. c::::: :~ 1,000 ~ 500 o Source: USDA, Dairy Situation and Outlook 3
7 Figure 3. U.S. Milk Production 160~ ~------~----~~ U) "'C 140 o a.. c:::.q 130 Il -r ~~~~~~~~~~~~~~~~~~~ Source: USDA, Dairy Situation and Outlook Figure 4. U.S. Cow Numbers on Farms 16~----~~----~----~------~----~~ i 15 U) 14 "'C c::: is 13 a...~ 12 Il _ --'i-'-"--"'- I --- r- r------t -'--"'-- L I --, : I -r----~ i '" "' --+ I - r--..., i I - T - -,. --~ 9~~~~~~~~~~~~~~~~~~~ Source: USDA, Dairy Situation and Outlook I I 4
8 r were willing to pay for the higher cost of a supply management program in exchange for a rise in the support price. A consensus on such changes, however, could not be reached and changes in federal dairy legislation were not made. As a result, several states have turned to "self help" programs. Missouri Production Trends The number of dairy cows on Missouri farms has declined over the years. The reduction in cow numbers has been offset by higher milk yields that have stabilized Missouri milk production at around 3 billion pounds per year. One cow can produce 3.5 times more milk today than it could in What may be of concern to Missouri is the rise in milk production in other states, particularly California, Washington, Florida, and Texas (see figure 5). Milk production has been slowly shifting from the Midwest to large "mega farms" that can milk 1,000-3,000 head of cows (see table 1). The average number of cows on Missouri dairy farms is around 80 head. Such mega farms may not be possible in the state of Missouri because of the adverse environmental effects. What is of concern then is that if this trend were to continue, Missouri's share of national milk production would continue to dwindle. For every Missouri cow that is slaughtered or sold out of state, there will be fewer jobs and less employment in Missouri. Dairy cows not only develop agri-business jobs that meet the Figure 5. State Trends in Milk Production 6,000, r ,----r ,---, en "'C c:: 5,000 ' ~ 4,000 a a.. c:: a 3,000 I FL~DA MI~URI T~S WAS~GTON I.._ L_.... _... " -.. _- ~ 2,000 1,000 L...L...---' L--'----'---'--...l L L...--'---L--L--..I----'-----'-----'-----L.---'----'-----'-----'---.J Source: Milk Production Annual Report, USDA 5
9 Table 1. Regional Shares of U.S. Milk Production percent of U. S. total Northeast 20.7 Lake States 28.3 Corn Belt' 17.1 Northern Plains 5.3 Appalachian 6.9 Southeast 3.0 Delta 2.3 Southern Plains b 3.5 Mountain 3.7 Pacificc 9.2 Source: USDA, Dairy Situation and Outlook amissouri, Iowa, Illinois, Ohio. "Texas. cinciudes California, Washington, and Idaho input needs of the dairy sector, but also a host of other jobs related to the bottling and manufacturing of milk produced in Missouri. There are a number of plants within the state that process milk into value added products such as cheese, nonfat dry milk, ice cream, etc. u.s. Dairy Outlook Milk supply, use, and prices are forecasted in this study via use of the Commercial Agriculture Dairy Model. This is an econometric model that was designed to forecast the behavior of the U.S. dairy industry. The 1992 outlook for the average U.S. price of milk, called the all-milk price, is for an 11 cent increase from $12.24 per cwt in 1991 to $12.35 (see table 2). Milk production is expected to increase 1.3 percent in 1992 from stagnant growth levels in The reason for the increase in production is higher yield per cow, which is expected to increase by 2.5 percent from the year before. We assume in our analysis that normal weather conditions will occur in 1992 and This contrasts to last year's dry summer. Cow numbers, however, will continue to decline in 1992 at the same rate as in 1991 due to a.lower milkto-feed price ratio. Higher prices for feed concentrates are expected due to the sharp reductions in available corn stocks. On the demand side, consumption of milk and dairy products is expected to increase from 1991 levels. Consumption fell slightly during the first half of 1991, but then grew slightly in the latter half. Assuming a continued slow growth in the general economy, milk consumption is forecast to increase by 3 percent in 1992 from year earlier levels. Government purchases of dairy products under the price support program are expected to fall from nearly 10 billion pounds (milk equivalent) in 1991 to 7 billion pounds in
