The importance of trade
Wednesday, July 5, 2017
Posted by: Lauren Brey
By Mark Stephenson, director of dairy policy analysis, University of Wisconsin-Madison
Milk prices have always been moved by milk supply and demand for dairy products, and this is still the case. In simpler times, we could probably focus on the supply side alone because that used to be the source of greater variation and tended to drive changes in the milk price. Today, demand may be the more impactful price mover.
We often use “commercial disappearance” as our proxy for demand. Commercial disappearance is calculated as production plus the change in stocks plus imports minus exports.
It turns out that there is a regular seasonal pattern to domestic consumption of many dairy products. For example, fluid milk consumption is less in the summer and greater when school is back on in the fall, and butter and cheese consumption tends to be greater around the holidays. Because we can store butter and cheese, the stocks of those products tend to grow during the spring flush of milk production, and we draw down on those stocks from the fall through winter.
The element in the commercial disappearance calculation that is having the biggest impact on our milk prices is trade and, more specifically, exports. Our domestic consumption of dairy products may be somewhat seasonal, but quite predictable. Imports of dairy products are fairly stable, too. But exports of dairy products from the U.S. vary more than the other factors in the commercial disappearance calculation.
The graph below shows a rolling 12-month average of milk solids exported as a percentage of milk solids produced. Since 2000, exports have accounted for an ever-greater proportion of our milk production. That nice trend has supported an expansion of dairy cows and productivity per cow. But our exports of dairy products are not always on a smoothly increasing path.
The graph also shows the U.S. All Milk Price for the same period. It is easy to see that every major downturn in farm milk prices since 2000 has occurred when exports have either plateaued or declined. When importing countries of the world want less of our dairy products, more of our production stays home having the effect of increasing stocks of cheese, butter and other storable dairy products until prices are lowered and stocks return to pipeline levels.
Trade has become important to the U.S. dairy industry. It has supported growth in milk production and today we are the world’s third largest exporter of dairy products after the European Union and New Zealand. However, trade also become a primary source of milk price instability.
If you are trying to anticipate your milk check, keep an eye on the level of dairy exports.