Milk Price Swings Wider Than in Years Past

By Ron Johnson, Dairy Editor
Thursday, May 15, 2008 12:45 PM CDT

If there’s one thing dairy farmers hate, its wide swings in the price of milk. Sure, they like the highs, but they detest the lows and the fact that price variability makes it tough to write an accurate budget.

Can anything be done about the wide swings in the price of milk n from as low as $9 per hundredweight to as high as $21 in recent years?

She did not offer any definitive answers, but Margot Rudstrom, a regional Extension educator with the University of Minnesota Extension recently examined the problem. She spoke at the Minnesota-Wisconsin Dairy Policy Conference in La Crosse.

Just how bad is the problem? Just a few years ago, farm milk prices usually held in a narrow range of just $1 to $2 per hundredweight annually. Now, however, that range has broadened considerably, to $4 to $5 during any given year, Rudstrom said.

Looking at it another way, Rudstrom pointed out that the Class III milk price has, for the most part, stayed above the federal support price, though it has dipped below $10. On the high side, the Class III price has topped $21.

Looking back at the 1980s, she observed that the Class III price averaged $11.92 per hundredweight. Meanwhile, the median Class III price n the point at which half the prices are above a certain point and half are below that point n was $12.06 during the ‘80s. The range of Class III prices during that decade was $4.30 cents.

But things began to change during the 1990s. Then the Class III price averaged $12.29, 37 cents higher than it did during the previous decade.

Also in the ‘90s, the median point for the Class III price was $12.07, according to Rudstrom. That was a mere one cent higher than the median of the 1980s.

And the range? In the 1990s it was $7.81, or $3.51 cents wider than during the ‘80s. The actual low and high Class III prices during the 1990s, Rudstrom said, were $9.53 and $17.34 per hundredweight.

This Class III milk price volatility has been even more visible so far during the 2000s decade. So far the median Class III price has been $12.58, while the average has been $13.11.

At the same time, the range of Class III prices has expanded greatly. For the 2000s it’s $12.81 - $8.57 on the low end and $21.38 on the high side.

Supply programs

Rudstrom went on to talk about efforts to control the U.S. milk supply and how they might have affected price volatility. She began by discussing the federal government’s “dairy termination program” of the 1986 and 1987.

That effort cost $1.8 billion. To participate, dairy farmers had to agree to idle their facilities five years.

After the dairy termination program, milk production from the remaining herds rose, even though overall cow numbers fell. And, for a while, the Class III price blipped up.

Rudstrom next spoke about the impacts of four herd buyouts under Cooperatives Working Together (CWT). While CWT has been lauded in some circles for adding an estimated 75 cents per hundredweight to the price farmers get for their milk, and has removed “a fairly large amount of milk,” it hasn’t been a panacea for the dairy industry, Rudstrom indicated.

Cow numbers have risen again after the latest CWT herd buyout, she noted. And, the Class III price is higher.

It looks like CWT has contributed to milk price volatility, too. Rudstrom said that during the five years before the first CWT herd buyout, Class III milk prices varied by $2.55 a year. But after CWT began, the price swings have been as much as $3.16 in a given year.

She went to say a few words about voluntary supply management efforts in general. First there’s the problem with so-called “free riders.” With CWT, these are the dairy farmers who do not pay into the pool of money that’s used to buy herds. They don’t pay, yet these farmers still reap the 75-cent-per-hundredweight price increase that CWT is said to provide.

Mandatory participation in funding some sort of herd buyout effort would solve the “free rider” problem, Rudstrom said. But such a program might run afoul of World Trade Organization (WTO) rules.

To any producers or processors thinking about trying to get some sort of mandatory herd buyout program going, Rudstrom offered these words of warning: “I would caution, be careful what you wish for.”

The Milk Income Loss Contract (MILC) program might not have contributed to price volatility. But it has done one negative thing, according to Rudstrom. MILC payments to dairy farmers “lengthen periods of low prices.”

That happens because farmers who get MILC payments during periods of low prices are better able to stay in business or at least maintain their herds at higher numbers. That adds to the milk supply, keeping prices depressed.

“Price volatility in and of itself is not a bad thing…” Rudstrom said. But she added that it needs to be managed somehow, to narrow the range of peaks and valleys.

What about the futures market. Dairy producers can protect themselves against wide milk price swings this way, can’t they?

Yes, they can, to a certain extent, Rudstrom said. But she pointed out that the markets for some of these price protection tools are “thin… especially options.”

She compared the interest in dairy futures to those for more heavily traded commodities like corn and soybeans. During a recent trading period, the volume of milk futures was 1,003. That was far below the 159,000 contracts for soybeans, and the 389,000 contracts for corn during the same time period.

In the face of rising feed and fuel costs, it’s especially important for dairy farmers to be able to lock in profitable milk prices, Rudstrom said. Trouble is, wide swings in milk prices make doing that difficult.

Panelists comment

Panelists offered their views about the wide swings in milk prices. Bob Topel, a dairy producer from Waterloo, advocated changing or getting rid of federal milk marketing orders. As it is, the orders prevent milk buyers from offering long-term contracts to farmers.

Topel pointed out that dairy herds were much smaller n 25 to 30 cows n when federal milk marketing orders were established. Besides not allowing long-term contracts, the orders regulate the shipment of milk. Topel said he should be allowed to ship his farm’s milk to Kentucky, for example, if he wants, in an attempt to gain a higher milk price.

Steve Etka, Etka Consulting, Alexandria, Va., commented on MILC. He said it “has been a significant safety net,” but probably will not be used much during the next five years, if the trigger price remains at $16.64.

Etka said he supports changing the price at which MILC payments kick in to a Boston Class I price of $18.25. Even if the trigger is altered, “Dairy farmers will experience financial stress at higher (milk) prices,” Etka said.

Evan Kinser, director of dairy policy and commodities for the Dean Dairy Group, said many of the factors that contribute to volatile milk prices can’t be controlled. These include the weather and cyclical demand for dairy products.

“What can be done?” Kinser asked. “I’m not sure.”

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