Dairy Price Volatility Increasing

May 10, 2010 06:38 AM
 
 
Volatility in dairy prices has now reached record levels, according to Dairy Policy Briefings pulled together by the Universities of Missouri and Wisconsin.

In the 1980s, the high milk price of the decade was $16/cwt. while the low was $11.30, a difference of $4.70. By the decade of the 2000s, the spread had increased to $10.90.
 
There are three key factors to this increasing volatility, say authors and dairy economists Scott Brown, University of Missouri, and Ed Jesse, University of Wisconsin:
 
• Domestic dairy policy. "Lower support prices along with the absence of buffer stocks contributed to much of the increased volatility experienced in the late 1990s,” they say. In addition, the lag time in transmitting price changes to farm level milk prices as a result of Federal Order pricing formulas also were a contributing factor.
 
• Dairy export policy. "The addition of new markets is thought to reduce risk and should therefore help decrease volatility,” say the authors. But when access to those markets is inconsistent, such as the demand shocks of the 2007 through 2009 experience, volatility can actually increase.
 
Larger, specialized dairy farms. "The need to service debt means that idling these [large, specialized] facilities is not an option; they usually remain in operation until their owner exits the business,” say Brown and Jesse. "Even then, the facilities often change owners and stay in milk production since few alternatives exist.” The result is more milk production which prolongs and intensifies periods of low milk prices, a factor in increased volatility.
 
For the complete Policy Briefing on Volatility, click here.
 
For the entire series of 11 Briefings, click here.
 

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