Florida Dairy Industry Market and Policy Revie w

Transcription

1 Florida Dairy Industry Market and Policy Revie w William A. Thomas Professor and Extension Dairy Economist University of Georgia, Athens, G A The frequently asked question is how low will milk prices fall in 1999? While there i s consensus that prices will fall, there are considerable differences in opinions in how low prices wil l get. Why milk prices are falling is basic economics. Record milk prices were experienced in because of milk production problems coupled with relatively strong commercial sales. A very hot summer negatively impacted milk production in much of the Southeast, parts of the Southwes t and particularly California in the west. Milk production totaled billion pounds for 1998, u p only 0.9% from This was the net result of 1.0% less milk cows, and only 1.9% more milk per cow. Commercial milk sales are estimated to being up 1.8% to 2.0% from Milk production started to improve the last two months of Compared to a year earlier, milk production was up 2.4% for the fourth quarter. At that time Florida's production wa s down 4.2%. During the first quarter of 1999 production was 3.3% higher than the first quarter of 1998 and Florida showed a complete turn-around and increased 2.6%. During March the state' s production was up 3.5%. Over the past two months US production increases have been 4%. More favorable weather, relatively cheap feed costs and very favorable milk feed ratio contribute d to this strong increase in milk per cow. Comparing March milk production to a year shows strong production from the southwest to the northwest with production up 15.1% in Arizona, 10.6% in California, 7.9% in Idaho, 7.3% in New Mexico, 4.5% in Washington. Production was up 1.5% in Texas. Each of these states, except Texas and Washington, had more milk cows than a year ago, and all had improved mil k production per cow from earlier months. U.S. production per cow was up just over 4% so far thi s year. The improved milk per cow in California is a major factor in the increase in national milk production. Also milk production in the South continued to show weakness. March production was down 4.5% in Kentucky 1.8% in Virginia. Missouri was down 0.9% in spite of a 6.4% increase in production per cow. But milk is in excess of fluid needs in the southeast and needs to mov e north to find manufacturing facilities. With milk seasonal production increasing nationally and uncertainty about cheese prices, this excess milk is being sold at prices below the BFP. This increase in milk production is finding its way into the production of manufactured dairy products. The increases in milk production, dairy product production and stocks have pushed dair y product prices down. On the CME, 40-pound cheddar blocks were $1.90 per pound. They fell to $1.25 per pound mid-january and started to rebound some in late January. By the end of April, 40-pound cheddar blocks were at $1.30 per pound. Cheddar barrels did weaken and were at $1.24 per pound. The spread between barrels and blocks is close to normal at 4 cents, but th e question is, will blocks hold at their level over the next few weeks? Not likely. We can expect 23

2 some weakening of cheese prices as the spring flush continues. Dairy futures, the BFP future s contracts, have held steady over the last week. They predict the BFP to dip under $11.00 in Jun e but to climb back to $12.00 by August and to stay there for the rest of the year. While futures prices have declined sharply from levels early in the year, producers ma y wish to consider buying BFP PUT options to protect against possible further price declines. With futures prices at lower levels, the premiums for PUT options are also more reasonable. A BFP above $11.00 for May would be a nice surprise. Remember that the May BFP was $10.88 in and $10.70 in The BFP's for the immediate months ahead are nearing or are slightly abov e the averages for the past 5 years. But with anticipated relatively low grain and concentrate prices, while down from recent months, the milk feed-price ratio will still remain favorable to increase milk production. The average BFP for 1999 could be around $12.25 compared to $14.20 for 1998 an d $12.05 for This assumes favorable weather this summer and fall and good crops. Milk production for the year is expected to be up more than 2% and commercial sales up less than this, about 1.8%, resulting in milk prices averaging less than 1998, but close to the 1997 average. As of April 30th, the CME BFP April settled at $11.59 per hundredweight. USDA' s March Agricultural Prices Report suggest that March payments in Minnesota and Wisconsi n exceeded the $11.62 BFP If so, the April BFP could get a $ boost. Several charts follow that were used in this presentation at the conference. 24

3 Percent Change in SE Cows & Productio n Jan-Mar Production Cows AL AR Fl GA KY LA MS -6A -9.3 MO NC Sc TN VA US o lame s sums lasso US & Southeast Milk PMudion. 190,98 nu nn // 1M Ins kn. teaa o n , $0 0 12,00 0 1Ua Southeast Mllk Production as a Percent of Annual Averag e tan trots Daily Milk Production as a Percent of Annual Averag e Florida Daily Milk Production as a Percen t of Annual Average a % 1ma 110%,,.1 February APi rw, N.,w..w. Wood %...~.e.,,e.. e«.~.. 0, bn a.v..,. J. Set. Yerm[a Aug. Oda. 0...A.. 2 5

4 FLORIDA CLASS I MILK PRODUCTION & SALE S Millions 1998, Orders 6, 12, & Total Fluid Sales FL Productio n Thomas : 99outlook -7 Source: USDA. Atlanta MA Other Source s Florida Class I Sales Florida and Non-Florida Plants,199 8 Thomas : 99outlook-8 Source: Atlanta MA 26

