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An oversupply of the “perfect food” is pushing farm milk prices to their lowest levels in recent years. The slumping prices could mean tougher times ahead for the dairy industry but inexpensive milk for consumers, say two Purdue University experts.
A dairy industry expansion that began in 1998 is behind the milk glut, says Michael Schutz, Purdue Cooperative Extension Service dairy specialist.
Schutz says dairy farmers increased their herds when farm milk prices were high and consumer demand was good. Prices hit a peak of around $20 per hundred pounds of milk in 1999. Those same prices today range from $13.50-$14, Schutz says.
“High milk prices encouraged a lot of expansion in nearly every state in the United States. Indiana was no exception,” Schutz says. “Farmers got financing to expand their herds. Then, when prices began to go down, bankers wanted them to fill the new barns with dairy cows. As the oversupply was beginning, the expansion was still going on.”
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By GlobalDataNationally, U.S. milk production approached 168 billion pounds in 2000, an increase of more than 7 billion pounds from 1999, according to the U.S. Department of Agriculture.
Schutz says Indiana’s dairy herd grew to 151,000 cows in December 2000, up from 135,000 in 1998. “As a percentage increase in cows, Indiana has led the nation,” he says.
Indiana has 2,400 dairy farms. The Hoosier state produced 223 million pounds of milk in December alone, a 19 percent increase from the same month a year earlier. Indiana ranks 15th nationally in dairy production, two spots higher than its 17th place ranking in 1998.
Schutz expects dairy farmers to trim their herds, in response to the poor milk prices. Some smaller dairies may close.
Consumers can expect retail prices to remain competitive in the months ahead, until milk supplies move more in line with consumer demand, says Joseph Uhl, a Purdue agricultural economist and consumer prices analyst.
“There’s a lot of milk out there. Consumption is still strong, but there’s not enough consumption to use up the supply,” Uhl says. “It’ll take a while for the producers to respond to these prices. I suspect we’ll see a long period of low prices for dairy products and pretty good prices for consumers.”
Although farm milk prices are lower and milk supplies are large, dairy production isn’t the only force at work on retail prices, Uhl says. Retail competition is helping drive prices down, as well.
Milk is considered a “loss leader” by retailers, which rely on low-priced milk to lure customers into stores, Uhl says. If one grocer runs a special on milk, competitors often follow.
“Fluid milk is used as a ‘football’ item in grocery stores. It’s one thing the stores want to promote as a special,” Uhl says.
Other dairy products, such as cheese and ice cream, have not been affected as much by the low milk prices, Uhl says. “There’s a very strong demand for premium ice cream and cheeses,” he says.
Butter prices keep churning along, too.
“Butter inventories have remained relatively low through the end of the year, preventing dairy prices from dropping even lower,” Schutz says. “Butter has been a safety net for the dairy industry.”
