Here & Now

UW Professor Explains Implications Of Falling Milk Prices

BRIAN GOULD:

90% OF OUR MILK – THAT IS STATE OF WISCONSIN MILK – GOES FOR CHEESE MANUFACTURING. AND MOST PEOPLE DON’T REALIZE THIS. THAT IN THE U.S. AND IN THE MAJOR DAIRY-PRODUCING STATES MINIMUM PRICES FOR CHEESE ARE SET BY ADMINISTRATIVE RULE. AND THOSE ADMINISTRATIVE RULES PRICE MILK BASED ON THE PRICE OF PRODUCTS MADE FROM THAT MILK. FOR WISCONSIN CHEESE IS NUMBER ONE. IF WE HAVE A LOT OF STOCKS, THAT’S GOING TO PUT DOWNWARD PRESSURE ON THOSE CHEESE PRICES.

FREDERICA FREYBERG:

AND MILK PRICES ARE LOWER THAN THEY HAVE BEEN.

BRIAN GOULD:

YES. AND IT’S A COMBINATION OF HAVING AN ALL-TIME HIGH IN 2014, ALL-TIME RECORD. WE SORT OF GOT USED TO THAT. ’15 WAS AN OKAY YEAR, RELATIVELY HIGH IN PRICES. NOW WE’RE BACK TO LOW, BUT NOT AS LOW AS WE’VE HAD. WE’VE HAD PRICES DOWN TO $9 A HUNDRED-WEIGHT WHICH IS TYPICALLY HOW YOU MEASURE MILK PRICE BY HUNDRED POUNDS. IT'S ABOUT $13, $13.50 RIGHT NOW.

FREDERICA FREYBERG:

EVEN AS THESE PRICES ARE GOING LOWER FOR MILK, FARMERS ARE PRODUCING MORE TO MAKE UP FOR THAT?

BRIAN GOULD:

WELL, THAT’S A BIG PROBLEM. IF YOU RECALL, WHEN WE HAD THE FARM BILL DEBATE, THERE WAS SOME DISCUSSION ABOUT HAVING SUPPLY MANAGEMENT. BECAUSE IF EVERYONE ACTS ON THEIR OWN, THEY DON’T HAVE THE OVERALL INDUSTRY GOAL IN MIND. IF EVERYONE PRODUCES MORE, WHAT DOES THAT DO? THAT’S GOING TO PUT MORE DOWNWARD PRESSURE ON PRICES. AND WISCONSIN HAS CONTINUALLY INCREASED PRODUCTION SINCE 2004. ABOUT 30% SINCE 2004. BUT WE’RE NOT THE ONLY ONES. MICHIGAN HAS INCREASED THEIR PRODUCTION I THINK 80% OR SOMETHING SINCE 2004. JUST TREMENDOUS. AGAIN, THEY’RE LOW COMPARED TO WISCONSIN. BUT IN A RELATIVE SENSE THEY’RE QUITE HIGH. THE ONLY MAJOR PRODUCING AREA THAT’S HAD SOME LOWER PRODUCTION IS CALIFORNIA, WHICH IS THE LARGEST PRODUCER OF MILK. SO WISCONSIN HAS AN IMPACT ON THE OVERALL MARKET. WE PRODUCE ABOUT 16% TO 15% OF THE MILK IN THE U.S. BUT WE’RE NOT THE ONLY PLAYER. BUT EVERYONE IS TRYING TO DO THAT. AND GETTING BACK TO YOUR ORIGINAL QUESTION, THE REAL STRATEGY WOULD BE TO CUT BACK AND REDUCE THAT SUPPLY IN THE LONG RUN. AND IN THE LONG RUN WE’D PROBABLY BE BETTER OFF. BUT THE QUESTION ONE HAS TO ASK IS IF YOU’RE PRODUCING MORE AND YOU’RE PRODUCING AT A LOSS, DO YOU WANT TO REALLY PRODUCE MORE. BECAUSE THE NET WILL BE LESS. THAT’S THE QUESTION.

FREDERICA FREYBERG:

YET IT’S HARD TO BE THAT FIRST ONE TO DO THAT.

BRIAN GOULD:

RIGHT. AND THERE’S NO COLLECTIVE ACTION BECAUSE WE DON’T HAVE SUPPLY MANAGEMENT AS PART OF A FEDERAL DAIRY POLICY.

FREDERICA FREYBERG:

ALSO FACTORING NOW INTO THE PRICE OF LOW PRICE FOR CHEESE IS THE EU MARKET. DESCRIBE WHAT’S HAPPENING ON THIS GLOBAL MARKET?

BRIAN GOULD:

THE EU HAS GONE THROUGH WHAT WE CALL A STRUCTURAL CHANGE. THERE WAS A CHANGE IN THE RULES BACK IN APRIL OF LAST YEAR. SO IT HAS BEEN ABOUT A YEAR. THEY HAD STRICT QUOTAS BY COUNTRY. THAT IS, COUNTRIES COULD NOT PRODUCE MORE MILK THAN THEY WERE ALLOWED TO. THAT WAS LIFTED IN APRIL. AND THE INITIAL THINKING WAS THAT THERE WASN’T GOING TO BE MUCH RESPONSE. WELL, WE’VE BEEN WRONG. THERE’S SO MUCH PRODUCTION GOING ON IN THE EU THAT WAREHOUSES ARE STARTING TO FILL UP. WE’VE HAD SOME DOWNTURNS IN OUR CHEESE AND BUTTER MARKETS RECENTLY. BUT STILL THERE’S A LARGE PREMIUM PER POUND OF THE SAME TYPE OF CHEESE IN THE U.S. VERSUS THE EU. AND THE MAJOR EXPORTER IS NEW ZEALAND. AND THEY’RE MUCH CHEAPER AS WELL.

FREDERICA FREYBERG:

SO WHAT DOES ALL OF THIS DO TO WISCONSIN’S ECONOMY, SO DEPENDENT ON THE DAIRY INDUSTRY?

BRIAN GOULD:

AGAIN, OBVIOUSLY IT’S GOING TO HAVE A DEPRESSING EFFECT JUST BECAUSE OF THE LINKAGES. YOU’VE GOT A DAIRY FARMER PRODUCING RAW MILK. BUT THAT DAIRY FARMER IS PURCHASING INPUTS, PAYING WAGES. THAT’S ALL GOING TO BE AFFECTED. THIS IS VERY CYCLICAL. WE HAD RECORD, ALL-TIME RECORD IN ’14. 2015 WAS VERY, VERY GOOD. IF THE APPROPRIATE RISK MANAGEMENT STRATEGIES WERE ESTABLISHED THEN OR THE FUNDS WERE PUT AWAY TO COVER THESE DOWNTURNS, WE SHOULD BE OKAY. AND, AGAIN, REMEMBER, IN 2009 AND ’08, WE HAD SIGNIFICANTLY LOW PRICES, VERY, VERY LOW PRICES. AND A LOT OF THE MARGINAL PRODUCERS HAD TO LEAVE THE INDUSTRY AT THAT TIME. SO SINCE THEN I THINK THE PRODUCERS THAT HAVE COME IN AND HAVE BEEN CONTINUING TO PRODUCE ARE MUCH MORE EFFICIENT THAN HISTORICALLY.