Through much of last year, the average milk price hovered around $17 per 100 pounds -- although consumers purchase milk by the gallon, the industry measures by pounds. The bottom fell out of the market when the economy tanked last fall. Prices now hover around $10, according to the California Department of Food and Agriculture. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors.What I haven't seen anywhere is a particularly good explanation for the volatility in prices.
Wednesday, July 1, 2009
Got Milk?
Milk prices have been dramatically falling over the past year:
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What we have here is an opportunity to test a bit of micro theory. In a competitive market, firms making losses will exit. So, if this persists, exit will occur, the supply curve of milk will shift to the left, the price of milk will rise, and losses will be "competed away."
ReplyDeleteFrom an analytical perspective, you're right that one of the questions is, "What happened to the demand for fluid milk?" Was it driven by a decline int he end-market demand for milk? Was it a result of declining eport demand?
This (http://usdec.files.cms-plus.com/TradeData/PDFs/WPI%20VAL.pdf) suggests that exports have declined by about 1/3 in 2009, compared with 2008. Which sugests that the declingin prices are a reaction to the world recession.
US exports, by the way, nearly tripled betwen 2004 and 2009. I suspect that this drove milk prices up, led to unexpectedly higher profits, and induced entry.
So what we're seeing may in fact be a return to long-run normal conditions...
(By the way, it took me les than 5 minutes to find these data--Google are your friend), and why a reported for the LA Times couldn't have done the same thing is beyond me.)
That should read "US exports...nearly tripled between 2004 and 2008" (not 2009). Oops.
ReplyDeleteThanks for the info, doc. I agree with your comment that exit should occur and prices will eventually rise. What initially caught my eye was some stories saying dairy farmers were slaughtering cows because of the low prices (exiting).
ReplyDeleteI saw some of the stats you mentioned regarding the claims that the declining prices are a reaction to the world recession. I didn't find that a particularly satisfying explanation - I didn't think milk demand would be that responsive to general economic conditions. Perhaps I'm wrong.
Some of what I've read (which is admittedly not much)is that the recent growth in incomes worldwide has been a significant driver of increased demand for milk. Keep in mind that the increased demand for milk also encompasses increased demands for cream, butter, cheese, and other products made from milk. For me, the startling fact is the huge increase in US milk exports in the last five years. Even with this year's apparent decline, exports in 2009 will still be something near twice their 2004 level.
ReplyDeletePerhaps the cows should go on strike and demand hirer wages. That is sure to fix the low prices. UAW seems to use that strategy.
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