Wisconsin and National Dairy Policy:

Challenges and Opportunities

Mark Stephenson, Ph.D.
Director of Dairy Policy Analysis
 Background
Use policy to fix problems that the market or an individual
can’t
Standards of identity
FMMOs
Price Support Program

Policy fails when it does too little or tries to do too much

Eg. Price Support Program

Policy does not determine the end result—only the path that
the market takes
Can help speed up or slow down the trail to the end result
What Is Special About Milk?
It’s perishable
It’s bulky
It’s produced and must be sold 365 days a year
Specialized assets for production
Many more sellers than buyers
Relatively inelastic demand for products
Historically led to “destructive competition”
What’s the Big Problem Today?
Milk price?

What aspect of price?

Volatility?
Certainty?
Adequacy?

If adequacy, for whom?

 $10.00
$12.00
$14.00
$16.00
$18.00
$20.00
$22.00
$24.00
$26.00
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
US All Milk Price

Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Milk Prices Have Been Range-Bound
Is This a Problem for Everyone?
We see a $10 range every year in the
cash costs of production on WI
dairy farms.

20% of farms have cash flowed

right through this trough

30% have had to borrow more

30% have had to restructure loans

20% are in real trouble.

 The Importance of Dairy Trade
$26
16%
Exports US All Milk Price $24
14%
$22

Dollars per Hundredweight

Percent of Milk Production

12%
$20
10%

$18
8%

$16
6%

4% $14

2% $12

0% $10
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
 How Bad Is It?
Wisconsin Dairy Farm Attrition Rate
10.0%

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

2016 2017 2018 2019

 Fewer U.S. Dairy Farms
U.S. Licensed Dairy Herds
75,000

70,000

65,000

60,000

55,000

50,000

45,000

40,000

35,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
 Millions of Pounds

140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
U.S. Milk Production

2006
2007
2008
2009
2010
2011
More Milk Production

2012
2013
2014
2015
2016
2017
2018
 Census Change in Operations
Numbers of Operations by Herd Size
120,000
100,000
80,000
60,000
40,000
20,000
0
1997 2002 2007 2012 2017
10 to 100 100 to 500 More than 500
 Census Change in Cows
Numbers of Cows by Herd Size
10,000,000

8,000,000
6,000,000

4,000,000
2,000,000
0
1997 2002 2007 2012 2017
10 to 100 100 to 500 More than 500
 Structure Is Changing
225000.00

200000.00
Milk Producrtion in Millions of Pounds.

175000.00

150000.00
2000+ Head

125000.00 1000-1999 Head

500-999 Head
100000.00 200-499 Head
100-199 Head
75000.00
50-99 Head
30-49 Head
50000.00
1-29 Head

25000.00

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
 Average ROA by Herd Size
20

15
% Return on Assets

10

-5
<200 cows 200-499 cows 500+ cows
Average Debt to Asset Ratio by Herd Size
55

50

45

40
%

35

30

25

20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

<200 cows 200-499 cows 500+ cows

 The Progression…
Good cow Profit and
manager + incentive to
hard work do more of it

Good Profit and

people incentive to
manager do more of it

Good finance Profit and

and business incentive to
manager do more of it
 Large farms are 1 part scale
economies and 9 parts self-selection
 Social Engineering
Dairy Margin Coverage Program
Tier 1 coverage is
Coverage Level Tier 1 Tier 2
cheap at any level Threshold DMC DMC
Qualifying
If you are a larger farm Production 5 M lbs. or less above 5 M lbs.
$4.00 $- $-
(more then 5 million $4.50 $0.0025 $0.0025
lbs PH), always pick $5.00 $0.0050 $0.0050
$5.50 $0.0300 $0.1000
$8.50 or above $6.00 $0.0500 $0.3100
$6.50 $0.0700 $0.6500
Cover as much Tier 2 $7.00 $0.0800 $1.1070
$7.50 $0.0900 $1.4130
as you want at $5.00— $8.00 $0.1000 $1.8130
it’s cheap catastrophic $8.50 $0.1050 n.a.
$9.00 $0.1100 n.a.
coverage $9.50 $0.1500 n.a.
Where is the milk?
Where are the people?
Where is milk needed?
 Where is milk needed?
40000

30000

20000

10000
Millions of Pounds

0
2007 2009 2011 2013 2015 2017
-10000

-20000
NE SE MW WE

-30000

-40000

-50000
Location & Volume of Dairy Plants
 Improved efficiency
Annual U.S. Milk Production per Cow
25,000

20,000
Pounds per Cow

15,000

10,000

5,000

0
1960 1970 1980 1990 2000 2010
Consider trends in top four states
70
Average Daily Pounds per Cow

65

60

55 California
Wisconsin
Idaho
50
New York

45
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
 Degree Celsius

-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940

Above Average
1945
1950
1955
1960
1965
Below Average

1970
1975
1980
1985
1990
1995
History of Global Surface

2000
2005
2010
Temperature Anomaly Since 1880

2015
Temperature Extremes
New Federal Report
 FMMO Milk Use Has Changed
140,000

120,000

100,000
Manufacturing Milk
80,000
Class I Milk
60,000

40,000
Class I
32%
20,000

0
Class I
1947

1968

1974

1995
1950
1953
1956
1959
1962
1965

1971

1977
1980
1983
1986
1989
1992

1998
2001
2004
2007
65%
Not Much Money in FMMOs
A $3 differential on top of a $5 manufacturing price when
Class I utilization is more than 60% was a lot of money
(26% of your milk check)

A $3 differential on top of a $16 manufacturing price when

Class I utilization is less than 30% is not so much money
(5% of your milk check)

In regions like the Upper Midwest or California the value is

much less (about 1%)

Processors need relief in the make allowance

Do farmers have as much reason to fight for FMMOs?

Product Price Formula Issues
Processors need relief in the make allowance
Find relief with lower premiums
Find relief full or partial de-pooling

Negative PPDs

Milk doesn’t flow easily across different classes

Farms absorb almost all of the volatility

 In Summary…
What problem are you trying to fix with policy?

Is this a problem for everyone?

Will the policy have a social engineering aspect?

Who will care about the solution?

Consumers will always have all of the dairy products
they desire at very reasonable prices.