10 Table 2. Forecast of U.S. Milk Supply, Use, and Prices... Government All-milk... Production Consumption purchases price billion pounds $/cwt a Quarter Year Quarter Year Quarter Year ausda estimates. bporecasts provided by the Commercial Agriculture Dairy Model. 7
11 L r L The outlook for 1993 is similar to that of The increase in supply due to continued higher yields per cow will just be met by increases in consumption. Thus milk prices are not expected to grow significantly from current levels given normal or average weather and market conditions (see appendix A for more detail on the U.S. dairy outlook). Financial Outlook for Missouri Dairy Producers The financial outlook for an average Missouri dairy farmer is considered next. We will rely here on the University of Missouri's Management Information Records (MIR) Program. This program collects detailed financial information from Missouri farms that participate in the program. A broad cross section of farm types (crops, hogs, beef, and dairy) are represented in these records. For dairy, however, there are currently only 51 dairy-type farms that participate in the MIR program. An average of 40 of these farms were used to estimate the financial condition of Missouri dairy farms for While these 40 farms may not statistically represent the 8,000 dairy farms that exist in the state of Missouri, they are considered by University Extension as fairly typical of Missouri dairy farms. The MIR records for 1990, plus the forecasts for milk prices developed earlier, are then used to project the fmancial picture of Missouri dairy farms through We assume an average farm of 80 milking cows that produce 15,000 pounds of milk a year for the period based on our MIR records. Our average Missouri farm is assumed to have a percent debt load. The year 1990 was considered a good one for Missouri dairy farmers despite the counterseasonal drop in milk prices in the fall. Producers earned a 9 percent rate of return on their farm investment. Producers were able to cash flow and add to their net worth by the end of the year (for more detail, see appendix B). Earnings in 1991, however, have fell considerably below 1990 levels. The main reason for this was the drop in the average price of milk in Missouri that fell from $14.07 per cwt in 1990 to $12.04 in A hot dry summer also adversely affected milk production as well as hay and forage production and quality. As a result, Missouri dairy farmers are expected to pay more for hay and feed concentrates (mostly corn and soybean meal) in both 1991 and 1992 than they did in Partially offsetting these negative effects were higher beef prices in Missouri dairy farmers typically cull (remove from the herd for sale) 34 percent of their milking herd a year. Cash from the sale of cull cows and young stock at higher prices helped offset the lower milk prices. One concern, however, is that producers who culled at heavier rates last summer in order to take advantage of higher beef prices to help cash flow will have fewer cows in their milking string this year and less earning potential. Another concern is that producers who could not feed adequate levels of concentrates to their dry cows (cows not milking) due to the lower milk prices have reduced the body condition of those cows. That means these cows will produce less milk in 1992 when they are freshened (start milking). Our analysis indicates that returns to capital and management for our average Missouri dairy farm will be 2-3 percent in both 1992 and This represents a significant drop from a high of 9 percent during the period 8
12 With returns on a standard certificate of deposit expected to be in the range of 5-7 percent over the same time period, Missouri dairy producers would earn more if they were to liquidate their assets. Earnings for Missouri dairy farms have typically been above those of crop and beef farms, but below those of hog farms (see figure 6). Our financial analysis indicates that Missouri dairy producers with a debt-to-asset ratio of 20 percent or below will be able to meet cash flow obligations. Assuming $18,000 per year for family living expenses and a 20 percent debt load, our typical or average Missouri dairy farmer will have a $3,000 cash surplus in 1991 and $300 in 1992 compared to $23,000 in Producers above the 20 percent debt level, however, will have trouble cash flowing and will have losses. Again, for more information on our financial