Release Date: August 2006
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 The Solid Truth

Jerry Kozak
President/CEO

Probably the oldest falsehood in economics is that there is such a thing as a free lunch. Those of us who’ve been around the block at least once know that you can’t get something for nothing. One of the oldest falsehoods in dairy economics, by comparison, is the notion that the United States is a milk deficit country, meaning that we produce less milk than we consume in an average year. 

This particular fabrication comes up occasionally in conversation with people who sincerely assert it as a fact without stopping to actually look at what the numbers show. A full accounting of dairy production and consumption data, however, shows the exact opposite: that the U.S. typically maintains a surplus of milk production compared to consumption, particularly for skim milk solids.

So my column this month will delve deeper into how milk production and consumption statistics are calculated, and why the idea that a program like Cooperatives Working Together, which is designed to help trim supply, is a necessary thing from an economic standpoint.

First, some explanations. All the data cited in this column are courtesy of the U.S. Department of Agriculture, which maintains very comprehensive numbers on a variety of measures of the dairy sector. Second, there has to be an understanding of what exactly is being measured when we talk about production. The USDA statistics on overall consumption examine milk on a total solids basis, which includes both milkfat as well as nonfat solids (protein and sugars, mostly). So discussing this issue on the basis of total milk solids lets us address the big picture in its entirety.

Most importantly from a definitions perspective, however, is the term total commercial use, which is the basic measure of consumption. It includes U.S. domestic commercial use – what we consume within our borders.  It also includes commercial exports, i.e., exports that don’t take place because of government actions like the DEIP program or foreign aid donations. And it includes imports, since that is part of domestic demand. Commercial use, in effect, measures all commercial demand for dairy products during a given year, whether that demand is supplied by U.S. milk production, imported products, or those stored in inventory.

So what do the numbers show when you sift through the data?  In 2005, total U.S. milk solids production (both milkfat and nonfat solids) was 21.9 billion pounds. Total commercial use, a figure that again contains both domestic consumption and exports, was 22.2 billion pounds.  So comparing just those figures actually yields a net milk deficit. 

However – and this is the key point – total commercial use is broader than just U.S. domestic commercial use. If you look at just what the U.S. consumed domestically in 2005, the figure was 20.5 billion pounds. So, when you look at what U.S. farmers actually produced last year (21.9 billion) and compare it to what U.S. consumers actually used (20.5 billion), we had a surplus of 1.4 billion pounds of milk solids.  In short, the U.S. was in a milk surplus last year, not a milk deficit.  Only when you factor in commercial exports of 1.8 billion pounds was the market into a net deficit.

So that’s one year in perspective. What about the longer-term trends? Going back the previous five years, the difference between U.S. production and U.S. domestic use is a surplus each of those years: in 2000, it was 355 million pounds. In 2001, the surplus was 1 billion. In 2002, it was 1.4 billion. It 2003, it was 1.2 billion. And in 2004, it was 1 billion.

During the 2000-2005 period, total U.S. milk exports ranged from 1 billion pounds in 2000, to a record of 1.8 billion pounds last year. So clearly the ability to move product out of our market – especially the record skim milk sales we had last year – made a huge difference between a surplus and a shortage. 

It’s also worth pointing out that U.S. exports on a total milk solids basis are significantly more than our imports. This is another misconception that needs debunking. While imports are a factor in the domestic commercial market, on a volume basis, they are actually smaller than our exports. So if you were to completely shut our borders to all dairy trade, the U.S. milk surplus would actually grow significantly above those billion plus pound figures cited above.

This is why a program such as CWT is so crucial to the economic health of the dairy sector. It gives us a way to trim milk production, because clearly the U.S. has a robust capacity to expand output, and that capacity is running ahead of what consumers are eating. It also gives us a way to boost exports, which are crucial to reducing our net surplus into a deficit. In 2006, CWT has helped export over 450 million pounds of milk equivalent in just the first seven months of the year. That is a critical factor in light of the rapid expansion of U.S. production we’ve witnessed in the past 12 months.

One of the oldest truths in economics is also that when supply outstrips demand, prices drop. Fortunately, the corollary is also true: when supply lags demand, prices go up.  That’s the whole purpose behind CWT, and it is as solid as can be.