Of Data and Dairy Farmers
I don’t have a stake in agriculture past my consumption of the products, but I’ve heard rumblings about the state of the dairy industry in the US. What I’ve attempted to do here is come to a conclusion about the cause of closures in US dairy farms using publicly available data to see if I could better understand the claim.
My conclusion based on the skimming I’ve done is that the cause of dairy farm closures relates to the increase efficiency for milk production and the drop in international demand for US dairy products. This first cause isn’t surprising given that the historical trend has been towards fewer farmers as farming practices become more efficient. The second cause is more interesting, and I think, explains the reason price drop better. However, a full discussion of international trade would get too involved so in this case, I’ve aggregated the analysis of others.
What data do we have?
The data I used from this article is largely drawn from the USDA which has data available back to 1975. I examined it using Excel and R. Other information came from FRED, the WSJ, and a paper from the USDA ERS. These items are cited at the bottom.
Is the way people are consuming dairy changing?
Ultimately, any goods produced by farmers have to be taken to market — with this is mind, it would be helpful to know what the actual consumption of dairy products in the US is.
Since 1975, the per capita consumption of dairy products has dropped 21%. While this per capita estimate is not a country-wide total consumption number (which would have grown given the increase of the US population over the same time), it does provide evidence that these products are not viewed as necessary as they used to be.
What is happening to dairy production?
The total number of dairy cows has actually dropped by 14% while the number of gallons of milks each produces has went up 91% relative to 1980. This implies that dairy farmers are able to produce “more with less”.
How are prices controlled by the dairy industry?
The trend as of 2016 has been to increase the dumping of milk in order to lower supply.
How has international trade changed and how does it impact the US dairy industry?
Only looking at domestic factors on milk productions would be short sighted. As discussed in this blog post, a large impact was felt by the dairy industry because of the closing of exports to Russia, and the EU requiring fewer dairy products from the US. Interestingly, the biggest single factor impacting these dairy prices might right now might actually be the state of international trade policies!
In 2015, U.S. dairy exports declined for several reasons:
• Global demand for dairy products was relatively weak, especially from China.
• Since August 2014, Russia has banned imports of most dairy products from the United States, the European Union (EU), Canada, Australia, and Norway. Although the United States is not a major supplier for Russia, the ban caused the EU to export to alternative markets in competition with the United States. Russian dairy imports declined due to the ban and recession in the country, contributing to lower global dairy prices (see box, “Russian Trade Ban”).
• The value of the U.S. dollar was strong relative to other currencies, causing U.S. exports to be less attractive.
• In April 2015, the EU discontinued its milk supply quotas. EU dairy farmers thereafter increased their level of milk production, boosting their exports and crowding out dairy product imports from the United States.The 2015 decline in U.S. dairy exports contributed to a substantial fall in milk prices received by dairy farmers. The all-milk price fell from a record high of $24.00 per cwt in 2014 to $17.10 per cwt in 2015 (USDA NASS, 2016), a 29-percent fall — “Growth of US Dairy Exports,” USDA ERS
What can we say about the dairy industry based off the evidence we have?
A major change has occurred in the way that the United State dairy industry operates: The person that ultimately buys the product has changed. Whereas the industry previously has been domestic in scope, falling per-capita consumption by people in the US and an increase in exports means the price a dairy farmer is paid may well be more affected by trade policy and subsidies than anything else.
As discussed in [3] and [4] the recent volatility in the prices can be explained by the rise in demand from increased exports, and then the sudden shutting off of that demand due to greater competition in the EU and Russia’s trade ban.
A final note on price controls for dairy products. While beginning to write this article I noted several people I knew had substituted milk for one of the alternatives (for instance, almond milk). Throughout history, dairy products have had no competition and were viewed as a staple. Recently, more people have ceased purchasing dairy, while we have seen the entry of a wide range of alternatives to dairy products. With greater competition in mind, it seems like strategies to artificially raise the price of dairy products may do more harm than good since a consumer can easily replace milk with a substitute.
References:
[1] USDA ERS Dairy Product Data
[2] FRED