forecast for the average Missouri dairy producer, see Appendix B. Missouri Dairy Stabilization Program Senate Bill No. 473 proposes the development of a "Missouri Dairy Stabilization Fund." This fund would be supported by an assessment collected by the Missouri Department of Revenue on the wholesale value of packaged dairy products sold within the state of Missouri. Such products would consist of fluid milk, creams and mixtures, butter, cheese, cottage cheese, ice cream, evaporated and condensed milk, nonfat dry milk, yogurt, and other products manufactured from milk. Each Figure 6. Returns to Capital and Management , , ,------, , +"' C Q) ~ Q) a IlSl Hog Crop-Beef ill Dairy I _._._._... _ -_._._ i I "1~-- -r-, I Source: Missouri MIR Records 9
13 L r L Missouri dealer, processor and wholesaler of such packaged dairy products would pay an assessment on a monthly basis. The assessment rate would determine the size of the stabilization fund. We used an assessment rate of 2.64 percent in our analysis. A smaller assessment rate would result in a smaller fund. A forecast for the fund is provided in table 3 for the years We assume for the purposes of this analysis that the fund was established and operational on January Per capita consumption of U.S. dairy products is forecast first using our U.S. forecast from the Commercial Agriculture Dairy Model (see table 2). Missouri consumption of dairy products is forecast next by multiplying per capita consumption by a forecast of Missouri population (based on trends). Next, wholesale dairy product prices are collected and converted to dollars per pound. We assume for simplicity that these wholesale prices, which are January 1991 prices, will hold for Total Missouri expenditures on dairy products at the wholesale level is then calculated next by multiplying the wholesale price of the product (per pound) by our estimate of the number of pounds consumed. The results indicate that expenditures at the wholesale level for dairy products in Missouri will range between $770-$830 million per year over the period U sing an assessment rate of 2.5 percent would result in an annual Missouri Dairy Stabilization Fund of $19-$20 million. If a 2.64 percent assessment rate is applied, the fund will rise to $20- $22 million per year. Disbursement of Funds Funds will be disbursed monthly to Missouri dairy producers based on a producer's level of milk marketings and on the level of a "target price." This target price will be equal to the average cost of producing milk in Missouri times a rate equal to between.85 and.90. One source suggested for objective information on the cost of producing milk in the state of Missouri is the University of Missouri's Management Information Records (MIR) Program. University Extension provides. annual estimates and future forecasts of milk production costs based on MIR records and projections of prices and costs for the forecast period. A forecast of milk production costs would be needed for purpose of this legislation because of the time delay involved in obtaining final MIR numbers. Therefore, in this study, the cost of producing milk was estimated from MIR record data for 1990 and forecast for the period (see table 4) for an average Missouri dairy producer. While the actual cost of production will vary from farm to farm, estimates thereof are reasonable since most farmers face similar input prices for corn, soybean meal, fuel, etc. The target price would then be determined by the Missouri Department of Agriculture which would be required to set it at between 85 and 90 percent of the average cost of production as determined by the University of Missouri's MIR program. Missouri dairy producers will then be paid on a monthly basis the difference between the annual target price and the M -Won all milk marketed in Missouri. Our estimates for the target price, assuming a discount rate of.1, is between $ and $ over (see table 5). Based on our projections of the 10
