These are unprecedented times in the dairy industry, and the current pricing structure is more than just a problem for dairy producers. The volatility in the dairy industry, from high price to low price, has increased in recent years, with even less time between the peaks and valleys – almost to the point of being unmanageable.
How did we get here? The main reasons for the price decline are a supply and demand imbalance as well as weakening U.S. and global economies. First, we all recognize that dairy is, to a large degree, a commodity market. So, a relatively small difference between supply and demand will cause a very significant change in price, hence the volatility. Dairy farmers did not cause this current down cycle. Producers responded responsibly and intelligently to the price signals that were sent in 2007 and 2008, which indicated the world needs more U.S. dairy protein for export. By most accounts, this is a long-term opportunity/trend, and dairy industry leaders responded by accessing more export markets. Ultimately, farmers responded with an increased milk supply. World population continues to rise, and many countries will be looking to increase their dairy consumption. These countries will simply not have the ability to meet demand without significant imports. The U.S. is well positioned to provide such support and will gain from these sales.
Unfortunately, as we all know, the U.S. and world economy has since entered into the worst down cycle probably since World War II, maybe even since the Depression. At a time when U.S. dairy producers are still modestly increasing production at a rate of 1 to 2 percent, U.S. sales are off and international sales are expected to slow appreciably in 2009. This trend is causing dairy product inventory increases in the U.S. and weaker sales. Therefore, we have more milk than there is demand domestically and in the world markets. Most experts would agree the difference between where we are now and being in balance, is the equivalent of removing 200,000 to 400,000 cows from the U.S. herd. It is astounding that such a small difference in supply and demand has caused the huge price decline that we are experiencing.
What can we do to fix the price volatility problem? First, there are risk management tools available to dairy producers that can offer some insurance and stability. Dairylea Cooperative has the longest running risk management program for producers of any cooperative in the U.S. During late spring/early summer 2008, a producer could have purchased a price floor that would effectively have garnered an approximate $17.50 per hundredweight price floor in the Northeast for all of 2009’s milk for an approximate cost of $.25 per hundredweight. In hindsight, that is a great value. Producers need to be sure they understand what tools are available and how they might fit into their operation.
Another short-term solution is a strong Cooperatives Working Together (CWT) program that can help manage supply and demand in the industry. This voluntary self-help program is a great tool, that has the size and scope to take only part of the volatility and length of the down cycle out (i.e., it cannot guarantee a profitable price for every dairy farmer in the U.S.) The program deserves continued support by cooperatives and all producers. A strong CWT program will shorten the length of the down cycle significantly.
On a longer-term basis, dairy promotion dollars continue to be focused on selling more products, and the U.S. Dairy Export Council, supported by dairy industry leaders, is very focused on the export market and maintaining a growing U.S. share.
For eight of the past 10 years, the Northeast has been in balance or short on regional supply and demand. We have felt the effects of consolidations and plant closures. However, the Northeast Boston-Washington corridor is a very good market, and processors here have started to reinvest in the Northeast infrastructure. High freight costs and our proximity to a large population puts the Northeast in a very good position. We believe this is an excellent place to dairy, and there are many opportunities ahead.
Many producers are asking what they can do to get through this difficult period. There is no easy answer, but to manage the things they can control, and do the best they can. Demand will rebound; it is just a matter of when. Additionally, it is important to be sure producers are marketing their milk with a financially strong company – hopefully a cooperative, since there is strength in numbers. As stated above, there are tools available to manage some of the price risk. Most importantly on a long-term basis, encourage your farm organizations and leaders to work hard on long-term solutions to price volatility. PD
Gregory Wickham
Chief Executive Officer
Dairylea Cooperative
