2007 Dairy Outlook Dr. Tommie Shepherd Center for Agribusiness and Economic Development
Georgia began 2007 with 283 dairies, which are expected to produce just under 1.4 billion pounds of milk during the year. The number of dairies in the state has declined by about 5% annually over the past decade, from 489 in 1996 to 296 in 2006. As farm numbers have declined, the average farm has increased in size from 200 to 250 cows, or by about 1.7 million pounds of milk produced annually. Averages may, however, prove misleading. The actual number of 200 to 250 cow dairies has declined in recent years, while the greatest increases have been in dairies consisting of 750 or more cows. Growth in the number of large dairies has not been sufficient to offset the loss of numerous smaller ones. In total, Georgia’s dairy herd has declined by about 2% annually, from 95,000 cows in 1996 to 76,000 in 2006. Over the same time period, this decline was offset to some extent as milk per cow grew from 55 to 62 lbs./cow/day. The net effect on Georgia’s total milk production has been a slow, but steady erosion of about 8 million pounds or .05% per year, from 1.47 billion lbs. in 1996 to 1.39 billion lbs. in 2006.
Milk production is highly concentrated in the central and southwest parts of the state, where the top five milk producing counties are home to 44% of the state’s dairy herd and produce an equivalent percentage its total milk production. About half of all milk produced in Georgia goes to supply fluid milk bottling plants in the state, while the remainder is transported south to the Florida market.
Although Georgia’s Dairy Industry is primarily a local industry that supplies fluid milk to local markets, local milk prices are increasingly influenced by regional, national, and even international supply and demand conditions for dairy products. Despite the fact that per capita fluid milk consumption has been slowly eroding for decades, demand growth for manufactured dairy products, most notably cheese, has boosted overall demand for milk at rates that have kept pace with average national production increases of 2% annually. Federal Order milk prices are minimum prices determined by Federal Milk Marketing Order policies that tie local milk prices to national dairy commodity market conditions. National conditions may in turn, be influenced by global dairy markets. In addition to milk prices, production costs also play a significant role in determining both production levels and dairy farm profitability. Production costs are highly dependent upon feed prices, which are influenced by crop conditions, existing stocks of major feed stuffs, and more recently in the case of corn, by demand from the ethanol industry. A number of regional, national, and international dairy market fundamentals will influence milk prices and production in Georgia during 2007.
Global Markets Will Influence Georgia’s Dairy Industry in 2007 Depressed milk production in Australia and New Zealand, both major exporters of dry dairy products, coupled with a strong international demand for skim milk powder, whey, and whey protein concentrates increased demand and bolstered prices for U.S. exports of these products during 2006. As a result, U.S. stocks are significantly reduced from typical levels. These trends will likely extend through 2007, with the result of
bidding up U.S. prices for dry dairy products to even higher levels. Increased domestic prices for these products factor into Federal Milk Marketing Order pricing formulas, leading to increased Federal Order minimum milk prices for Georgia’s dairy farmers.
U.S. Market Conditions Suggest Slower Growth – Higher Milk Prices Domestic dairy market conditions suggest that farm milk prices will rise in 2007 as the rate of growth in milk production slows. The nation’s milk supply grew rapidly during the first half of 2006, before moderating to more typical levels during the second half. This supply growth lead to depressed milk prices, which dampened the incentive for significant expansion going into 2007. Increased milk supplies in 2006, coupled with flat sales of fluid milk, lead to increases in production of storable manufactured dairy products such as cheese and butter. Predictably, domestic supplies of these commodities expanded during 2006. The resulting growth in stocks of these commodities will serve to cap the up side potential that milk prices could realize during 2007 from slower milk production growth. The likelihood of higher corn and soybean prices in 2007 will increase feed costs for dairy farmers across the country, further depressing the rate of growth in milk supply and placing additional upward pressure on prices, while simultaneously reducing overall farm profitability. At a national level, milk production can be expected to grow at a rate of between 1.2% and 1.4%, compared to 2.7% in 2006. Milk prices can be expected to increase by 12% to 15%, and feed costs may rise by between $.50 and $1.00 per hundred pounds of milk (cwt.)
Georgia Will See Higher Milk Prices - Declining Production Georgia is located in the Southeast Federal Milk Marketing Order. As a part of the Federal Milk Marketing Order system, milk prices in Georgia are tied to national prices for manufactured dairy products and adjusted upward to account for the fact that the state is “milk deficit” (i.e. consumes more milk than it produces). Milk prices in Georgia will follow the national trend of increasing by an estimated 12% to 15% above the 2006 average of $13.89 per hundred pounds (cwt.) and 6% to 8% above the 5-year average of $14.69/cwt. Georgia’s milk production will likely continue its slow but steady decline despite higher prices as the underlying fundamentals driving state trends remain in place. Increasing input costs will reduce profitability as feed and energy costs rise, competing off-farm employment opportunities bid up labor cost, and urban encroachment in the northern part of the state causes farmland to be more valuable in alternative uses. Several changes and proposed changes to federal dairy policy have the potential to impact milk prices and production in Georgia during 2007. Increases in Federal Order manufacturing allowances go into effect in February that will reduce minimum milk prices in the south by an estimated .22 cents/cwt. as manufacturers retain more of the revenue generated from sales of cheese, butter, milk powder, and whey. Proposals were heard by USDA in December, 2006 that, if adopted, would have an offsetting effect by increasing the price of milk bottled for fluid consumption. Additional Federal Order changes that reduce the amount of milk from outside the region that may participate in the southeast pricing pool as reserve supply may also increase prices for Georgia producers by several cents per hundredweight. The next U.S. Farm Bill will likely begin to be debated in 2007 and may also address dairy policy, with
the most probable change for dairy being elimination of the Milk Income Loss Contract (MILC) program, which pays an additional subsidy to producers when milk prices fall below a target level. This program has been criticized for working counter to the Commodity Credit Corporation’s Dairy Price Support Program.
Summary Milk prices will rebound from the depressed levels of 2006, as growth of the nation’s milk supply slows from its year earlier pace and national, as well as international, market conditions serve to buoy dairy commodity prices. In 2007, Georgia producers should see prices average between about $15.50 and $16.00 per cwt., 12% 15% above 2006 and 6% - 8% above the 5-year average. The beneficial impact to producers of increased milk prices will be partially offset by rising feed and energy costs which will squeeze margins and reduce dairy farm profitability in spite of higher milk prices. State milk production will likely continue its slow but steady decline as small farms continue to exit the industry. Numerous changes and proposed changes to Federal Dairy Policy have the potential to significantly impact milk prices and production in Georgia during 2007. However, the potential for countervailing effects from the various possible combinations of such policy changes make it impossible to anticipate their net impact.
Projected 2007 Southeast FMMO Minimum Prices
$17.00
$16.00
$15.00
$/cwt
$14.00
$13.00
$12.00
2006
$11.00 Jan Feb Mar Apr May
2007(est)
Jun Jul Aug
5-Year Avg.
Sep Oct Nov Dec
Georgia Milk Production: 1996 – 2006
100
Billion Lbs.
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
200
300
400
500
600
0
19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06
1.6
19 96
19 97
19 98
19 99
20 00
20 01
20 02
Number of Georgia Dairy Farms
20 03
20 04
20 05
20 06