14 Table 3. Forecast of the Missouri Dairy Stabilization Fund Units Missouri consumption" Fluid whole milk mil. lbs Cream and mixtures mil. lbs Lowfat and skimmed milk mil. lbs Butter mil. lbs Cheese mil. lbs Cottage cheese mil. lbs Ice cream mil. lbs Evap. and condo milk mil. lbs L Nonfat dry milk mil. lbs Missouri wholesale prices b Fluid whole milk $/gal Cream and mixtures $/pint Lowfat and skimmed milk $/gal Butter $/lb Cheese $/lb Cottage cheese $/24 oz r Ice cream $/half gal L Evap. and condo milk $/12 oz Nonfat dry milk $/25.6 oz Wholesale value of Missouri dairy products C Fluid whole milk mil. $ Cream and mixtures mil. $ Lowfat and skimmed milk mil. $ Butter mil. $ Cheese mil. $ Cottage cheese mil. $ Ice cream mil. $ Evap. and condo milk mil. $ Nonfat dry milk mil. $ Total expenditures mil. $ Stabilization fund 2.5 % assessment rate mil. $ % assessment rate mil. $ "Forecast based on per capita consumption of U.S. dairy products for 1990, forecasts of U.S. milk consumption, and U.S. and Missouri population trends for Assumes Missouri per capita consumption of dairy products is the same as the U.S. average. bsource: Missouri Department of Agriculture and estimates based on retail prices. CAssumes the following conversions: 1 gal. milk = 8.62 lbs.; 1 pint cream =.926 lbs.; 16 oz. cottage cheese = 1 lb.; 1 gal. ice cream = 5 Ibs.; 16 oz. evaporated and condensed milk = 1 pound; 16 oz. nonfat dry milk = 1 lb. 11
15 Table 4. Major Costs To Produce 100 Pounds of Milk in Missouri" Commodity prices: dollars per cwt Com price ($/bu.) Soybean meal ($/ton) Cost of minerals, vitamins, preparation, etc L Concentrate costs Production costs: b L Feed Other cash costs Labor Fixed costs Total costs "Estimates for 1990 from MIR records; forecasts for bcalcu1ated by dividing the major components of cost contained in Appendix C by average milk production in the state (15,000 1bs. per cow) plus the milk equivalent of beef sales (2,300 1bs. per cow). L 12
16 Table 5. Forecast of Missouri Stabilization Payments Item Cost of production ($/cwt.)" ~ Discount rate (percent) Target price ($lbu.) M-W price, 3.5% milkfat ($/cwt.) January February March April May June July August September October November December Stabilization payments ($/cwt)c January February March April May June July August September October November December Annual average Missouri Dairy Stabilization Fund (mil $) Receipt,sd Producer payments" End-of-year balance "See Table 4. bmonthly forecasts for approximated from quarterly projections from the Commercial Agriculture Dairy Model (see Appendix Table A.l). cdifference between the target price and the M-W price. dbased on an assessment rate of 2.64%. 'Stabilization payments times monthly projection of Missouri milk marketings. 13
17 L L M-W, Missouri dairy producers will be eligible for stabilization payments for the months of January through August. The largest payments will be made in the months of February through March, the months of largest decline for the M-W. Our projections of the monthly stabilization payments average cents per cwt on all milk marketed for the year. In other words, had this program been in effect for 1991, producers would have collected payments between January and July at payment rates between $1.22 and $0.25, and nothing for the months of August through December. Dividing total payments from the stabilization program by all milk marketed in Missouri in 1991 would result in an average return of 58 cents per cwt. Assuming an assessment rate of 2.64 percent on the wholesale value of dairy products marketed in Missouri and the target prices presented in table 5, our estimates indicate a positive balance for the Missouri Dairy Stabilization Fund for the years (assuming the program was in effect for 1991). Consumer Impacts The cost of the Missouri Dairy Stabilization Program is expected to be paid for by consumers, and in some cases by retailers who may be reluctant to pass on all of the higher costs to consumers. The level of the retail margin varies from business to business and some retail grocers may be reluctant to pass on all of the higher costs to consumers if it will involve a loss of customers who purchase more than just dairy products. In most cases, however, the assessment for the stabilization program will be passed on from the wholesale to the retail level. The maximum effects of the assessment on consumers is presented in table 6. Retail prices will increase by 5-6 cents per gallon for fluid milk. For a family of four purchasing three gallons of milk per Table 6. Maximum Impacts of the Missouri Dairy Stabilization Program on Consumer Prices in Wholesale Assessment Rate Product Units prices 2.5% 2.64% Whole milk $/gal Lowfat milk $/gal Cream and mixtures $/pint Butter $/lb Cheese $/lb Cottage cheese $/24 oz Ice cream $/half gal Evap. and condo milk $/12 oz Nonfat dry milk $/26 oz. box Assumes that all of the assessment at the wholesale level will be passed on to consumers. 14
