y FOR THE 1990 FARM BILL

MILK PRODUCTION AND SUPPLY

Andrew Novakovic, Cornell University

Sometimes dairy policy drives milk production, at other times changes in milk production lead to changes in dairy policy. Probably more often than we might think, what happens to milk production doesn't have that much to do with dairy policy; it's more a function of basic economic conditions, technological change, weather, and the like. In any case, milk production and what is occurring on dairy farms is of major interest to dairy policymakers. In this leaflet, national milk production trends and related factors will be discussed . Although this paper will touch briefly on characteristics of the production sector by region or for farms of different sizes and structure, these topics are presented more completely in Leaflets 4 and 5. The complementary topic of dairy product demand is discussed in Leaflet 3.

Basic information on milk production is typically expressed by total pounds of milk produced per year and the two basic components of that total: average numbers of cows and milk production per cow per year. Our discussion centers on a review of these three figures and key prices affecting them.

NationaL Milk Production

As illustrated in Figure 1, milk production has had some ups and downs over time, but the direction of the long-term trend is clearly upward. Milk production in 1989 and 1988 was just over 145 billion pounds. Since 1975, milk production has trended upward more than 2.2 billion pounds per year. Not to be overlooked is the fact that it trended downward at nearly the same rate during the 1960s.

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Figure 1. U.S. Milk Production,

1950 to 1989

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50 54 58 62 66 70 74 78 82 86

Production has been increasing at such a steady and large rate for a long enough period of time that it is easy to forget that large annual increases are not the only lesson of history.

Interactions Between Support Prices and Milk Production

One could argue that Figure 1 illustrates what has occurred to U.S . milk production under a price support program that mixes basic support Objectives with an underlying orientation toward keeping dairy markets in balance over the longer term.

The Dairy Price Support Program (DPSP) was transformed from a special wartime food initiative to a bas ic component of U.S. agricultural policy in the Agricultural Act of 1949. Early in the program, the Secretary of Agriculture used his authority to set support prices toward the high end of the allowable range. This had the effect of halting production declines in the early 1950s and led to annual increases in the mid-1950s that were even larger than those experienced since 1975. Surpluses leapt from 3.6 billion pounds in fiscal year (FY) 1953 to 11.3 billion pounds in FY 1954, a large amount even by 1980s standards. The Secretary quickly exercised his discretionary authority by lowering the support price in 1954 and holding increases to minimal levels in the next few years. Milk production tapered off in the late 1950s and government surpluses returned to very reasonable levels.

Production began increasing again in the early 1960s and surpluses developed in FY 1962, following a pattern and level almost identical to what it had been 10 years earlier. The Secretary of Agriculture dropped the support price in 1962 and held it to the minimum level allowed by law until 1966. Milk production soon began to fall. In FY 1966, net removals returned to a low level, but milk production was still falling . In June, 1966 , the Secretary increased the support price to nearly the maximum allowed by law and held it at a high level into the early 1970s. Milk production turned around in 1970 and started to increase at what might have become a troublesome rate. However, in 1973 milk production abruptly fel! as feed values increased 39% due to a rapid increase in grain prices.

A President bent on controlling economy-wide inflation and a Secretary of Agriculture bent on getting government out of agriculture were both reluctant to increase support prices to fully compensate for the increase in feed prices. The next President and Congress sought to make it up to the nation's dairy farmers and initiated measures that overcorrected and eventually led to the large production growth beginning

This paper is part of a series entitled "Dairy Policy Issues and Options for the 1990 Farm Bill," a project of the Cornell Program on Dairy Markets and Policy in conjunction with the National Institute for Livestock and Dairy Policy.

in ] 976 and the large surpluses of the 1980s. Although the process of decreasing support prices was not implemented as easily as it was in the 1950s and 1960s, prices were eventually lowered in the 1980s. Milk production dipped in 1984 and 1987 in response to the Milk Diversion and Dairy Termination Programs; however, it has yet to respond to price cuts the way it did in the 1960s.

Productioll Per Cow

Production per cow has been increasing at a substantial and steady rate. At 14,358 pounds, the preliminary estimate for 1989 is up only 183 pounds or 1.3 % from 1988 (1988 data are adjusted for leap year). Since 1950, production per cow has increased at a trend rate of about 236 pounds per year. As ind icated in Figure 2, this rate of gain has been nearly constant. Production per cow decreased in only two years since 1950. The first time was in 1973 when the average cost of purchased feed rose so rapidly. The second time was in 1984 when participants in the Milk Diversion Program found it advantageous to temporarily reduce their production per cow as a way to reduce farm milk marketings. Feed costs and other condi tions related to the 1988 drought resulted in the slower than normal gains in 1989, but even then there were gains.

Milk vs. Feed Prices

Feed costs are the single largest cost item in producing milk and can have implications for changes in production per cow. The latest USDA cost of production report estimates that feed costs averaged 41 % of total cost per cwt of milk produced. The percentage for an individual farm could be much lower or higher, but if one takes into account the production expenses of homegrown feed as well as purchased feed, feed is surely the leading cost factor in every style of U.S. dairy farming .

