1. Potential Impacts From the Growth of New Mexico Dairies By Terry L. Crawford USDA-ERS at “Dairy Fair” At ENMU-Roswell, New Mexico August 7, 2000

2. Key Factors to Consider Changes in the U. S. Dairy Industry Changes in the South West Dairy Industry New Mexico prospects Impacts on New Mexico resources Planning for growth

3. Changes in U.S. Dairy Industry FMMO Reform Scheduled Removal of Price Supports NAFTA reductions in trade barriers with Mexico Technology Growth European type of Cheese Consumption

4. Federal Milk Marketing Order Reform

6. The Classified Pricing System Class I =Class III + a regional differential Class II=Class III + a national differential Class III (market clearing price) Class III-A (market clearing price) Fluid milk products soft products (ice cream, yogurt) Cheese and butter Nonfat dry milk

7. What did Congress direct USDA to do? Required: –Consolidate the present order system into no less than 10 and no more than 14 orders

8. What did Congress direct USDA to do? Allowed: –California may join the order system –Change in Class I price surface –Use utilization rates and multiple basing points in establishing Class I differentials –Use component pricing in establishing one or more Basic Formula Price (BFP)

9. What has AMS done? Consolidated the 31 orders into 11 orders Proposed 4 options on the price surface Changed the Classified pricing system Proposed uniform regulations ( these are different in each order)

18. Changes in the South Western Dairy Industry Texas production growth slows Texas environmental issues Increasing Texas Demand/Supply imbalance provides opening for NM production. Near term lower prices due US production response to previous higher prices.

19. New Mexico Prospects Has the resources to support 50 to 100% more dairy cows, if developed carefully. Increasing environmental limitations. Critical location decisions for both plants and dairies. If growth continues at the pace of the Ninties, could match Texas output in 5 to 6 years becoming the 7th largest dairy state.

20. NM Growth Scenario For the past 10 years NM has added an average of 16,000 milk cows per year. If NM only averages 10,000 cows per year and Texas and Washington continue to grow at current rates, NM will match Texas in 5 to 6 years, and surpass Washington and Michigan.

21. NM Growth Scenario Continued Cows will increase from 246,000 in June, 2000 to 290,000 in 2005 or 2006. Milk production will increase from 4.7 billion pounds in 1999 to nearly 6 billion lbs. in 2005/6; even as the rate production growth slows down. Will need 22 to 32 new dairies, 2 to 3 new cheese plants the size of F&A or Lovington.

23. NM Growth Scenario Continued Most of the added milk will need to be used by manufacturing because of limited fluid market growth. This will cause lower blend prices as manufacturing utilization increases for the Southwest FMMO. Or markets in Mexico need to be developed for fluid or manufactured products.

24. Impacts on New Mexico resources An additional 50,000 milk cows will require: –75,000 to 100,000 acres of production of hay and silage. –25-35 large dairies and 700 workers –2 to 3 plants equivalent to at least half of LePrino’s plant size and employment –Plus import of grain and concentrate from other regions.

25. Planning for growth Environmental consequences Water use for cows and forage Development of community college level programs of study for dairy herd management and food technologists to supply dairies and plants with a trained supply of workers Capital acquisition and tax structure

29. Additional Slides If Needed

30. Federal Milk Marketing Order Reform “Milk “ says USDA’s Chief Economist Keith Collins, “can give you a headache.” - Wall Street Journal

31. What is the Federal Milk Marketing Order System? FMMO’s were established in the late 1930’s –Farmers had few outlets for their milk –Poor roads –There was little or no refrigeration – Milk moved in 10 gallon cans –The concerns at the time were “market power” and “equity”

32. What do FMMO’s do? FMMO’s set monthly minimum prices paid by first handlers of milk, by use. Handlers are required to pay these minimum prices into a “pool” A weighted average (blend) price, based on use, is paid to farmers from this “pool” FMMO’s align prices to encourage the movement of Milk

33. Milk pricing options

34. Classified pricing changes under the Federal Milk Marketing Order Reform New proposalOld systemClass I price = Class III price (national price) +Basic Formula Price (national price) +Class I differential (order specific)Class II price= Class IV price(national price) +Basic Formula Price + $0.70 (national)$0.30 (national) Class III price (national)= Basic Formula Price (national)= formula based onMinnesota-Wisconsin Grade B price butter, cheese, and whey pricesupdated by butter and cheese price formula Class IV price (national)=Class III-A (national)= formula based on butter and formula based on nonfat dry milk prices and nonfat dry milk pricesthe butter fat differential

35. What are the economic impacts of order reform Change in the utilization rates-effect of consolidation –Merged orders may change the utilization rates of different classes Intra-order zone pricing-effect of consolidation –within orders locations (plants) have different blend prices, based on distance from the main demand point

36. Intraorder pricing

37. Class I differentials-effect of the price surface The basic economic principle behind the FMMO’s is price discrimination –Fluid milk has the most inelastic demand and is assigned the highest price in the system. –Manufacturing milk is more elastic therefore additional milk is moved onto this market. –The higher the Class I differentials, the higher farmer income and the higher consumer costs

38. Discriminatory pricing Pd Pe Pdm QdQe Qd Se D Sd

39. Formula pricing input markets and price discrimination Class I and II prices are based on fixed differentials added to the Class III and IV prices. Class III and IV prices are formula driven based on output prices Rule 1 of price discrimination: –allow at least one market to clear