Milk Markets Overview

Milk has suffered a long-term decline in consumption since its peak in World War II and has fallen by over 30 percent since 1975. Much of the decline has been offset by increased sales of yogurt, cheese, and other dairy products. The industry has endeavored to combat the decline in milk consumption with measures such as convenient packaging and healthy brands with protein additives. The decline can be attributed, partly at least, to factors such as a lower proportion of children in the population, price increases due to increasing costs of grains fed to cows, and milk no longer being seen as healthy as it once was.

The milk industry is around the size of corn production and second only to beef in the livestock industry. Milk is produced in all 50 states, mostly on family farms that are generally members of cooperatives. The cooperatives collect the milk and deliver it to processors and manufacturers. Dairy farms have been reducing in number and increasing in size, with higher output per cow more than offsetting fewer cows.

As with sugar, the U.S. milk market is heavily regulated and manipulated. There have been federal and state dairy programs since the 1930s, with subsequent programs added and discontinued over the years with changing market conditions. There are a number of reasons for the existence of such programs. These include the fact that milk is a highly perishable product that must be harvested daily, while quantities produced can vary daily according to the weather and feeding conditions. At the same time, consumption can also vary daily due to consumer shopping patterns.

The two main federal programs are the price support program and the system of milk marketing orders. Under the former, the Commodity Credit Corporation purchases manufactured products like butter and cheese, but not milk, at specified support prices and can sell at prices at least 10 percent above the purchase prices. The marketing orders are intended to establish orderly market conditions by setting the relationship between fluid and manufactured dairy products and a geographic price structure. There is also a program to provide income stabilization payments to producers.

Exhibit 18.3 shows U.S. milk prices from January 1995 to August 2013.

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