Supply Management Won’t Eliminate Dairy Volatility
Apr 11, 2011
Not only does Cornell University data confirm it, but such programs could also impede our ability to become consistent and reliable suppliers to export markets.
The past decade’s volatility in dairy markets was unheard of during your father’s dairy career if it spanned the 1960s, ‘70s, ‘80s and ‘90s. But wild price swings were not new or foreign to your granddaddy or your great granddaddy.
In fact, there were periods in the early 20th century that mirrored today’s roller coaster ride of prices. And their effects were likely as nauseating.
Andy Novakovic, professor of ag economics at Cornell University and the chairman of National Dairy Industry Advisory Committee, presented a history lesson and provocative analysis of U.S. dairy markets at the Association Milk Producers, Inc. annual meeting a few weeks ago. His data show that milk price volatility was not tamped down until dairy price supports effectively floored and capped milk prices in the 1960s. What this suggests, says Novakovic, is that aggressive (and I would add sometimes very expensive) federal dairy policy can dampen volatility.
Raging federal deficits (déjà vu all over again) in the 1980s led President Reagan to conclude that the country could no longer afford billion-dollar annual dairy expenditures. Those high support prices, automatically increased every six months, only produced dairy surpluses that had no markets to stomach them.
Once those price supports were ratcheted back, glimpses of increasing volatility emerged. (See chart.) But only twice in the 1980s did milk price increase or decrease 10% or more from the previous year. Since 1996, however, two out of every three years have seen price changes of 10% or more. In five of those years, price changed 20%. And in three of those five, prices changed 30% or more.
So what changed in the mid-90s? Federal Order reforms kicked in as did the Uruguay agreement of world trade talks. All of a sudden, U.S. milk prices were more closely linked to market conditions and, more importantly, ocean-going supertankers were beginning to ferry more and more dairy products over the seven seas. The result, today, is that some 13% of U.S. milk solids are now sold internationally. The U.S. is becoming, if it has already not become, export market dependent.
The other intriguing fact of Novakovic’s analysis is that since 1995, the U.S. has been slightly milk deficient. He defines milk surplus (or deficiency) as simply the difference between milk marketings and commercial disappearance. And since 1995, we’ve needed to import a few percentage points simply to meet commercial disappearance demand.
The most fascinating part of the chart, however, is that regardless of our constant deficit production, milk prices started behaving erratically: Up 15% in 1996, down 10% in 1997, up 15% in 1998 and on and on and on. It’s becoming clear that milk prices in the U.S. are becoming less dependent on domestic production and consumption and far more dependent on global economic shortages or demand shocks.
2009 was the classic example. Even though U.S. fluid milk and cheese sales increased, and casein, MPC and cheese imports were at their lowest levels since the mid-2000s, milk prices still dropped 30%. What happened? U.S. exports plunged 35% on a tonnage basis and 50% on a value basis during the global recession.
What is also apparent is that supply management programs that attempt to ratchet back U.S. milk production will have minimal, if any, effect on price volatility. What’s more likely is that such programs could impede our ability to become consistent and reliable suppliers to export markets, reinforcing our sullied reputation as last in, first out marketers. In a globalized market, that’s not a good place to be.