U.S. Bites Into Cheese Mountain With Stockpile Purchase (1) | Agweb.com

Milk glut has pushed dairy prices to lowest levels since 2009.

Source: U.S. Bites Into Cheese Mountain With Stockpile Purchase (1) | Agweb.com

The buy by USDA will do little to improve farmgate milk prices, and in the long run might actually do more harm than good by temporarily improving wholesale prices and thus encourage even more overproduction.

It has not been a good time to be a dairy farmer almost anywhere in the world over the last year or two. A variety of factors, including wide spread drought one year and China stockpiling milk products led to a dramatic upturn in the farmgate price for milk. And for a time dairy farmers were doing pretty darn good.

Unfortunately, it seems that everyone, including a lot of people who should have known better, seemed to think that this situation was going to continue into the future, that dairy prices would remain high, and that there were massive profits to be made if they expanded production. As a result dairy operations began expanding all over the world. The EU lifted its production restrictions, farmers added cows, processors began building new production facilities. Fonterra, the world’s largest dairy co-op based in New Zealand, was investing heavily in the Chinese dairy industry because it saw massive profits were just waiting.

Well, it couldn’t last. And it didn’t.

China wasn’t buying up milk products because it really needed them. China was buying because it was first of all, getting a really, really good price. It wasn’t using the products it was buying, it was stockpiling them against future price increases. Chinese consumption of imported milk products was also being driven by a series of serious food contamination scares, including the deliberate¬†adulteration of milk by criminals with chemicals that made the milk appear to have higher protein levels in order to get higher prices. The adulteration resulted in hundreds, even thousands of people becoming sick and some even dying. Ventures into marketing milk products in Southeast Asia were failing badly. The Chinese themselves were investing heavily in domestic milk production. China hates being dependent on imported foods for obvious reasons, and has been trying to do something about it. Western style mega-farms were starting to pop up, supported by the government. China was also cleaning house internally, launching extremely strict monitoring of food production to prevent things like the milk adulteration horror. They actually executed people for that crime.

So while China’s imports of milk products was shrinking drastically, world wide demand was flat, production continued to expand.

And milk prices plunged.

My father often said that a lot of farmers were their own worst enemy. Unfortunately he was largely correct.

He was also enormously skeptical of government price support efforts, and he was largely correct there as well. While these government programs like this cheese buy are well intentioned, in the long run they only serve to make the problem worse by temporarily propping up market prices and encouraging over production. Once the program ends, the market ends up being worse than it was before.

 

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