WILL $4 CORN SHIFT U.S. MILK PRODUCTION BACK TO THE EAST? C.W. Bill Herndon, Jr. Southern Dairy Conference January 26, 2010

Transcription

1 WILL $4 CORN SHIFT U.S. MILK PRODUCTION BACK TO THE EAST? C.W. Bill Herndon, Jr. Southern Dairy Conference January 26, 2010

2 SO, WHERE DID THIS CRAZY TITLE AND TOPIC COME FROM? From a Hoard s Dairyman s magazine article written by me and published last May 10 th Origins of the idea that milk production could migrate back to the East stemmed from several personal experiences 1. Listening to livestock/dairy producers 2. Working with grazing New Zealand dairy farmers 3. National agricultural/dairy and energy policies observations

3 LISTENING TO LIVESTOCK/DAIRY PRODUCERS About a year ago, participated in a meeting where producers stated $2.00/bu corn has hidden many management problems/errors in their operations Claimed $2.00 corn allowed producers to hide genetic problems, forage quality and pasture management deficiencies, etc., etc.,etc. Producers expected structural changes in livestock sector because of $4.00 corn

4 WORKING WITH NEW ZEALAND - STYLE GRAZING DAIRIES Developed Dairy Enterprise Budgets for large intensive grazing dairies Revealed costs advantages of grazing dairies versus conventional dairies Lower Cost of Production Impacts of reducing amount of feed concentrates fed in dairy rations Realizing eastern states have comparative advantages in grazing dairies

5 COMPARING COSTS OF CONVENTIONAL VS GRAZING DAIRIES IN 2008 MS Conventional Dairy w/500 cows Feed Conc $7.00/cwt or ~50% of Direct Costs Feed Conc+Silage/Hay+Pasture $9.10/cwt or ~ 65% of Total Direct Costs NZ-style Grazing Dairy in MS w/1,200 cows Feed Conc $3.00/cwt or ~25% of Direct Costs Feed Conc+Silage/Hay+Pasture $4.10/cwt or ~ 33% of Total Direct Costs

6 NATIONAL AGRICULTURAL/DAIRY AND ENERGY POLICIES OBSERVATIONS Reviewed previous agricultural policies impacts on dairy producers & milk migration Struggling to understand how energy policies are reshaping agriculture In particular, trying to comprehend these policies detrimental effects on livestock producers Contend that agricultural and energy policies have already & could again cause milk production to migrate, geographically

7 ESSENCE OF THIS HOARD S ARTICLE IS Milk migration from the East to the West over the past 30-plus years has been influenced by agricultural policies i.e. Farm Bills Will offer my ideas about how selected policies facilitated the Western migration Then, offer that current energy policies have precipitated $4.00/bu. corn prices In other words, I believe that milk migration has been and could be policy-induced

8 PLEASE ALLOW ME TO STATE CAVEATS These observations essentially ignore a multitude of environmental, regulatory, financial, economic and the other factors Clearly, these other factors were important influencers on western milk migration Obviously before an eastern migration occurs, these other factors must be considered for BOTH milk producers and dairy processors

9 FIRST REVIEW POLICIES INFLUENCING WESTERN MILK MIGRATION Reduction in milk price supports in the late 1980s and 1990s Lower milk price supports decreased profit margins per cwt which challenged the sustainability of smaller dairy operations Dramatically increased milk price volatility also placed smaller dairies at a disadvantage See graph

10 Monthly Dairy Support vs. MW/BFP/Class III Prices January October 2009 $/cwt $20 $18 $16 $14 $12 $10 $8 Support Meeting the Challenge 2008 MW/BFP/Class III

11 1985 AND 1990 FARM BILLS IMPACTS Prior to the 1985 Farm Bill, crop price supports were provided via loan rates which acted as price floors where consumers paid higher prices above market-clearing (world) prices 1985 & 1990 Farm Bills altered these loan prices allowing farm prices to fall to marketclearing prices and now taxpayers paid support prices as transfer payments to farmers Fundamental change allowed U.S. crop prices to fall to world prices i.e. lower corn prices

12 1996 FARM BILLS IMPACTS 1996 Farm Bill or Freedom to Farm removed all acreage restrictions and allowed farmers to plant crops of their choice Crop farmers received payments based on historical acreages and yields not actual planted acreages and current yields Commodity crops prices were again allowed to seek their market-clearing price levels

13 1996 FARM BILLS IMPACTS (CONT D) Many policy analysts contend that the results of Freedom to Farm were: 1. Increased supplies of agricultural products 2. Exceptionally low farm commodity prices 3. Dramatic reduction in the number of small farms supplanted by fewer, but much larger farms The 1996 Farm Bill initiated an era described as the Industrialization of Agriculture

14 WESTERN MIGRATION OF MILK OUTPUT Each of these policy factors quickened the demise of small, grazing dairies in the East and promoted fewer, larger western feedlot dairies: 1. Utilizing cheap $2 corn and alfalfa 2. Adopting larger breed Holstein cows 3. Environmental, heat stress and many other factors were certainly important, too $2 corn was also a MAJOR contributor to shifting the genetic characteristics and physical size/weight of the U.S. dairy cow/herd