Because feed costs arc so important, analysts have developed a simple tool for measuring the profitability of milk production over time, when milk prices and feed prices are both changing. The ratio between the price of 100 pounds of milk and the price of 100 pounds of feed results in a number which literaIly equates to how many pounds of feed equal the value of one pound of milk. As this number gets bigger, it tel1s us that milk is becoming more valuable relative to the feed that makes the milk; hence dairy farm profitability should be improving. As this ratio gets smal1er, dairy farm profitability should be declining. This "rule of thumb" indicator is hardly a perfect predictor of profitability, but over time it has proven to be a rather reliable indicator that is much quicker to calculate and project than a detailed cost analysis. Table 1 compares national average milk prices with a USDA estimate of the value of rations fed by dairy farms. The latter is not any particular feedstuff, such as 16% protein dairy ration, rather it represents the composite value of:1l1 concentrates dairy farmers report that they are feeding at a point in time.

The milk:ration ratio corresponds to some of the history discussed earlier. Notice the relatively high ratios in the late 1960s and early 1970s, when support prices were being increased rather aggressively. Note how the ratio plummets

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Figure 2. U.S. Milk Production Per Cow, 1950 to 1989

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Table 1. Selected Milk and Feed Prices, 1965-1989.

Value of Alfalfa Farm Price, Concentrate Milk :Ration Hay

Al1 Milk Ration Fed Ratio Prices

(S/cwt) ($/cwt) ($/ton)

1965 4 .23 3.03 1.40 24 .00 1966 4.81 3.15 1.53 24.70 1967 5.01 3.23 1.56 23.60 1968 5 .24 3 .10 1.70 23.00 1969 5.49 3.15 1.75 23.90

1970 5.71 3.28 1.74 24 .70 1971 5.87 3.44 1.71 27.10 1972 6.07 3.52 1.73 31.45 1973 7.14 4.88 1.46 41.55 1974 8.33 6.23 1.34 52.58

1975 8.75 6.25 1.40 54.38 1976 9.66 6.30 1.53 60.81 1977 9.72 6.20 1.57 60.57 1978 10.60 6.08 1.74 52.25 1979 12.02 6.68 1.80 60.37

1980 13.05 7.42 1.76 72.00 1981 13.77 8.02 1.72 70.90 1982 13.61 7.45 1.83 72.73 1983 13.58 7 .88 1.72 78.70 1984 13.46 8.16 1.65 79.48

1985 12.75 7.35 1.73 73.67 1986 12.50 7.00 1.79 64.85 1987 12.54 6.81 1.86 66.39 1988 12.24 7.75 1.58 83.26 1989 13.49 8.22 1.64 97.57 Sourer: Dairy Situation and Outlook , DS·423, February 1990, USDA.

in 1973 to 1975 as feed costs skyrocket and compare this to what happened to production and production per cow (see Figures 1 and 2). See how favorable this ratio has been in the 1980s, even as milk prices were leveling off and declining and compare that to the production record . This number

helps us understand why milk production hasn't responded to cuts in milk prices in the 1980s in the way production responded to cuts in the 1960s. The ratio will be watched closely by analysts as they try to assess what will happen to milk production in 1990.

Hay represents another significant cost to dairy farmers. Most of them, particularly in the Northern states, grow their own hay. On their cost ledger this shows up as seed, harvesting, and other such expenses. The alfalfa hay prices shown in Table 1 are not used as a profitability indicator to anywhere near the extent that purchased concentrate values are. Nevertheless, they provide another easy yardstick by which to measure dairy financial performance. In some years, like drought ravaged 1988, the jump in alfalfa hay prices adds to our understanding of the conditions farmers faced that year.

Size of the U.S. Dairy Herd

It is a simple fact of arithmetic that if production per cow increases at a faster rate than the total demand for milk, the number of cows in the nation's dairy herd must drop to keep total production in line with LOtal demand. As shown in Figure 3, this is indeed what happened to national cow numbers from 1953 to 1979. From 1953 to 1970, cow numbers declined at a very steady trend rate of 600,000 per year. In the 1970s the decline slowed to a trickle, and cow numbers actually increased during the first half of the 1980s. The Milk Diversion Program caused a minor downturn in cow numbers in 1984. The Dairy Termination Program initiated a more significant downturn in 1986. The decline in cow numbers in 1988 and 1989 has been due more to basic market conditions.

Figure 3. U.S. Average Annual Cow Numbers, 1950 to 1989

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Replacement and CUll Cow Prices

Two types of callIe prices affect dairy farmers and the number of cows they choose to milk. Replacement costs refer to the price farmers have to pay for (good) dairy cows that they want to buy to milk. Cull cow prices refer to the prices farmers get when they go to sell a (poor) low­producing, old, or sick cow. The cull cow price is simply a beef price for low-grade beef. When dairy farmers cull calves

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or sell other younger steers or heifers for beef, they will receive accordingly higher prices.

Cattle prices are important factors determining the size of the U.S. dairy herd. Replacement and cull cow prices since 1965 are listed in Table 2. It is important to note that these two price series differ by more than the obvious fact that replacement cow prices are higher. General inflation means both prices have trended upward but they don't necessarily increase and decrease at the same rate or time.

