Wayne M. Gauthier, Bogren, Richard C. | 3/16/2009 8:04:19 PM
Rising costs to retailers and heavy worldwide demand pushed up the cost of milk for U.S. consumers, but recent events have put dairy farmers in a bind, according to an agricultural economist with the LSU AgCenter.
“The outlook for dairying for 2009 is a year of declines in milk prices larger than the declines in feed and other input costs,” said Dr. Wayne Gauthier. “The net effect will result in an exit of dairy farms and a reduction in cow numbers, which will diminish milk production capacity in Louisiana and throughout the nation. However, total national milk production is expected to rise incrementally in 2009.
“Milk prices are very inelastic, which means that falling farm prices will put downward pressures on retail prices, but not very much,” Gauthier added. “If farm prices fall 25 percent, retail prices are not likely to fall even one percent. I don’t expect to see very much, if any, decline in prices at retail.”
But while consumers won’t see much relief from higher prices, dairy farmers will be hard pressed to make a profit as a result of a set of circumstances that came together prior to and throughout 2007 and 2008 to really drive up milk prices, Gauthier said.
The first event was a continued drought in New Zealand and Australia, which reduced the worldwide supply of milk. The second was a set of European Union farm policies that reduced milk production and export incentives. And the third was the relative weakness in the U.S. dollar, which made our exports cheap, he said.
“That particular combination of circumstances created a tremendous demand for dairy exports,” Gauthier said.
In addition, U.S. demand increased because more people were dining out, he added. Pizza sales grew, increasing the demand for cheese. (One pound of cheese requires 10.1 pounds of milk.) And people were eating out more at upscale restaurants that use large amounts of butter and cream.
The results were new exports, changes in European Union farm policies and continuing domestic demand carried milk prices to record levels in 2007, the LSU AgCenter economist said.
“It all came to an end in late 2008,” Gauthier said. “Record high farm milk prices in 2007 and the second-highest prices on record in 2008 put a lot of resources into dairy production. Farmers increased their cow herds and production per cow as high prices led to a build-up in U.S. milk production capacity.”
Then both the national and international economies decelerated quickly, he pointed out. The drought eased, increasing world milk supplies, while export demand for U.S. milk decreased and U.S. production was high with excess capacity.
“As a consequence,” Gauthier said, “milk prices fell so low that the U.S. Commodity Credit Corporation was buying surplus milk products for the first time since 2006.”
For Louisiana dairy farmers, one cushion to counter falling farm prices lies in the Dairy Producers’ Refundable Tax Credit created by the Louisiana Legislature in 2007.
The law provides a dollar-for-dollar reduction against the dairy producers’ state income taxes up to $30,000 per individual dairy producer, Gauthier said. The total tax credit program cost is capped at $2.5 million per year.
Louisiana dairy producers are eligible for the tax credit, which ranges from $5,000 to $30,000, based on a formula that includes individual farmers’ milk production, the costs of importing milk into Louisiana and the cost of producing milk in the state. Eligibility for the credit is assessed monthly, calculated for each calendar quarter in a year and credited annually against a farmer’s state tax.
The credit kicked in the first and fourth quarters of 2007, paying dairy farmers between $2,500 and $15,000 each. And it looks like the first and fourth quarters of 2008 will be the same, Gauthier said.
He anticipates that the current economy may cause the tax credit to be in effect for all four quarters of 2009.
Gauthier said the credit was in part enacted to maintain a dairy industry in Louisiana.
“Louisiana used to be self-sufficient in milk production,” Gauthier said. “Now, Louisiana imports 40 to 60 percent of its milk depending on the time of the year.”
Total state production is based on calendar-year milk production within the Federal Milk Market Order System plus additional production not included in the system, Gauthier said. The production price for each month is calculated by the LSU AgCenter’s Department of Agricultural Economics and Agribusiness using a formula specified by state law.
In addition to the Louisiana tax program, the federal government created a national Market Income Loss Contract program, which initially was created in 2001 and modified in the 2008 farm bill, Gauthier said.
The formula-based program includes a trigger price adjusted for changes in estimated feed costs, he said. If the market price for milk is below the trigger price in a particular month, farmers will receive a percentage of the difference.
Gauthier said he doesn’t expect domestic demand to contribute to increased prices any time soon. When it occurs, the extent of the reversal of the decline in milk prices will depend on the relative strength of export demand.