Thursday, September 17, 2009

Is someone manipulating the price of milk?

This is clearly a sensitive issue for anyone living in the North Country given our long-standing relationship with the dairy industry.

Farmers are understandably distraught by the 30%+ decline in milk prices in the past 2 years (they were surprisingly less upset by the 50% INCREASE in milk prices in 2006-07). The sharp decline in milk prices has farmers demanding investigations into the buying practices of major producers to see whether or not anti-competitive forces are at work.

Mish Shedlock has done a good job showing that milk is just another commodity. When supply rises and demand falls guess what happens??? Prices fall.
Now the severity of the swings has been more significant than we've seen in the past, but look at this price chart. The average price per 100lbs of milk has been about $13.80 over the past ten years. Today the price is around $12/100lbs of milk.
Consider what happened in 2006-07 as milk prices soared (almost DOUBLING in about a year) farmers added nearly 190,000 dairy cows to the US herd - increasing supply of milking cows by 2%. Throw in the added yields from every cow and a falling demand as a result of the global recession and you can see why prices have retreated.
Prices in 2007 for milk probably went about 20% too high - like they did for other commodities oil, copper, etc - and they may have over-corrected here by 10-15%, but the argument that there is some corporate conspiracy to stick it to the farmer is just not based on facts.
We're about to enter a special election season here in Northern NY. The first candidate to come out in support of an investigation into milk pricing (and you know one of them will) will lose all credibility in my book.
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Separately, Belgian farmers protested the price of milk by spraying their fields with excess milk.
This actually, is the first step in improving prices --- reduce supply :)
They should have partnered with Nabisco and had kids chasing the tankers with bags of Oreo's. Now that would have been some marketing.
Cheers!

7 comments:

The Hermit said...

All this while people go hungry in the world.

Anonymous said...

when the price of milk goes to $20.00/100 lbs with 4% intrest at farm credt. you run into a bubble just like housing. as a farmer i asked my coop. leaders not to lend money to farmers for larger milk tanks,and heifers. they told me that is how to make the coop. more profitable. now they are holding meetings around the country telling farmers we feel for you,and we are doing all we can for you. when farmers go out of business around the rest of the nation our price will go up.any industry who looks to the govt. for help is a industry in trouble.
to solve the problem it really isn't anything higher intrest rates wouldn't solve.

thanks for your insite mr.grindstone

mark

sharonwue said...

Best picture I've seen on why the price of milk is up/down. Understanding the commodity supply/demand dynamic doesn't take away the pain of the local dairy industry. And we don't want them ALL to go out of business. Downsizing in dairy still means job losses. They are not GM, but then we don't have GM here in the North Country anymore.
Don't price cycles like this contribute to the creation of bigger enterprises? The survivors eventually expand in the good times, and after a couple rounds of this, you have only the biggest farms remaining. May be that's the road we are on, small farm/family farm policies notwithstanding.
Love your blog.

Anonymous said...

In the 50's govt. told the farmers to get bigger, plants were built everywhere in the north country, Tylerville, Evans Mills, Theresa, Watertown, etc etc. What happened all these plants are now closed.??

Anonymous said...

can anyone say "another bubble created by low intrest rates"? where now is the next bubble to burst?

Anonymous said...

Maybe someone forgot that China messed up and added some additive that tainted milk and that led to the fright over milk as well. This led to an overall fright of buying milk. Led to sluggish milk sales and thus the drop in milk prices.
Here's just one article re;
http://business.globaltimes.cn/industries/2009-07/448891.html

The Artful Blogger said...

Lots of good comments. Thanks for the feedback.

I didn't realize that Co-ops were aggressive lenders for farm expansion.

Unfortunately, as sharonwue observed, these price swings will probably squeeze the little guy out of the market. Most major commodity markets -- sugar, oil, copper, aluminum, etc are now dominated by a few global players. Milk is different because it has historically been produced locally and the cost of transportation has never made global production possible.

It's an interesting observation re: the Chinese milk scare, but I'm not convinced that played a huge role. Like most commodities, the "true price of milk" was probably 25% below the peak price in 07 and we've probably slipped below the true price now. However, I think domestic demand may never be what it once was based on consumption patterns among those under 25 - but that's just a guess.