Will This Dairy Price Cycle Be Different?

July 20, 2015 10:48 AM

There have been five complete dairy price cycles since 1996, but the past is seldom if ever prelude when predicting short-term milk prices.

Charles Nicholson with Penn State and Mark Stephenson with the University of Wisconsin have just released an analysis of these past five cycles. The question they ask: What can this past 20-year history teach us?

“Although the current cycle began with much higher margins than any previous one, the margin value has experienced a faster decline than the previous four cycles,” write Nicholson and Stephenson.

Their statistical model predicts a short cycle this time—27 months. That’s a year shorter than the average of the five previous cycles, they note. The model also suggests a dairy margin, based on the Margin Protection Program (MPP) formula, of less than $8/cwt only through August 2015.

“The statistical model predicts a relatively rapid increase in the All-Milk price, with a new price peak in November 2016 at just above $22/cwt and the MPP margin reaching nearly $14/cwt,” they says. But another model suggests margins below $8 could last through September.

The economists also point out that both the amplitude and length of prices can vary, depending on the starting point and random shocks to markets which seem to inevitably occur.

Bottom line: Dairy farmers need to closely watch markets this summer to judge whether and at what level they should sign up for the Margin Protection Program. Sign-up is currently underway, and ends September 30. 

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