National Food Review

U.S. dairy markets since 1970

U.S. dairy markets since 1970

Sara D. Short

U.S. Dairy Markets Since 1970

Although milk and dairy product prices are influenced by a Federal price support program, market prices are not determined in a vacuum, void of effects exerted by supply and demand conditions. Prices received by farmers, processors, and marketing firms and prices paid by consumers are, to a large extent, jointly determined by the availability of raw milk supplies and prevailing demands for fluid and manufactured dairy products.

However, because milk production is highest in the spring while consumption is strongest in the fall, the Federal price support program attempts to smooth these seasonal aberrations in production and demand by removing excess supplies from the market in the form of butter, American cheese, and nonfat dry milk (see National Food Review, July-Sept 1988, for a description of U.S. dairy programs). As a result, farmers receive relatively stable prices throughout the year, and consumers have an adequate supply of milk to meet their needs.

In the 1970’s, market conditions were such that supply and demand were fairly balanced, and Government purchases of excess supplies were small. Increases in the use of milk and dairy products were met by either more production or smaller Government removals of dairy products. Increases in retail dairy prices were consistently smaller than rises in all food prices and the Consumer Price Index (CPI). However, the dominant pattern of the 1980’s has been the willingness of dairy farmers to produce more milk at lower real (adjusted for inflation) prices (figure 1).

Generally favorable prices, incomes, and expanded promotion by the dairy industry boosted use at an unprecedented rate during 1983-87, but production gains outpaced the increase. During 1980-86, Government removals of excess dairy products averaged more than 12 billion pounds per year, milk equivalent, larger than any annual total during the preceding 31 years of the support program’s history. The cost of these purchases averaged about $2 billion per year. The support price remained at the late-1980 level between October 1981 and November 1983, allowing inflation to reduce the real price received by farmers. However, the decline was not sufficient to stop the rise in surplus production.

Policy emphasis shifted to a combination of support-price cuts and voluntary supply management. A milk diversion program in 1984 and part of 1985 paid farmers to reduce their milk marketings by 5 to 30 percent, but provided only temporary relief. The Dairy Termination Program, in which the Federal Government paid farmers to stop milk production altogether, ran from April 1986 through August 1987. That program, combined with the schedule of possible price support cuts contained in the 1985 Food Security Act, resulted in greater reductions in the surplus. In addition, greater disposal of Government dairy product supplies since 1983 through domestic donations and exports has outstripped purchases and sharply reduced Government stocks.

If the trends of the early 1980’s continue, a propensity toward bigger surpluses will exist. Mechanisms for setting the support price must be sufficiently flexible to quickly adjust to industry changes if large surpluses are to be avoided. Consumers would benefit from such policies through lower retail dairy prices and, as taxpayers, they would see smaller dairy program costs.

Milk Production

Productivity gains have been important to the dairy industry and the American consumer. Such advances result in either lower input costs or more milk per cow. They also increase the availability of milk and dairy products at prices favorable to consumers.

Modern dairy buildings, improved milking equipment, and better forage storage are examples of cost-lowering improvements. Typically, such advances reduce labor per cow. Genetic improvement and advances in health, reproduction, and other management areas generally boost output per cow without increasing most production inputs.

Milk output per cow has trended upward for decades, partly because of heavier concentrate feeding, as relatively cheaper concentrate feeds–like grains and protein meals–replaced more expensive inputs. Since World War II, annual milk production per cow has declined only twice–once in 1973 in response to drastic price increases in protein feeds (the cost of soybean meal more than doubled, for example) and again in 1984 in response to the diversion program. During 1970-87, the amount of concentrates farmers fed to each cow grew an average of 44 percent (table 1).

In the 1990’s, per cow output may increase at a faster rate because of new technologies. For example, bovine Somatotropin, a naturally occurring hormone that stimulates milk production, will probably have an effect if it is approved for commercial use. Other technologies may accelerate genetic improvement.

The long downward trend in milk cow numbers turned around in the early 1980’s. Large productivity gains encouraged expansion of the dairy cow herd even though farmers received lower real milk prices. Cow numbers edged higher, except during the 1984 diversion program, the Dairy Termination Program in 1986 and 1987, and when continued lower support prices and higher feed costs hit in 1988.

An expanded cow herd and productivity gains led to an unprecedented growth in milk production during 1979-86. Since 1978, production has declined only once–output per cow dropped an average of 79 pounds in 1984 as a result of the diversion program. Although the Dairy Termination Program was in effect for part of 1986, total milk production still reached a record 143.4 billion pounds as output per cow climbed to 13,260 pounds. Production in 1987 decreased about 1 percent as milk cows on farms declined more than 4 percent. However, output per cow increased almost 4 percent, compensating for most of the drop in cow numbers.

