The Crash of 1999

If you were milking cows in early 1999 you remember when the bottom dropped out of the price of milk. The price dropped from $17.34 cwt. in December to $10.27 cwt. in February, a decrease of 40% in 60 days.

How could the price of milk drop so drastically in such a short time? In my reading I found a general rule of thumb used for milk pricing. It states that when supply exceeds demand by 1% the price of milk will drop 18%. According to this then supply must have exceeded demand by 2.2% to cause a 40% price drop.

Using actual figures I have found this not to be true:

Spring 1999:
Excess of 61 carloads if cheese
Average carload of cheese contains 44,000 lbs. of cheese
61 carloads X 44,000 lbs/carload = 26,840,000 lbs. of cheese
10 lbs. of milk is needed to make 1 lb. of cheese
10 lbs. of milk/1lb cheese X 2,684,000 lbs. of cheese = 26,840,000 lbs. of milk surplus
There was 157,000,000,000 lbs. of milk produced
The actual excess was 0.0171%, far below the 2.2% needed to decrease the milk price 40%.

Last fall the milk price again took a drastic drop. The reason for the drop was that an error was corrected in the books showing 650 million pounds more milk. Before the error was discovered, October futures went down $6.00 / cwt. We can then assume if that milk had not been there the price of milk would not have dropped.

In order to prevent this drop in milk price what would it have cost the dairy farmer to remove this excess cheese from the market based on a per cwt. of milk? Last year 160 billion pounds (1.6 billion cwt.) of milk were produced. Using the price of cheese on the 40 lb. block market at the time the error was reported we can calculate the cost to remove the excess.

Summer 1999:
The 40 lbs. block price = $1.9725/lbs. (approx. $2.00)
65 million lbs. of excess cheese X $2.00/lbs. = $130 million
$130 million/1.6 billion cwt. = 8.25¢ cwt.

Now the question is, How can we keep a surplus of cheese out of the market to bring the milk price back up? First we need to know what the excess approximates each year. In 1999 milk production increased 4% while milk product consumption increased by 2.7% in the same time period. That leaves us with an excess of 1.3% of production. Rounding that number to 2% we can do the necessary calculations.

160 billion lbs. of milk X 2% = 3.2 billion lbs. of surplus milk
3.2 billion lbs. of milk = 320 million lbs. cheese
320 million lbs. of cheese X $2.00/lb. = $640 million

Farmers are you prepared to let the industry lower your price dramatically?

Or are you willing to contribute 10¢ per cwt. to stabilize and increase your price when history shows that 8.25¢ per cwt. would have prevented a $5.00 per cwt. drop in your price?