VOLATILE MILK PRICES EXPECTED
E. Bruce Godfrey,
USU Extension Economist
Since the early 1980's the price dairymen have received for milk has been above the government support price. But, passage of the 1995 farm bill resulted in a new environment that has led to increased volatility in milk prices. With the passage of this act the government became essentially an inactive player in the purchase and storage of commodities (primarily non-fat dry milk, butter and cheese). The private sector for the first time in several decades became the primary holder of these commodities. This change was anticipated, but there have been adjustments in meeting the demand for stored products. Thus, when milk production in many areas declined in 1996 and the demand for stored commodities increased, prices rose to unprecedented levels. This was followed by a period of increased production and declining demand for stored products with a resultant decline in milk prices. For example, the average price of milk in Utah peaked at $15.60 per cwt. in September of 1996. This high was followed by a bottom of $11.20 per cwt in July 1997. This change of more than $4.00 per cwt. in 10 months was the largest change in milk prices within a year that I have found in the historic data for Utah. This is one of the consequences of moving from government controlled prices to prices that are determined primarily by market forces. As a result, dairy farmers now have some feel for the adjustments to the market system that has occurred in the eastern Europe and the Soviet Union since the collapse of the communist regime. While large changes like those experienced in 1996-97 are not expected in 1998, prices are not expected to be stable in the coming year.

The price of milk normally reaches a peak in March and April each year with a fairly rapid decline associated with increased milk production that occurs in the spring. This decline normally continues until July-August when prices start to increase as production declines in the summer. This increase in prices during the fall is also enhanced by the return of children to school. This pattern of prices is expected in 1998. I would expect milk prices to decline about $1.50 per cwt from current levels by mid summer. This will be followed by a recovery to the mid to upper $13.00 per cwt (blend price) range by late fall if milk production does not increase dramatically in the coming months. However, the changes may be greater than those projected if recent increases in milk production continue. For example, the latest data from USDA indicates that milk production in the West (primarily California, Idaho and New Mexico) increased more than expected in January. If production increases more than expected and if exports decline, milk prices could be lower than projected above.