Sunday, July 26, 2009

Low Cheese Prices have Nothing to do with the Poor Economic Times

In many previous posts to this blog, the formulas and historic pricing have been shown to firmly link dairy milk prices to cheese prices. Cheese prices are by far the most important variable in milk pricing. Milk prices are down because cheese prices are down. It has been suggested by some well known agricultural economists that the low cheese prices are, in part, caused by reduced consumer demand resulting from the current economic downturn. This absolutely is not true!

Below is a graph of per capita consumption of cheese in the U.S. with all recessions noted in blue. There appears to be NO correlation between cheese consumption and the state of the economy. Cheese consumption has been rising steadily for 37+ years and, while final statistics for 2008 have not been released, there is no reason to think that 2008 and 2009 will be any different than the long term trends.

Worldwide, cheese consumption continues to grow; but, toward the end of 2007, supply began outgrowing consumption. This over production continued through 2008 but is expected to slightly narrow in 2009.

The current "crisis" in the dairy industry has nothing to do with the hard economic times. It has everything to do with over production globally. The current cheese prices result from a 33% increase in New Zealand cheese production (see July 12 post) while the U.S. cheese production grew slightly more than normal (approximately 1% more than normal) due to favorable exchange rates and resulting exports.

The solution for the U.S. dairy industry cannot be controlled by programs only within the U.S. To have any long term impact on U.S. milk prices, programs are needed that recognize the global nature of the cheese prices.

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