While supply and demand are two pillars that form the basis of milk prices, the two do not always have the same weight in determining what dairy farmers are paid for their milk, according to Peter Vitaliano, chief economist of the National Federation of Milk Producers (NMPF). .
With milk demand and milk production per cow being on a constant upward trajectory, it is the growth in the number of cows, sometimes leading to larger jumps in overall milk production, which is putting downward pressure on milk prices. milk.
Vitaliano’s role with NMPF relates primarily to national and international economic issues, particularly from a policy and forecasting perspective. At a World Dairy Expo seminar on September 29, he offered what he called a “Hitchhiker’s Guide” to the American dairy industry, focusing on historical and current factors that contribute growth of domestic and export dairy markets, cow productivity and milk prices.
Highlighting 25 years of data, Vitaliano noted that overall consumption of dairy products in the United States is steadily increasing, despite ebbs and flows within individual product categories. Components of this overall consumption have been influenced by a global dairy industry that has moved away from subsidies, affecting exports and imports, as well as US government policies and marketing messages that have wrongly lowered nutritional value. natural dairy fat.
The consumption of dairy products and the production of milk in the United States are characterized by two constants, described Vitaliano.
On the consumption side, the trend that has emerged is that of steady growth in long-term consumption, regardless of dairy prices, consumer incomes or the strength of the economy in general. Demand is further enhanced by the gradual growth of the US population.
On the production side, long-term year-over-year increases in milk production per cow have also been consistent. Increases in milk solids production per cow have been equally consistent, but slightly faster in recent years, and a more appropriate measure of supply, as average tests of milk components have increased.
The problem, however, is when large fluctuations in cow numbers cause surges in milk production, resulting in excess supplies that exceed the growth in domestic demand that cannot be offset by stronger export sales.
“The bottom line is when consumption growth lags, the number of cows becomes excessive and milk prices are under pressure,” Vitaliano said. “When cow productivity lags, the number of cows becomes insufficient for total consumption needs and milk prices rise to stimulate more production through more dairy cows.”
Dairy markets and elasticity
Discussing the impact of economic variables on dairy markets, Vitaliano noted that the dairy export market is more sensitive to product prices, or more elastic. In contrast, the US domestic market has always been less price sensitive and even inelastic.
And when we compare domestic supply and demand, this inelasticity is significant. “The consumption of dairy products is not very sensitive to changes in prices and incomes,” he said. “This means that relatively large price changes did not generate large changes in consumption. On the other hand, small changes in supply generate relatively large price changes.
Supply or growth management policy
With the supply of milk weighing so much on the prices that dairy farmers receive for their milk, calls for national supply or growth management programs have multiplied. In response to a question from the audience, Vitaliano indicated that opposition in Congress is a major obstacle to the implementation of any federal supply management policy.
“I have worked for National Milk for many years, and would love to have $ 1 for every time we say ‘support supply management’. I am convinced that the United States Congress will not legislate on a supply management program and that it will never obtain uniform support among dairy farmers.
“It’s interesting because the opposition to supply management is not geographically fixed,” continued Vitaliano, noting the changing regional attitudes among dairy farmers throughout his career as an economist in the United States. NMPF. “So getting a consensus among dairy farmers to overcome the overwhelming opposition in Congress is going to be a boost that I don’t expect to see in my lifetime.”
Industry measures have been effective
The disruptions in the dairy market 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 that in the first months of the pandemic in April and May of last year, you will remember the situation was so dire because you suddenly had a huge drop in the use of dairy products in food service and an increase in retail use. It took a while for the supply chain to change. You had pizza cheese formulated for food service delivered to pizzerias in large containers…. You cannot retail this product; you need to reconfigure this product and its packaging, and it took a long time. A lot of milk was spilled during this transition.
“The co-ops across the country, which normally compete with each other – they’re reluctant to close their memberships because other co-ops might take away their members – they bite the bullet and come together collectively, and we’ve had two strong months. basic surplus programs. If you look at the numbers, it had a big positive impact on getting the production under control quickly, so it works.
“It’s just politically, it’s something that’s not going to happen legislatively,” he continued. “From my years of experience in politics, it’s just too much to do. If dairy farmers are serious about this, they need to work through their cooperatives and get them to cooperate. “
Dairy economists Charles Nicholson, Cornell University, and Mark Stephenson, University of Wisconsin – Madison, have compiled the results of a study evaluating alternative programs for growing milk production. Read: What if? Milk production growth management plans assessed.
“Reviews of Alternative Growth Management Programs Proposed for the US Dairy Industry” was published in August 2021. The analysis and video discussion featuring Nicholson and Stephenson are available on the Dairy Markets and Policy website.