Rabobank Sheds Light on Dairy Market Shift
By Amanda Brodhagen, Farms.com
Rabobank released a new report on Wednesday entitled “Dysrhythmia” suggesting that the U.S. dairy industry no longer experiences a degree of cyclicality, with highs and lows occurring on a regular basis, which is something that dairy farmers have come accustomed to. The report was critical to say that the industry still views the market conditions from a cyclical point of view and their planning is based on poor assumptions. Rabobank argues that the cyclical US dairy market pattern became apparent in the mid-2000s.
What factors contributed to the cyclicality dairy market?
The report outlines three major variables that have shifted cyclicality from being a common feature among the US dairy market. First, it was common place that when government-run producer support programs became less effective and producer target support levels were less than originally anticipated and the cost of production rose. This means that dairy farmers experienced losses in market downturns, which created supply downturns which prompted price cycles.
Second, prior to the 2000s, the US market was for the most part isolated from world and a system of import barriers coupled with export subsidies, which separated prices from other regions in other parts of the world. In these market conditions, the demand for dairy products rose as factors such as populations and the middleclass grew.
Third, prior to the 2000s, the US dairy industry could easily be described as homogeneous with the majority of dairy farmers managing pretty much the same types of management operations in terms of their production systems; and therefore were working with similar cost base. Competition was less apparent and most dairy producers found themselves in the same types of situations in terms of profit levels. With this in mind, when there was a shortage of milk supply, most producers responded by creating an excess of supply which deprived investment in correlation with prices falling.
What has changed?
A lot has changed since the 1990s, which supported a regular cyclicality. The US is now heavily involved in the global market, which has freed them from isolation. With this additional market exposure, US dairy farmers began to produce larger volumes of milk to supply the demand coming from international markets. Also, dairy farmers are a lot less homogenised as a group and have diversified themselves to remain competitive given different consumer price markets. Dairy farmers operate a wide variety of production systems.
The new reality
The evolution of all of these changes has left markets more erratic that ever before - with highs and lows becoming less regular and no longer predictable. Feed price volatility has become the new norm and is a newer challenge for dairy producers. However, despite this industry shift there are options and tools available for farmers to utilize as part of their business model. Dairy farmers can utilize futures contracts and or forward contracts to look in the prices of milk and feed. Farmers will need to take a multi-faceted approach to managing price volatility and find the best strategy for their business.