At the beginning of the year, we said the dairy markets might turn around by midyear.
Well, midyear is here: Congress is holding hearings to review "the economic conditions facing the dairy industry,” industry groups are scrambling for solutions to the crisis on the farm, and the return of profitable milk prices now looks like it might not come until 2010.
Because of the pricing structure and the various add-on programs in place, the market signals have been slow to reach the farm. Co-ops began selling surplus milk powder to the government in October 2008, but in the fourth quarter of 2008 dairy farmers were still getting $17/cwt. for their milk. It wasn't until February 2009—five months after sales to CCC started—that the All-Milk price fell below $12.
By then, rumors of a major Cooperatives Working Together herd retirement began to surface, prompting some producers to delay culling decisions. For smaller producers, Milk Income Loss Contract payments cushioned the impact of low prices as well.
And so in the first half of the year, U.S. milk production—despite historically low profitability—increased 0.3% (adjusted for leap day). This growth comes on top of four uninterrupted years of expansion in which U.S. dairy producers added 318,000 cows and increased milk production by a staggering 19 billion pounds from 2004 to 2008 (see chart).
This year's production growth, albeit small, has occurred against a backdrop of crashing export markets. The U.S. Dairy Export Council (USDEC) estimates that more than one-third of that massive milk production growth over the last four years went into exports. Now those overseas markets are mostly out of reach, due in large part to tremendous expansion in New Zealand.
The Kiwis grew milk production by nearly 10% in the year ending June 2009, a gain of 3.3 billion pounds of milk. Since about 94% of New Zealand's milk production is sold overseas, virtually that entire extra portion has been peddled on the world market.
"Entering the second half of 2009, recovery in global dairy demand remains elusive, leaving expectations for soft commodity markets for the balance of the year and into 2010,” USDEC said in mid-July.
So we sit near the end of summer with cheese inventories at a 25-year high and manufacturers' stocks of nonfat dry milk running 50% higher than the eight-year average.
These surplus inventories will continue to hang over the dairy market until production shrinks—both here and in New Zealand—and the global economy regains some of its earlier strength. And that will push the long-awaited recovery back even further than was earlier thought.
Cooperatives Working Together
USDA''s Milk Income Loss Contract program
U.S. Dairy Export Council