Market Update
August 31, 2009
Dairy Market Update: A Tale of Two Dairy Farming Systems
By Bob Yonkers, IDFA Chief Economist, Ph.D.
With the exception of 2006, the dairy industry experienced the highest milk prices on record during the five years between 2004 and 2008. So far in 2009, however, farm milk prices have been among the lowest in decades, and farm profitability measures like the milk-to-feed price ratio are at record lows because feed prices have been well above average. So, why then has average daily farm milk production for every month so far this year been higher than the same month in 2008?
The U.S. Department of Agriculture recently announced that estimated total U.S. milk production for July 2009 was barely higher, 5 million pounds, than last July. June 2009 milk production, originally reported to be lower than last year, was revised upward to be higher. A closer look at the individual state milk production changes is very revealing.
USDA reports monthly state milk production for only 23 major dairy states, but a very clear pattern shows up in the July 2009 data. The major dairy states in the Western United States were among those with the largest milk production declines, while those in the Eastern United States were among the largest milk production gainers.
States with the Largest Changes in Milk Production between July 2008 and July 2009
| Largest Declines |
Largest Increases |
||
| Arizona |
-8.3% | Minnesota |
+5.9% |
| California |
-5.0% |
Wisconsin |
+5.8% |
| Vermont |
-4.5% |
Virginia |
+5.8% |
| Idaho |
-3.5% |
Iowa |
+4.8% |
| New Mexico |
-2.8% |
Michigan |
+4.6% |
| Utah |
-1.9% |
Indiana |
+4.0% |
| Colorado |
-1.6% |
Illinois | +3.9% |
| Washington |
-1.6% |
New York |
+2.6% |
Only Vermont does not fit the pattern, but just this week USDA reported in Dairy Market News that, "Some milk handlers are attributing Vermont's decline as a result of CWT participation." (CWT refers to Cooperatives Working Together, a producer program that reduces milk production through herd retirement.)
It appears that the systems of dairy farming commonly found in the Eastern United States are reacting differently to this year's low milk prices and high feed costs than those commonly found in the Western United States. One reason for the different reaction may lie in the greater diversity of farming systems used in the Eastern United States; most of these dairy operations raise their own young stock as well as some or most of their feed inputs. Dairy operations in the Western United States over the past few decades increasingly have specialized their dairy operations to only milking cows. Another reason may be differences in financial structure, where the Western farming systems have higher debt-to-asset ratios.
Whatever the reasons, the USDA July Milk Production Report provides evidence that the growth of milk production in the Western United States during the past few decades was based on a farming system that relied on lower cost feed on average and higher and less volatile farm milk prices. It is also evidence that dairy farming systems typically found in the Eastern United States are more resilient in the face of a period of low farm milk prices and higher feed costs.
Just as the domestic and global economic systems are undergoing dramatic changes following the financial crisis of the past year, the United States and world dairy industries will have to adapt to changing market conditions from those commonly experienced in recent decades.
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