NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
May 18, 2000
The price of milk received by U.S. dairy producers during the last six months is the lowest since 1978, based on the current basic formula price. Herd expansion and increased production per cow have resulted in supply exceeding consumer demand. Future price fluctuations will be driven by the same factors but especially by the relationship between per-cow production increases and consumer demand, says an agricultural economist at North Dakota State University.
"Current low prices look particularly bleak compared to the record high prices received from October 1998 to February 1999," says Dwight Aakre, extension farm management specialist at NDSU. "Within the dairy industry, producers and processors have expended a lot of energy looking for causes and solutions to this drop in the basic formula price, which fell from about $19 per hundredweight at the peak to the current price of about $9.50."
For the last 20 years, the percentage increases in milk production per cow in the United States have exceeded the growth in commercial demand for dairy products. During this period, U.S. population has increased about 1 percent per year while milk production per cow has increased closer to 1.5 percent per year, Aakre says.
Production increases greater than the growth in demand would have led to significantly lower prices to producers had it not been for the declining number of cows producing milk in the United States. In 1989, U.S. dairy cow numbers approached 10.14 million. By 1999, the dairy cow inventory had declined to about 9.1 million head, Aakre says. This 10-percent reduction in producing cows--the milk factory--is the reason the industry avoided a free-fall in price during that period. But the six months of highly favorable milk prices from October 1998 to February 1999 was enough incentive to bring about a halt to the declining dairy cow numbers. As of Jan. 1 the U.S. dairy cow herd totaled about 9.2 million head, or a 0.6-percent increase compared to one year earlier.
"As long as increases in production per cow continue to outpace growth in consumption it will be necessary to shrink the size of the U.S. dairy herd," Aakre stresses.
Dairy cow slaughter data compiled by the Livestock Marketing Information Center based in Lakewood, Colo., reveals a significant decrease in slaughter numbers during 1999 relative to the average of the preceding five years. The period of high profits resulted in a drop in cull rates, which caused the reduction in slaughter numbers. But data from March indicate slaughter numbers returning to the five year average, Aakre says, and if this continues throughout the year, the rise in cow numbers should halt and begin to decline once again.
"For the last 20 years there has been an ample number of small dairy operations exiting the business to offset the expansion plans for those remaining and to make room for new operations," Aakre concludes. "Eventually the number of small operations exiting the industry will fall short of offsetting the new operations coming on line. If at that time production gains per cow are still outpacing growth in demand, another downward adjustment will occur in the real price producers receive for milk."
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Source: Dwight Aakre (701) 231-7378
Editor: Dean Hulse (701) 231-6136
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