Producting Milk in the Past Decade

Posted: June 17, 2011

What the first 10 years of the 21st Century have taught us about milk production.

It is hard to believe we’re over a decade into the 21st century. It has been a decade filled with a wide variety of struggles and changes. According to Wikipedia, the first part of this century has seen challenges within international trade, concerns over energy supplies and ecological crisis, international concerns on terrorism and war, the explosion of telecommunications and further integration of technology into society, as well as the widespread economic failure hear in the last quarter. All sectors of business, including agri-business such as dairy, have been impacted by these events.

A Wikipedia definition for the dairy industry in the same time may look like the following: The decade has been dominated by price fluctuations, for cost of production and revenues, especially in the later part of the decade, emphasizing the growing need to continuously plan and manage a dairy operation finances to promote sustainability and profitability. The key there is in the planning and management. So let’s take a look at where milk prices, estimated feed costs, and fuel costs have been in the past decade, and what clues they may have as we continue through this early part of the 21st century.

Chart 1 - Monthly Prices

The following two paragraphs are based on the Monthly PA Milk, Feed and Northeast Diesel Monthly Prices Graph. As mentioned above, the past decade saw many highs and lows not just for class I milk price for producers (this is not the retail price), but also components of feed costs, and fuel costs. Chart 1 depicts the monthly average prices for Pennsylvania in relation to class I milk price, estimated feed cost (based on USDA feed value formula using corn, soybean, and alfalfa hay prices), as well as diesel fuel costs for the Northeast. Note that fuel costs are on-road diesel, and not the exact price paid by a producer. The trends, however, would be consistent and reflect the fluctuation in the price of oil. All these values were adjusted to reflect 2011 dollar values, and were converted to a price/gallon basis. Fuel and milk price both had highs and lows throughout the decade. Feed costs did not see the same level of highs and lows throughout the decade. Most of the dramatic changes can be seen in the last third of the decade. If we would average the peaks and valleys, and visualize overall trends, it is obvious fuel costs, and energy costs in general, are trending upward. Feed costs had a slight upward trend in cost, while milk price trend would have been pretty level.

Chart 2 - Milk Disappearance

A critical factor to any commodity is the supply of the product and the demand for the product, and milk is no exception. Chart 2 depicts the U.S. supply of milk (in billions of pounds) over the last decade, as well as the demand estimated by yearly commercial disappearance (indicator of use) of milk and milk products for the U.S. The graph clearly shows that in 2007 and more so in 2009 the U.S. experienced a decrease in overall demand of milk, and it actually dropped below the available supply. U.S. demand of milk has slowly started increasing since 2009, and U.S. production has slowed since 2008. 

Has the first part of the 21st century left us any clue about the next 10 years in relation to milk production? Yes and simply put, it is to monitor and manage costs. With price shifts in feed, fuel, and milk price happening regularly and more dramatically, producers need to track and monitor their individual feed costs, monitor other production costs, plan ahead for high or low prices, and continue to advance the efficiency of their dairy operations to produce milk. There is even some room to control milk price, specifically by looking at component production, as well as milk quality. It may be unclear what the next decade has in store, but hopefully learning what we can from this decade will help prepare us for that future.

- By Robert Goodling, Penn State Extension dairy educator