Wisconsin Ag Connection - Dairy Situation Report: Less Production, More Exports Needed for Recovery

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Dairy Situation Report: Less Production, More Exports Needed for Recovery
Wisconsin Ag Connection - 08/20/2009

There is light at the end of the tunnel, but the length of the tunnel remains somewhat in doubt. That's one of the assessments made by Ed Jesse, an emeritus professor and Extension dairy marketing specialist with the University of Wisconsin. In a special report entitled 'Current Dairy Situation FAQs,' he said the first six months of 2009 were perhaps 'the worst' that state and national dairy farmers have experienced for at least several generations; and there are several reasons why.

"The succinct explanation is the loss of export markets," Jesse said. "Until 2004, U.S. dairy exports were small, usually representing less than five percent of total U.S, milk production. Exports in 2004 jumped to 7.5 percent of production, and increased steadily to nearly 11 percent in 2008. U.S. milk production increased at a slightly lower rate, tightening domestic markets and creating the milk price run-up in 2007 and 2008."

He also noted that the global economic crisis, which began in the fall of 2008, shrunk demand for dairy products world-wide and also dried up credit to finance imports.

"World prices for dairy products crashed--butter, nonfat dry milk, and cheese prices dropped by at least half between late summer and the end of 2008," the report said. "Even at these bargain basement prices, buyers were hard to find and U.S exports (with the exception of whey) fell off sharply."

In the meantime, the U.S. milk production engine was geared up to send 11 percent of its milk supply overseas. Jesse said some products previously destined for export began to back up on domestic markets and milk previously used to produce milk powders for export was increasingly diverted to other dairy products, especially cheese. On the cost side of the ledger, prices for purchased feeds have been close to record high. So far in 2009, Wisconsin cash corn prices have been between $3 and $4.

As a result, Jesse's numbers show that the average Wisconsin dairy producer is realizing a cash flow deficit of $47 per cow per month and a monthly loss of about $4,500 per herd.

"Wisconsin dairy farms are showing large, painful losses, but the situation is even worse in some Western states, where more of the feed supply is purchased rather than home-grown," Jesse pointed out. "Not only does California show higher feed costs than Wisconsin, but also a much lower milk price."

So how do we get out of this mess? He says the three principal avenues to higher milk prices are market forces, government market intervention, and private market intervention.

"Market forces are in play affecting both supply and demand. Supply reductions are in the form of financially-induced dairy farm exits and less dramatic forms of supply reduction like altering rations to cut feed costs and milk yield per cow. There is anecdotal evidence that dairy farm foreclosures are on the rise, but foreclosures do not usually eliminate cows from the national herd, as most move to other herds."

The only government intervention in dairy markets has been through the existing Milk Income Loss Contract program, which has yielded payments on eligible producer milk marketings as high as $2 per hundredweight, and a three-month augmentation of Commodity Credit Corporation purchase prices for cheddar cheese and nonfat dry milk. Numerous other forms of government market intervention have been proposed, but are not yet in place. Private market intervention has been in the form of the Cooperatives Working Together program operated by the National Milk Producers' Federation.

"Recovery has been painfully slow in coming, but there are more encouraging signs," Jesse says. "July saw the first down-tick in monthly milk production compared to 2008. Milk cow numbers have been falling every month since December 2008, and the decrease will likely accelerate as the year progresses with second-round CWT herd terminations and more involuntary exits. Demand growth is sluggish but positive. Markets are beginning to tighten."

Jesse notes that the temporary increases in support prices for cheese and nonfat dry milk will help elevate milk prices in the short run. He also foresees lower prices for milk and dairy products boosting consumption, which will help in the long-run.