The Flip Side

If you have been paying attention to the news lately, you've probably noticed there have been a number of stories written and broadcast about the rising price of milk and other dairy products. Those of us in the industry who follow the futures markets knew that this trend was about to spill over into the public arena, and sure enough, there's been a surge in reporting about the seemingly relentless rise in retail prices in 2007.

NMPF, when it serves as an information resource to the media, always tries to make sure that reporters understand there are clear and understandable factors affecting supply and demand that are resulting in the higher prices. Our primary goal is to explain things in a way that makes obvious that farmers themselves are not colluding to extort more money from consumers. We don't want the same type of conspiracy-seeking, finger-pointing media coverage about dairy that often comes when oil and gasoline prices suddenly rise.

The milk price stories so far this year have tended to be very similar, in that reporters are inclined to focus on a few key reasons behind the price spike. The convenient target in many stories is the sudden jump in corn prices over the past year (that's a dynamic I wrote about I wrote about in May's column). The rise in petroleum prices is often also cited as a factor affecting the cost of milk production, as is everything from bad weather, ongoing financial stresses on the farm, and a reduction in the use of rBST. All are valid factors, and it's hard to tease out which is having the biggest influence on prices.

Truth be told, however, the various pressures affecting production are only part of the story, and maybe not the most important part. Yes, the cost of making milk has skyrocketed in the past year. But milk production in the first five months of the year is still up from last year, about one percent. So it's not like the situation back in 2004 – the last time we saw sudden price spikes – when production basically flattened for the whole year. This year – at least to date – production has grown slowly and not declined; it's just not growing at the same rate as consumption.

So, the flip side of the “why are milk prices getting so high?” headline is demand – a story that is not as well reported as the supply side. Let's look at the black and white facts on where demand is going:

Cheese consumption continues its welcome and unrelenting growth. Per capita cheese demand in the U.S. reached 31.4 pounds in 2005, up from 29.8 in 2000. Since 42% of American farmers' milk goes into cheese, that product is really in the driver's seat where demand is concerned;
While cheese is the slow but steady tortoise, the real surprise in domestic consumption has been fluid milk. Traditionally, when we talk about dairy sales, cheese and milk are on the same highway, headed in opposite directions. Fluid consumption has been in steady decline for a generation….but not lately. In 2006, per capita consumption actually rose for the first time since 1989. The hard work of making a better product available in better packages in more stores and foodservice settings is paying off in greater demand, a trend we can only hope will continue into the future.
Perhaps most shocking to some reporters is that the U.S. is now moving a significant portion of its milk production overseas. U.S. dairy exports, measured by volume, are up 75% since 2003. Last year, we exported 9.3% of our production, which is a record share. Those who follow the protein markets know that whey exports are going gangbusters, accounting for more than half of total export dollar growth in 2006. Similarly, skim milk powder exports were at a record high last year of 645 million pounds, 43% of total U.S. skim solids production.
The export side of the coin is itself being driven by everything from the Australian drought, to the elimination (at least for the time being) of European Union export subsidies, to the Chinese buying American dairy products with the same dollars that we have spent on their exports of clothes, toys and electronics.
And let's not forget that in the past 18 months, Cooperatives Working Together's export assistance program has really helped boost commercial dairy sales in dozens of different countries. In 2006, CWT helped export the equivalent of 700 million pounds of milk, and in the first half of 2007, CWT has exported nearly as much – 680 million lbs.

Some of these demand side of the coin elements have been mentioned in the media focus on milk prices, but not to the same extent, or with the same urgency, as the supply side factors. In reality, there are always dozens of different pressures on both supply and demand of any commodity. In dairy, it doesn't take much change in either side of the ledger to produce major price swings. So, when supply sags at a time when demand booms, the result is a near-doubling of milk prices from last summer to this summer.

The other untold story is that price spikes rarely last. That certainly was the case in 2004, and as production and consumption realign themselves in the future, it will likely produce a drop in prices at some point in the future. But at least for the time being, it's great to have good news to report from dairy farms this summer.

National Milk Producers Federation

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