5 HIGHLIGHTS OF THE FEDERAL ORDER REFOR M FINAL RULE ' Consolidation - 31 orders merged into 11. Only minor changes made in southern order s from the initial proposal. Classification - four classes are proposed : Class I still contains fluid milk products, including eggnog (from Class II). Class II still contains soft manufactured products. Class III contains most cheese, includin g cream cheese. Class IV replaces Class III -A and would include butter, nonfat dry milk, and whol e milk powder. Class I Pricing - The rule recognizes that the value of milk differs by location. The Class I price surface relies on an mathematical mode l rather than the current differentials. It is marketoriented and will rely on the market to generate higher prices to attract sufficient milk to market. The final rule was based on Cornell University & USDA models. This price surface is somewha t flatter the current. It is basically Option 1B with 40 cents added to all differentials. Comparisons of Class I Differentials City Final Current Diff. Atlanta Charleston Charlotte Baton Rouge Birmingham Greenville Jackson Little Rock Memphis Miami Mobile Nashville New Orleans Springfield Tampa Basic Formula Price - In seven of the 1 1 orders, milk will be priced on the basis of butterfat, protein, and nonfat solids components. In four markets (SE, FL, App, & Az-LV) milk wil l be priced on the basis of skim milk and butterfat. Separate product price formulas will replace th e current BFP and butterfat differential, includin g three butterfat prices and four skim prices. Each Class price is a formula based on the price of manufactured dairy products as estimated i n surveys conducted by the National Agricultura l Statistics Service (NASS). Competitive pa y prices will no longer be used. One criteria fo r this process was that manufacturing milk prices would not be very different from the current BFP and that the pricing mechanism be made simpler. Class III prices are estimated to average 47 cents/cwt less than the BFP. The Class IV price will average 4 cents less than the III-A and the Class II one cent more. Prices Announced On The 5 0 Of The Following Month (April prices announced i n May 5th ) Class IV Skim based on NASS nonfat dry milk prices. Class III Skim based on NASS cheese and dry whey prices. Will now include bot h barrels and blocks and weighted by sales. Class IV & III butterfat based on NAS S butter price survey. Class II butterfat equal to Class IV & II I butterfat plus $.007 per pound as a Class I I differentia l Prices announced in Advance on the 23 6' of the previous month (April prices announced o n March 23'") Class l price will be announced 7 days in advance. Class II Skim is the Class IV skim formula, using the survey prices for the most recen t two weeks available (this will usually be th e first two weeks of the previous month), plu s 70 per cwt. Class I Skim is the higher of the Class Ill or Class IV skim price formula, using the surve y ' William A. Thomas, Extension Economist, The University of Georgia College of Agriculture & Environmental Sciences, based on information from FO #7 Market Administrator, April 15,

6 a prices for the most recent two week estimate, plus the Class I differential. Class I butterfat is the Class III/IV butterfat formula, using the survey prices for the most recent two weeks, plus the Class I differential. Shrinkage modified and each plant will g o from lowest valued class for that month to the highest value for individual plant. Identical Provisions - Many provisions are made identical for all orders. They ar e contained in the General Provisions which appl y to all the proposed marketing orders. The proposed changes establish : o Standardized definitions. o Modem order language. o Uniform reporting and classificatio n standards. Uniform pricing methods. Unit pooling in all markets ( new to FL ) o Allocation procedures (similar to curren t ones). Southern Provisions - Each order still has provision unique to specific orders. Transportation Credits are retained in th e Appalachian & Southeast Order. Producer Payments in the Appalachian and S Southeast Orders, with partial payments at 90 % of previous month's uniform price and dates moved up for Appalachian order. The Florida order will have three payments, with partia l payments at 85 percent of the previous month' s uniform price, adjusted for location. o Plant pooling requirements remain simila r to the present orders. Supply plants are required to ship eac h month. There are no provisions fo r automatic pooling in the southeaster n markets. a Market performance by a cooperative association is required in order to qualify the cooperative's balancing plants locate d in the marketing area. o Producer association with the market - existing'touch-base requirements and diversion limitations are left substantiall y intact. MA has some discretionary authorit y to set requirements Voting - producers will vote on the 1 1 proposed orders in a up-or-down vote. A twothirds vote is required. Co-ops will be allowed to block vote. The exact time of the vote has no t been set but probably in August The ne w orders are scheduled to go into effect October 1, CONSOLIDATE D FEDERAL MILK MARKETING ORDER AREA S Agwbn,Mariwug Snot. D oty Program* DIFFERENCES IN SIADING MERELY WRVET O DIFFERENTNTEEErNEEN MMYETING AREAS

7 Impact on Florida Orders Class I differential +.32* Class I price mover (+.20x85%) +.17 Class II price (+.Olx 7%) Class III price (-.47x7%) -.03 Consolidation.00 Net Impact +.46 * This is not an average, only a example using Tampa pric e Thomas: 99outlook -25 Remember : The real impact is determined by impact on Net Price - includin g Premiums Premiums are determined by cost of alternate supplies - not the cost of loca l supply Fl order price may go up but if price i n supply areas go down everyone has a problem. Thomas: 99outlook

8 COMPARISON OF DALLAS & ATLANT A PRICES ATLANTA DALLA S CURRENT DIFF $3.08 $ PREMIUM NET PRICE FINAL DIFF PREMIUM NET PRICE Needed price decline _1,06 Thomas : 99outlook -2 7 COMPARISON OF ATLANTA & TAMP A PRICES TAMPA ATLANTA CURRENT DIFF $3.88 $ PREMIUM NET PRICE FINAL DIFF PREMIUM NET PRICE Needed price decline _1,06 Thomas : 99outlook