18 week, that would mean higher expenditures equal to cents per week or $7.80-$9.36 per year. Conclusions Our analysis of Missouri Senate Bill No. 473 does not assume the repeal of the "Unfair Milk Practices Act." It indicates that the stabilization bill would be funded by an assessment that would ultimately be passed on to Missouri consumers of dairy products. This would translate into a higher retail milk price of not greater than 5-6 cents per gallon. The proposed bill would create a fund of approximately $19-$21 million per year. The "target price" would be set in relation to an objective forecast of the average cost of producing milk in the State of Missouri. We forecast the production costs to be $12.93 per cwt in 1992 and $13.07 in Assuming a discount rate of 90 percent, that would set a target price of $11.64 per cwt in 1992 and $ in We predict an average payout from the fund (on all milk marketed) to be 62 cents per cwt in 1992 and 70 cents per cwt in This report analyzes the short-run implications of the proposed Missouri Dairy Stabilization Fund. What is not considered or analyzed is any intermediate or long-run effects such as the effect of such legislation on dairy cow numbers on the state or on state beef prices. One program detail regarding operation of the fund should be noted. If the objective of the program is to provide a payment based upon an objective forecast of the cost of producing milk, then no payments should be made for any month when the target price is below the announced M-W. If for example market prices were higher than expected and the year ended with a large cash surplus in the stabilization fund, then that balance should be carried into the next year, not paid out. If the fund is disbursed at the end of every year, then payments are not based upon any estimate of the cost of producing milk, only the timing of the payments are. Thus the program should be operated based on three parameters: the assessment rate, the cost of production, and the discount rate. It is recommended that a balance be reached so that funds collected will equal payouts, with a positive ending balance from year to year in order to accommodate a year of low milk prices. 15
19 r L Appendix A L Forecast of U.S. Milk Supply, Use, and Prices for 1992 a.nd
20 Appendix Table A.1. Forecast of U.S. Milk Supply, Use, and Prices for / Item IV IV IV Annual Production (bil. Ibs.) Percent change 2/ % % % % % % % % % % % % % % % Milk per cow (Ib) Percent change 2/ Cow numbers (1,000) Percent change 2/ 3, % 10, % 3, % 1.5% 10, % 3, % 9, % 3, % 9, % 3, % 9, % 3, % 9, % 3, % 9, % 3, % 9,902 -% 3, % 9, % 4, % 9, % 3, % 9, % 3, % 9, % 14, % 10, % % 9, % 15, % 9, % Fann Use Billion Pounds Marketings Beginning commercial stocks Imports TOTAL SUPPLY l Ending commercial stocks Net Removals Total Solids Basis Commercial disappearance Percent change 2/ % % % % % % % % % % % % % % % TOTAL USE Milk Prices ($/cwt) All milk Manufacturing grade Support price, 3.67% fat M-W, 3.5% fat Assessments Milk-feed price ratio (I b) Value of conc. ration ($) / Values prior to the 1 st quarter of 1992 are USDA estimates; thereafter they are forecasts provided by the Commercial Agriculture Dairy Model. 21 Percent change on an annual basis from the same quarter (or year if on an annual basis) a year ago.
21 Appendix B Missouri Dairy Farm Financial Outlook 18
22 Appendix Table B.l. Profit and Loss on an Average Missouri Dairy Farm a Dollars Income Milk 177, , ,500 Livestock 32,785 40,092 32,263 Crop sales 11,800 11,598 12,790 L Other farm income 2,390 2,390 2,390 A Gross cash farm income 224, , ,944 r- Expenses Seed 2,357 2,357 2,357 Fertilizer 9,124 9,124 9,124 Crop chemicals 1,799 1,799 1,799 Crop insurance Purchased feed 53,562 47,970 50,050 Purchased hay 4,392 16,211 7,516 Purchased silage 2,826 3,181 3,783 Purchased AUMs pasture Artificial insemination 2,370 2,340 2,310 Veterinary 4,503 4,446 4,389 Livestock supplies 6,004 5,928 5,852 Livestock marketing 9,085 8,970 8,855 Machine hire 2,353 2,353 2,353 Fuel and oil 8,836 7,952 7,952 Repairs 13,382 13,382 13,382 Hired labor 15,400 15,400 15,400 Farm taxes 1,370 1,370 1,370 Farm insurance 1,655 1,655 1,655 Utilities 4,886 4,886 4,886 L Interest 12,627 11,516 11,180 Miscellaneous 1,164 1,164 1,164 B. Cash operating expense 157, , ,938 C. Net cash farm income (A-B) 66,684 37,505 42,005 D. Depreciation 13,790 13,790 13,790 E. Profit or loss (C-D) 52,894 23,715 28,215 Rate of return on investment 8.8% 2.6% 3.6% a Assumes 80 dairy cows that produce 15,000 pounds of milk each per year. 19
