Demand Collapse Differentiates Current Dairy Crisis from 1970s’ Slump

October 22, 2009 07:00 PM
 

The current dairy crisis shares one characteristic – and shows one important difference – with the industry's 1972-77 downturn, says dairy economist Dale Leuck with USDA's Farm Service Agency.

 

The similarity is that both crises were at least partially precipitated by sharp increases in dairy feed costs, Leuck writes this week in USDA's Dairy Market News.

 

The major difference between this year's crash and the 1972-77 depression is that the current collapse in the all-milk price was brought about partially by the drop in world demand and partly by decreased domestic demand as a result of the U.S. recession.

 

The milk-feed-price (MFP) ratio, a widely used indicator of profitability in the dairy sector, reached its lowest level in nearly 35 years in May 2009. At 1.5, the MFP dropped below its long-term average of 2.74, set during 21 consecutive months from January 2008 through September 2009. May's 1.5 MFP was comparable to its level in August 1974, Leuck says.

 

Though of shorter duration than the 1970s' slump, "the present crisis may rank as at least a close second, as the worst dairy crisis in more than 35 years, before the MFP returns to a more normal level,” he adds.

 

In response to the current crisis, dairy producers must not only adapt to higher feed prices but also to international demand, which is unlikely to return to the 2007 level in the near future because of slower global economic growth and a resumption of more-normal dairy production in Oceania.

 

While milk prices are forecast to increase and feed prices are expected to remain low relative to early-2009 levels for the remainder of this year and through at least 2010, the MFP ratio is unlikely to exceed 2.74 before the end of 2010, based on October WASDE forecasts.

 

"The MFP ratio would therefore remain below its long-term average for at least an additional 15 months,” Leuck writes. "Added to the 21 months from January 2008 through September 2009 in which it has already been below its long-term average, that would place it at least 36 months below its long-term average, making this crisis a close second as the worst dairy crisis in more than 40 years.”

 

The August 2009 Farm Income release from USDA's Economic Research Service projects average net dairy farm income down 94%  in 2009, to $9,200 from $152,000 in 2008.

 

Read Leuck's full report on page 9 at /files/dywweeklyreport.pdf.

 

Catherine Merlo is Western editor for Dairy Today. You can reach her at cmerlo@farmjournal.com.

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