CIAS partnered with CALS Global and the UW Center for Dairy Profitability to feature renowned German dairy economist Torsten Hemme, director of the International Farm Comparison Network (IFCN) in a webinar April 2020, engaging an audience of nearly 100. He discussed approaches to balancing supply and demand, both in short-term, emergency situations and at the longer-term, structural level.
Dr. Hemme reviewed trends in world milk prices over the last fifteen years. His analysis indicated that milk price cycles are a delayed systems response to price signals. The U.S milk price is linked to world prices due to the high volume of US dairy exports. Strong domestic butterfat market and import restrictions result in slightly better US milk prices than world prices.
Import restrictions and the Federal Milk Marketing Order system insulate the U.S from catastrophic collapses in milk prices. Farm profitability challenges are related to the cost of production and reliance on exports. Hemme related that the average global milk price is $17/cwt, so farmers whose cost of production is higher may not benefit from export markets.
Hemme’s 30-year career as a dairy farmer and dairy economist gives him historical insight into the EU’s milk quota system. From his perspective, the benefits of milk quotas diminish over time. Europe and Switzerland gradually moved away from using quotas to manage milk production. In Canada the value of quota has increased over time, giving farmers who have inherited a milk quota a competitive advantage over those who buy quota. This makes it costly for beginning farmers to enter the dairy business.
How are profits distributed throughout the dairy industry? Hemme referred to it as an “unfair organization of the dairy supply chain.” It is the farmer who carries all the risk in the dairy industry, not the processor or the retailer, and this is something that he has observed throughout the world. No matter what happens to the price, cows continue to produce milk. Hemme reported that globally, milk production growth is around 3% in a good year and typically only drops to about 0.5% in a very bad year, but the growth is always positive. Milk availability is never threatened by low prices.