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June 9, 2016

Is the Milk Price Bust Halfway Over?

 |  By: Mary Ledman

Commodity producers, including dairy farmers, are quite familiar with boom and bust cycles—also called bull and bear markets. Until recently, dairy researchers have not attached a time frame to milk price cycles.

Paying attention to milk price cycles can help producers better manage their businesses and mitigate the emotional response that accompanies a quick market turnaround. Of course, even in bull and bear markets, peaks and valleys occur, making the starting and ending points of a cycle sometimes recognizable only in retrospect.

Recent research suggests farm-level milk prices rise and fall according to a 3.3-year bull and bear price cycle. If that holds true in today’s current bear cycle, milk prices could remain low for another year—or even longer.

A 2014 working paper, “Milk Price Cycles in the U.S. Dairy Supply Chain and their Management Implications,” by agricultural economists Charles Nicholson of Pennsylvania State University and Mark Stephenson of the University of Wisconsin, defines the key factors contributing to the cycles as bovine biology, investment by producers and processors, and inventory behavior.

During the 10-year period from January 2005 to December 2015, the Class III milk price averaged $16.28 per cwt. The latest bull cycle, which began in July 2012 and ended in December 2014, lasted 30 months. The Class III milk price peaked at $24.60 in September 2014, an amazing $8.32, or 51%, higher than the 10-year average. During this 30-month bull cycle, the Class III price averaged an impressive 22% higher than the 10-year average price of $16.28.

Looking at the previous bear cycle, which lasted 27 months from November 2008 through January 2011, the Class III price averaged $13.09, or nearly 20% less than the historical average. The lowest Class III price during the 10-year period of $9.31 occurred in February 2009 and was 43% lower than the 10-year average.

January 2015 ushered in the start of the current bear market cycle, with lower- than-average Class III milk prices that could persist into June 2017 if the current bear cycle lasts as long as the previous bull cycle did. While the July 2012 to September 2014 bull cycle averaged 22% higher than the 10-year average Class III price, a similar 22% price decline in the current bear cycle would place the Class III price at $13.02, just 60¢ below the May 2016 Class III price of $13.62. However, the Class III price would have to fall to $7.96 during this bear cycle to match the amplitude of the $24.60 price peak reached in the previous bull cycle.

Today’s low prices will likely not drop as low as the previous bull cycle’s high prices climbed, but if this bear cycle proves to be a typical one, there could still be a year left before it fully plays out, unfortunately. This cycle, however, could last longer than prior cycles due to the elimination of the European Union milk quotas. Keep in mind the research was conducted when EU quotas were still in effect.