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Milk supply outweighs demand when it comes to pressure on producer prices

Progressive Dairy Editor Dave Natzke Published on 08 October 2021

While supply and demand are two pillars serving as the foundation for milk prices, both do not always bear the same weight in determining what dairy producers are paid for their milk, according to Peter Vitaliano, chief economist with the National Milk Producers Federation (NMPF).

With dairy demand and milk production per cow on a steady, upward track, it’s growth in cow numbers, leading at times to larger jumps in overall milk production, that puts downward pressure on milk prices.

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Vitaliano’s role with NMPF is primarily on national and international economic issues, particularly from policy and forecasting perspectives. During a World Dairy Expo seminar, Sept. 29, he offered what he called a “Hitchhiker's Guide” to the U.S. dairy industry, focusing on historical and current factors that contribute to growth in domestic and export dairy markets, cow productivity and milk prices.

Highlighting 25 years of data, Vitaliano noted overall U.S. dairy consumption has been growing steadily, despite ebbs and flows within individual product categories. Component parts of that overall consumption have been influenced by a global dairy industry that has moved away from subsidies, affecting exports and imports, as well as U.S. government policies and marketing messages that have erroneously downgraded the nutritional value of natural dairy fats.

Dairy constants

Both U.S. dairy consumption and milk production are characterized by two constants, Vitaliano described.

On the consumption side, the trendline that has emerged is one of long-term consistent consumption growth, regardless of dairy product prices, consumer incomes or the strength of the general economy. Demand is further enhanced by incremental growth in the U.S. population.

On the production side, long-term, year-over-year increases in milk production per cow have also been consistent. Equally consistent, but slightly faster in recent years, and a more appropriate measure of supply, have been increases in milk solids production per cow, as average milk component tests have increased.

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Problematic, however, is when large fluctuations in cow numbers result in milk production surges, yielding excess supplies that surpass growth in domestic demand that can’t be offset by strengthening export sales.

“The bottom line is when consumption growth lags, cow numbers become excessive and milk prices come under pressure,” Vitaliano said. “When cow productivity lags, cow numbers become insufficient for total consumption needs, and milk prices rise to stimulate more production through more milk cows.”

Dairy markets and elasticity

Discussing how economic variables impact dairy markets, Vitaliano noted the dairy export market is more sensitive to product prices, or more elastic. In contrast, the U.S. domestic market always been less sensitive to price, or inelastic.

And when comparing domestic supply and demand, that inelasticity is significant. “Dairy consumption is not very sensitive to price and income changes,” he said. “That means that relatively large changes in prices did not generate big changes in consumption. In contrast, small changes in supply generate relatively large changes in prices.”

Supply or growth management policy

With milk supply bearing so much weight on the prices dairy farmers receive for their milk, calls for supply or growth management programs at the national level have grown louder. In response to an audience question, Vitaliano indicated that opposition within Congress is a major barrier to implementation of any federal supply management policy.

“I've been with National Milk for many years, and I'd love to have 1 dollar for every time we said ‘let's support supply management.’ I'm convinced the United States Congress will not legislate a supply management program, and they'll never get uniform support among dairy farmers.

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“It's been interesting because the opposition to supply management is not fixed geographically,” Vitaliano continued, highlighting changing regional attitudes among dairy producers throughout his career as an economist at NMPF. “So getting a consensus among dairy farmers to overcome the huge opposition in Congress is just going to be a lift that I don't expect to see in my lifetime.”

Industry steps were effective

Dairy market disruptions resulting from the onset of the COVID-19 pandemic illustrate what the dairy industry can do internally to manage supply, Vitaliano said.

“What is instructive is in the early months of the pandemic in April and May last year, you'll recall that the situation was so dire because you suddenly had a huge drop in food service use of dairy and a surge in retail use. It took a while for the supply chain to switch. You had pizza cheese formulated for food service use being delivered to pizzerias in large containers … . You can't sell that product at retail; you have to reconfigure that product and packaging, and it took a while. A lot of milk was dumped during that transition.

“The cooperatives of the country, who normally compete with each other – they’re reluctant to close their memberships because some other cooperatives might take the members away from them – they bit the bullet and collectively got together, and we had two months of strong base-excess programs. If you look at the numbers, it had a big positive impact in getting production quickly under control, so it works.

“It’s just politically, it is something that's not going to happen legislatively,” he continued. “Speaking from my years of experience in the political sphere, it's just too heavy of a lift to get that done. If dairy farmers are serious about it, they have to work through their cooperatives and get them to cooperate.“

Related reading

Dairy economists Charles Nicholson, Cornell University, and Mark Stephenson, University of Wisconsin – Madison, have compiled results of a study evaluating alternative milk production growth programs. Read: What if? Milk production growth management plans evaluated.

“Analyses of Proposed Alternative Growth Management Programs for the U.S. Dairy Industry” was published in August 2021. The analysis and a video discussion featuring Nicholson and Stephenson are available on the Dairy Markets and Policy website.  end mark

Dave Natzke
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