Commercial Use of Dairy Products

Allocation of the milk supply is partially determined by the market for dairy products. Because fluid milk sales have remained steady, their share of the increasing milk supply has declined. In 1986, 37.2 percent of the milk supply went into fluid products, down from 45.8 percent in 1970. Among manufactured products, market changes mean more milk is needed for cheese, a steady amount of cream for butter, less milk for canned milk, and less skim for nonfat dry milk.

Although total sales of fluid products have remained steady since 1970, sales of individual fluid products have shown divergent trends. Consumers have steadily substituted low-fat for whole milk because it is lower in calories and fat and lower in price. Also, the U.S. population now has a larger share of adults who, on average, drink less milk. Skim milk sales have varied some, but not significantly. In 1971, low-fat and skim items accounted for 20.9 percent of fluid market sales. By 1986, this share had reached almost 50 percent. Sales of cream items rose every year between 1971 and 1986 as product quality improved and prices generally declined.

Total commercial use of dairy products grew at an annual rate of about 1 percent during the 1970’s, as real retail prices held fairly constant. Increases in cheese sales outweighed declines in use of some other products. Weak economic conditions lowered commercial use in 1980 and limited recovery during the next few years. Almost all dairy products were affected. However, after 1983, declining real retail prices, economic growth, and expanded promotion boosted commercial use at an unprecedented rate. Most dairy products enjoyed larger sales but by 1987, the expansion had slowed.

The size of the surplus also affects the allocation of the milk supply because surplus milk is converted to American cheese, butter, or nonfat dry milk for sale to the Government. The capacity to handle the surplus and its location greatly influences which products are sold. More of the surplus from the upper Midwest tends to go into cheese, while that from the West is made into butter and nonfat dry milk for sale to the Government.

Dairy Prices

Between 1970 and 1979, milk prices received by farmers rose as support prices increased. However, supply and demand conditions were such that surpluses were manageable and prices for manufacturing grade milk–milk used for hard dairy products like cheese–were consistently above support levels. Between 1979 and 1981, manufacturing grade prices began to fall below support levels as production increased sharply and demand declined. The surplus grew so large between 1980 and 1986 that price supports were lowered, beginning in 1983, to realign supply and demand. Manufacturing grade prices declined and remained below support levels until 1987. The Dairy Termination Program also influenced the price picture in 1987 by lowering the rate of growth in the milk supply and, thus, allowing the largest seasonal price rise since 1980.

The farm-to-retail price spread for dairy products–measuring the difference between the farm and retail values of a bundle of dairy products with a retail worth of $100 in 1977–has increased steadily since 1970. However, the rises have been just slightly less than the inflation rate. Productivity gains in processing and distributing dairy products have lowered the real farm-to-retail price spread and kept retail dairy prices in check.

For most of the last two decades, increases in retail dairy prices have consistently been smaller than rises in all food prices and the CPI (figure 2). In 1987, retail dairy prices rose less than prices for other foods and all items for the eighth straight year.

Government Donations of

Dairy Products

Distribution of Government-owned dairy stocks continues to be an integral part of USDA’s food assistance programs. Available butter, American cheese, and nonfat dry milk are given to needy people, schools, institutions, prisons, veterans, and to the military. Direct distribution of Government inventories to the needy during the mid-1980’s occurred primarily through the Temporary Emergency Food Assistance Program (TEFAP) initiated in 1982. The purpose of TEFAP was to reduce Government inventories by distributing commodities to those who needed them.

Between fiscal years 1982 and 1987, domestic donations of dairy products increased dramatically as a direct result of TEFAP. Butter donations reached a high of almost 300 million pounds in fiscal 1983, and hovered around 200 million pounds in fiscal 1987. American cheese donations reached a peak of almost 700 million pounds in fiscal 1984, and hit about 670 million pounds in 1987. That year, nonfat dry milk donations totaled almost 240 million pounds. However, since Government stocks have declined considerably through increased donations and fewer purchases, donations in fiscal 1988 and beyond will be dramatically lower.

Future Trends

If the trends of the early 1980’s prevail through the 1990’s, a propensity for dairy farmers to produce more milk at lower real prices might exist. Real farm milk prices and real retail dairy product prices would continue to fall.

The decline in real retail prices would expand commercial use of dairy products, while falling farm prices would curtail the growth in milk production. As a result, the balance between the supply and demand for milk would narrow.

If dairy markets remain entirely domestic, the tightening of the supply-demand balance would probably depend upon the slow erosion of real prices. However, recent large increases in export demand for U.S. nonfat dry milk and similar products make it unrealistic to expect markets to remain purely domestic. Although international markets are particularly volatile, commercial exports of U.S. dairy products may periodically be important in the future.

PHOTO : Genetic improvement and advances in health, reproduction, and other areas boosted milk output per cow without increasing most production inputs.

Table : 1. Milk Production Has Steadily Increased

COPYRIGHT 1989 U.S. Government Printing Office

COPYRIGHT 2004 Gale Group