The short answer is probably not. The high milk prices in 2007 have come about as a result of increased demand for dairy products and only a modest increase in milk production.
Milk producers have reacted to the profit squeeze they experienced during 2006—largely a result of higher feed costs and lackluster milk prices—by only increasing production in the first half of 2007 by about 1 percent over year earlier levels. Previous years have seen year-over-year increases of 2 to 4 percent.
Domestic demand for dairy products has been quite reasonable, but foreign demand for milk proteins has been very strong. Oceania (New Zealand and Australia) have experienced a three-year drought, and milk production in Australia is down significantly. In preparation for the inclusion of additional countries into the European Union, dairy policy is being significantly altered there. In particular, the system of production quotas is being phased out by March 2008. Natural disasters and shifts in policy have meant that world markets are looking for new sources of powdered milk proteins. Exports have been aided by a weaker dollar. As a result of these factors, U.S. exports of powders have increased dramatically in recent years, and this has yielded strong milk prices for U.S. producers.
The change in European Union agricultural policy is unlikely to be reversed, and higher feed prices resulting from policies to encourage domestic ethanol production are here to stay. Energy prices and related costs seem likely to stay high also. However, we can’t count on Australia remaining in drought forever, and U.S. producers have repeatedly demonstrated their ability to produce more milk when prices are strong.
The bottom line is that we can expect continued milk price volatility in the years ahead, but the average price (and average costs) will be higher than in the past decade.
Mark Stephenson, Cornell Program on Dairy Markets and Policy
