Managing for Profit

The second-worst dairy crisis in 40 years

The monthly Livestock, Dairy and Poultry Outlook from USDA this month features a special article from Farm Service Agency Dairy Economist Dale Leuck. He compares the current dairy crisis to that of the mid-1970’s noting some similarities and some differences. He points out that the milk-feed-price (MFP) ratio, the widely used indicator of profitability in dairy, reached 1.5 in May, the lowest level since August of 1974. As it stands right now, Leuck says, “The 21-month duration of the present crisis is so far considerably less than the 56-month crisis that extended from December 1972 through July 1977.” However, he points out the present crisis is not over yet as it may be a while before the MFP returns to a profitable level.

The economist says there are similarities between the two periods; both were precipitated by sharp increases in dairy feed costs. In 1972, news of significant feed sales to the former Soviet Union started to push feed prices higher to where the cost of a diary ration more than doubled by August of 1974.

The current dairy crisis was also precipitated by higher feed costs but the reasons were different. Here again, the cost of the average dairy ration more than doubled from the summer of 2006 to the spring of 2008. This time feed costs were driven by higher energy prices, speculation on ethanol demand and strong grain exports due to the weak dollar.

How the dairy markets reacted differed as well says Leuck. In the 70’s, milk prices continued to increase thanks to support prices tied to parity in the 1973 Farm Bill but inflation and a 16-month recession extended the dairy crisis for another three years.

This time around, milk prices initially were shooting higher through 2007 and much of 2008 as world economic growth, a weak dollar and drought in New Zealand and Australia all came into play. But a collapse in world demand, a decrease in domestic demand and resumption of normal dairy production in Oceania combined to pull the rug out from under dairy prices.

In summation, Leuck writes, “While milk prices are forecast to increase and feed prices are expected to remain low relative to early-2009 levels for the remainder of this year and through at least 2010, the MFP ratio is unlikely to exceed 2.74 before the end of 2010.” In other words, he projects the industry will remain below the long-term MFP average for an additional 15 months for a total of 36 months below average, “Making this crisis a close second as the worst dairy crisis in more than 40 years.”

One final note, the August 2009 Farm Income report from the Economic Research Service projects average net dairy farm income this year at $9,200, down 94 percent from 2008.