15 EASTERN MIGRATION OF MILK OUTPUT??? Let s shift our attention to what policies could induce a migration of milk production back to eastern regions in the U.S. That is focus on two basic and very important U.S. energy policies

16 $4 CORN AND CURRENT ENERGY POLICIES Continuing political support for corn-based ethanol production propped up corn prices that have remained above $4 Despite market fundamentals The central energy policies promoting cornbased ethanol production and what I have called the Ethanolization of U.S. Agriculture are 1. Blenders tax credit 2. Renewable Fuels Standard (RFS)

17 BLENDER S TAX CREDITS & TARIFFS Various tax incentives have promoted ethanol/biofuel production through RFS: cent/gallon blender tax credit cent tax exemption for alcohol-based fuels cent tax credit for small producers <15MGY 54-cent/gallon tariff on imported ethanol 1. Plus 2.5% ad valorem tax/duty Blenders tax credit has been in place since 1978 when 10% ethanol was called gasohol Why should we think it will go away?

18 RENEWABLE FUELS STANDARD (RFS) December 19, 2007, President Bush signed the Energy Independence and Security Act of 2007 that increases the Renewal Fuels Standard (RFS) to 36 billion gallons by 2022 RFS is a mandate requiring transportation fuel manufacturers to blend a required total number of gallons of alternative fuels 1. Currently, that alternative fuel in almost exclusively corn based ethanol

19 Year Conventional Biofuel Advanced Biofuel Cellulosic Biofuel Biomass Diesel Undiff Adv Biofuel Total RFS (BGY) Ethanol Year

20 Marketing Year INCREASING CORN USE FOR ETHANOL 2008/ / / / / % 45.9% 49.9% 54.6% 57.8% 31.5% 24.7% 18.9% 14.2% 12.4% 10.5% 16.5% 10.5% 18.9% 12.2% 19.0% 12.2% 18.9% 12.8% 17.1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Total Corn Use Feed & Residual Ethanol Other Industrial Exports

21 Corn Balance Sheet 2004/ / / / / /10 Planted Acres Harvested Acres Yield (harv. ac.) Beginning Stocks 958 2,114 1,967 1,304 1,624 1,673 Production 11,807 11,114 10,531 13,038 12,101 13,151 Imports Total Supply 12,776 13,237 12,510 14,362 13,740 14,834 Feed & Residual 6,158 6,155 5,591 5,913 5,246 5,550 Ethanol 1,323 1,603 2,119 3,026 3,677 4,200 Food, Seed, Ind.* 1,363 1,378 1,371 1,337 1,275 1,270 Exports 1,818 2,134 2,125 2,437 1,858 2,050 Total Use 10,662 11,270 11,207 12,737 12,056 13,070 Ending Stocks 2,114 1,967 1,304 1,624 1,684 1,764 Avg. Price $ 2.06 $ 2.00 $ 3.04 $ 4.20 $ 4.10 $ 3.60 * Excluding ethanol production.

22 CORN PRICE FUNDAMENTALS ALTERED Traditionally, the most important factor used to reflect expected corn prices was the Stocks-to- Use Ratio (S/U) which is the percentage of carry-over stocks compared to total corn use For example prior to 2007, S/U near 10-15% usually meant that corn price would be in the $2.50-$3.00 range Under RFS in the past 3 years, a 12-15% S/U ratios has resulted in corn prices near $4.00 RFS has changed the rules in corn markets

23 $/bu Stocks/Use % % % % % % % % S/U MYA Price

24 CORN PRICE FUNDAMENTALS ALTERED Corn market analysts claim that RFS and the anticipation of increased use of corn for ethanol production has altered this basic S/U ratio and corn price relationship Given the long-term RFS mandates of increased corn-based ethanol production there is no reason NOT to believe that $4 corn prices will remain a reality for the foreseeable future

25 RFS INFLUENCE ON LONG-TERM FEEDGRAIN PRICES Jan. 22 Settle $$ July 2011 July 2012 July 2013 CORN $ $ $ SOYBEANS $ $ $ WHEAT $ $ NA Source: FutureSource.com

26 SUMMARY AND CONCLUSIONS If you will agree that the evidence reviewed is convincing and that $4 corn will continue Then, the question dairy farmers must address how to produce milk with $4 corn and be profitable!! My conclusions are forages and grazing will become mainstays in returning profitability to dairy farms

27 SUMMARY AND CONCLUSIONS AND Eastern/Southeastern regions have comparative costs advantages in producing forages for grazing THUS U.S. milk production could migrate back to the East and Southeast but, Dairy cows must be genetically different to be able to graze and a Myriad of other factors must be analyzed Any eastern migration would require decades

28 COMMENTS? and/or QUESTIONS? and/or REACTIONS?