The milk-feed-price (MFP) ratio, a widely used indicator of profitability in the dairy sector, reached its lowest level in nearly 35 years in May 2009, dropping below its long-term average of 2.74 for 21 consecutive months from January 2008 through September 2009, with reports of financial stress in the sector reaching what many consider to be crisis proportions. 1 The MFP ratio reached 1.5 this May and June, comparable to its level in August 1974.2 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, the present crisis may rank as at least a close second, as the worst dairy crisis in more than 35 years, before the MFP returns to a more normal level.

The current crisis shares one characteristic with the crisis of 1972-1977 and has one important difference. The similarity is that both crises were at least partially precipitated by sharp increases in dairy feed costs. Feed costs had been relatively stable from January 1970 through the fall of 1972. However, as news of sudden and significant feed and food grain purchases by the (now) former Soviet Union as a result of several years of poor harvests emerged in late 1972, feed prices began to sharply increase. With continued shortfalls in its grain production, the Soviet Union remained a major purchaser of U.S. feed and food grains, contributing to dairy feed ration costs that more than doubled by August 1974. The dairy feed ration cost remained quite variable during the early crisis and thereafter, but at around a level roughly double its pre-crisis level.

Between the fall of 1972 and August 1973, the MFP ratio dropped to 1.6 from near its long-term average of 2.74. The decline occurred entirely because of the sudden increase in dairy feed costs, as the all milk price generally continued to increase. The MFP ratio then began to increase in August 1973 as a result of higher dairy support prices (tied to parity) mandated in the 1973 Farm Bill. In spite of the 1973 Farm Bill and other policies aimed at ameliorating this earlier dairy crisis, the crisis persisted for an additional 3 years, which were characterized by general inflation and a 16-month recession extending from November 1973 to March 1975. However, an important underlying cause of the 1972-1977 dairy crisis was that the dairy sector had not adjusted to a doubling of its feed costs.

The current dairy crisis was also precipitated by higher feed costs, but initially these were largely offset by a nearly concurrent dairy-price-enhancing-surge of dairy product exports. The cost of dairy feed doubled from a relatively stable average of about $4.00 per cwt from early 1998 to summer 2006, to over $8.00 per cwt by spring 2008. The sharply higher feed costs were not trade-induced as in the 1970s, but occurred at least partially because of policies that mandated higher ethanol use, along with higher oil prices that also encouraged more use of ethanol and strong grain exports encouraged by a weak U.S. dollar.

Increases in feed prices that began in the fall of 2006 were followed by proportionately greater increases in the all milk price, as U.S dairy products surged onto world markets in 2007 that were growing as a result of strong world economic growth, a favorable U.S. exchange rate, and reduced supplies among major U.S. dairy competitors in Oceania (Livestock, Dairy, and Poultry Outlook. June 17, Special Section: Dairy Trade, at http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1350.

The major difference between the current dairy crisis and the 1972-1977 crisis is that this year’s collapse in the all milk price was brought about partially by the collapse in world demand and partly by decreased domestic demand as a result of the U.S. recession. While feed prices have also declined from their high in early 2009, they have not fallen in proportion to the decline in the all milk price. USDA forecasts that feed prices are likely to remain significantly higher next year and into the foreseeable future than they were in the 8 years preceding the beginning of the increase in grain prices in fall 2006 (http://www.usda.gov/oce/commodity/). Thus, in response to the current crisis, dairy producers must not only adapt to higher feed prices but also to international demand, which is unlikely to return to the 2007 level in the near future because of slower global economic growth and a resumption of more-normal dairy production in Oceania.

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, based on October WASDE forecasts. The MFP ratio would therefore remain below its longterm average for at least an additional 15 months. Added to the 21 months from January 2008 through September 2009 in which it has already been below its longterm average, that would place it at least 36 months below its long-term average, making this crisis a close second as the worst dairy crisis in more than 40 years. The August 2009 ERS Farm Income release projects average net dairy farm income down 94 percent in 2009, to $9,200 from $152,000 in 2008 (http://www.ers.usda.gov /Briefing/FarmIncome/Gallery/businessincome.htm).

In recognition of the continued severity of the present crisis, ameliorative actions have been taken by USDA and the U.S. Congress, and separately by the dairy industry. On July 31, the Secretary of Agriculture announced a 3-month increase in the purchase price of nonfat dry milk from $0.80 per pound to 0.92 per pound; block cheese from $1.13 per pound to $1.31 per pound; and barrel cheese from $1.10 per pound to $1.28 per pound. During FY 2009, USDA has purchased 277 million pounds of nonfat dry milk and 4.6 million pounds of butter under the Dairy Product Price Support Program. USDA has also made over $700 million in direct payments to dairy producers in FY 2009 under the Milk Income Loss Contract Program. On August 5, the U.S. Senate passed the Fiscal 2010 Agricultural Appropriations bill, with an amendment allocating $350 million to USDA to help alleviate the current crisis, of which $60 million will be used to buy cheese and the remainder to provide direct payments to farmers. Separately, on October 1, the private Cooperatives Working Together (CWT) announced its third 2009 herd retirement. Two retirements in the second half of 2008 and two in 2009 have already removed 250,000 cows accounting for 4.9 billion pounds of milk (http://www.cwt.coop/)—equivalent to roughly 2.5 percent of 2008 milk production.

Source: Dale Leuck, Dairy Economist, Farm Service Agency