23 Appendix Table B.2. Balance Sheet for an Average Missouri Dairy Fann a Dollars Total assets Current 88,353 99,853 88,353 Intermediate 115, , ,273 Long term 270, , ,823 Non-farm 34,937 34,937 34,937 A Total assets 509, , ,386 Total liabilities Current 1,352 1,352 1,352 Intermediate 53,566 47,617 48,090 Long term 66,069 63,426 60,519 B. Total liabilities 120, , ,961 C. Net Worth (A-B) 388, , ,425 Net worth change Profit or loss 52,894 23,715 28,215 Non-farm income Family living 18,000 18,000 18,000 Income tax and Soc. Sec. 13,865 2,917 4,518 Net worth change per year 21,029 2,799 5,697 Total percent in debt (BI A) 23.8% 21.6% 21.6% a Assumes 80 dairy cows that produce 15,000 pounds of milk each per year. 20
24 Appendix Table B.3. Cash Flow for an Average Missouri Dairy Farm a A Net cash farm income 66,684 37,505 42,005 r B. Non-farm income c. Net cash available (A + B) 66,684 37,505 42,005 D. Family living 18,000 18,000 18,000 E. Income tax & Soc. Sec. 13,865 2,917 4,518 F. Farm interest paid 12,627 11,516 11,180 G. Cash available for principal and interest (C-D-E+F) 47,446 28,105 30,667 H. Scheduled principal and interest 24,310 24,992 30,341 I. Cash surplus or deficit (G-H) 23,136 3, a Assumes 80 dairy cows that produce 15,000 pounds of milk each per year. 21
25 Appendix C Projected Dairy Cow Production Costs for
26 APPENDIX TABLE C.1. PROJECTED DAIRY COW PRODUCTION COSTS IN 1991 (15,000 Lbs. Milk Produced, Fluid Market) 1. ESTIMATED OPERATING COSTS Feed (includes waste): Cow: Grain concentrate, 6500 Forage: Alfalfa hay (55 therms or 54% TON, 2.5 $100 Corn silage, 6.3 T. corn or sorghum $24{f. Pasture, 2 $6/AUM Replacement share: Starter and grain, 950 $11 /cwt Hay, 1.5 T. mixed and grass $50{f. Pasture, 4 $6/AUM Total feed Veterinary and medicine Other livestock materials and services Machinery costs, feed preparation, etc. Utilities Other (insurance, property taxes, R.E. repairs, and miscellaneous) Operating interest (11 %) Total cash costs except labor 2. LABO R COST 3. ESTIMATED OWNERSHIP COSTS Real estate interest, depreciation, and taxes Breeding herd interest 8%) Machinery and equipment interest and depreciation Total fixed costs 4. ESTIMATED TOTAL COSTS 7.25/cwt , , , ""'
27 APPENDIX TABLE C.2. PROJECTED DAIRY COW PRODUCTION COSTS IN 1992 (15,000 Lbs. Milk Produced, Fluid Market) L 1. ESTIMATED OPERATING COSTS Feed (includes waste): Cow: Grain concentrate, jcwt Forage: Alfalfa hay (55 therms or 54% TON, 2.5 $100 Corn silage, 6.3 T. corn or sorghum $24/T. Pasture, 2 $6jAUM Replacement share: Starter and grain, 950 $11 jcwt Hay, 1.5 T. mixed and grass $45/T. Pasture, 4 $6jAUM Total feed Veterinary and medicine Other livestock materials and services Machinery costs, feed preparation, etc. Utilities Other (insurance, property taxes, R.E. repairs, and miscellaneous) Operating interest (10%) Total cash costs except labor 2. LABOR COST 3. ESTIMATED OWNERSHIP COSTS Real estate interest, depreciation, and taxes Breeding herd interest 8%) Machinery and equipment interest and depreciation Total fixed costs 4. ESTIMATED TOTAL COSTS , , ,237 24
28 APPENDIX TABLE C.3. PROJECTED DAIRY COW PRODUCTION COSTS IN 1993 (15,000 Lbs. Milk Produced, Fluid Market) 1. ESTIMATED OPERATING COSTS Feed (includes waste): Cow: Grain concentrate, 6500 Forage: Alfalfa hay (55 therms or 54% TON, 2.5 $100 Corn silage, 6.3 T. corn or sorghum $24rr. Pasture, 2 $6/AUM Replacement share: Starter and grain, 950 $11 /cwt Hay, 1.5 T. mixed and grass $45rr. Pasture, 4 $6/AUM Total feed Veterinary and medicine Other livestock materials and services Machinery costs, feed preparation, etc. Utilities Other (insurance, property taxes, R.E. repairs, and miscellaneous) Operating interest (10%) Total cash costs except labor 2. LABOR COST 3. ESTIMATED OWNERSHIP COSTS Real estate interest, depreciation, and taxes Breeding herd interest 8%) Machinery and equipment interest and depreciation Total fixed costs 4. ESTIMATED TOTAL COSTS 8.15/cwt , , ,
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