Table 2. Replacement and Slaughter Cow Prices, 1965-1989

Replacement Utility Cow Price Cow Price

($/head) ($/cwt) 1965 212 14.44 1966 246 17.73 1967 260 17.22 1968 274 17.94 1969 300 20.29

1970 332 21.32 1971 358 21.62 1972 397 25.21 1973 496 32.82 1974 500 25.56

1975 412 21.09 1976 477 25.31 1977 504 25.32 1978 675 36.79 1979 1,040 50.10

1980 1,190 45.73 1981 . 1,200 41.93 1982 1,110 39.96 1983 1,030 39.35 1984 895 39.81

1985 860 38.31 1986 820 37.18 1987 916 44.80 1988 990 47.24 1989 1,027 47.07

Source: Dai~ Situation and OUYQQK, DS-423, February t 990, USDA.

Since 1965, replacement cow prices have increased five­fold while cull cow prices have increased more like three-fold. A dairy cow produces not quite twice as much milk as her ancestor did 25 years ago; therefore cows are becoming more valuable as milk producers. Today's cow isn't much beller than her great grandmother as a producer of hamburger.

Cull cow prices peaked in 1979 and were fairly high when milk producers were interested in expanding their herds and the supply of cull cows was reduced. Replacement cow prices peaked a couple of years later, after cull cow prices had already come down 20%. Today, replacement cow prices are

just below their previous peak and cull cow prices arc similarly high. If milk prices fall substantially, culling cows may begin to look beLLer than milking cows. Analysts will be Natching these two numbers to see how they influence the size of the nation's dairy herd .

Rasic Trends and Future Growth

Forecasts for milk production in the 1990s are heavily influenced by the strong trends discussed above. There is no rcason to suspect that the steady upward trend in production per cow will abate. If anything, one might beLLer guess that it will accelerate. There continues to be a wide spread between the most productive cows and the least productive. This suggests that there is still plenty of room to exploit the genetic potential of the dairy cow through improved feeding, milking, heaILh care, and other basic management practices , and there continue to be opportunities for improvement in the cow hersel f through careful breecling programs.

Production gains will continue just from producers leam­ing how to better use the management tools that are already available. There is also a new wave of biologically based technologies just around the comer which show promise for even further gains. Some of these technologies, like embryo transfer, sperm sexing, and cloning, offer ways to increase the likelihood and number of genetically superior offspring.

Gene splicing technologies are beginning to allow the transfer of genetic material from one animal to another. There are two ways this will affect dairying. In the first case, genes from cows can be tra!lsferred to bacteria. This process enables the altered bacteria to produce the same substances that cows produce within themselves. Because bacteria can be cultured on a commercial scale, this technology allows the mass production of natural substances that cows produce in minute quantities . Substances that encourage milk produc­tion, promote lean body growth, or enhance disease resistance could be produced in this manner. Bovine growth hormone or somatotropin is the first substance likely to be produced commercially in this way. The second wave of genetic engi­neering will involve the transfer of genetic material into cows. The purpose of this would be to transfer genes from other species that would have beneficial effects on cows, such as improved heat tolerance, disease resistance, or perhaps alterations in the relative components of milk to improve fat composition, for example. These new biotechnologies are not exactly on the dairy industry 's doorstep, but many arc in the front yard or on the porch. To the extent that they result in greater production potential, the dairy industry may ques­tion whether we need such things right now. As world popu­lation continues to grow and, hopefully, as world diets improve, Lhere will no doubt be a need for new production tools in the future.

Not All States (or Farmers) Follo w the National Pattern

Regions, states, and individual farmers follow growth patterns different from the national average. In fact, half of the Slates are producing less milk Ihan they did 30 years ago, even as national production is up 18%.

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One hundred years ago New York was the leading milk producing state and there were more dairy farms in the North­east than we now count for the country as a whole. At that Lime Wisconsin was the sixth largest milk producing slate, and California didn't make the top ten. Fifty years ago, Wis­consin was firmly entrenched as the leading milk producing state; New York had slipped to third (behind Minnesota); and California had climbed to ninth place. Wisconsin is still the leading milk producing Slate today, but California has become the number two state and is rapidly gaining on number 1. New York has setLled back into third place after reclaiming second position in the 1950s and 1960s.

The rapid growth in California and Washington, and very recently in Texas, is well known and much discussed. Since 1980, California milk production has increased almost 6 billion pounds. No other state is close. California could become the leading milk-producing Slate in 10 years or so. Texas passed Ohio in 1988 and passed Michigan for the sixth spot in 1989. It will have to grow a lot more before it breaks into the top five as Pennsylvania and MinnesoLa have almost twice as much milk as Texas does today. Washington replaced Iowa as the number nine state in 1987, although it is growing more slowly than Texas or California.

Although Wisconsin production has grown at a slower rate, its total growth ranks second to California. For exam­ple, since 1980 Wisconsin farmers have added 2.2 billion pounds to their production . As California and Wisconsin become even larger, it appears that the gap between them and slates lower in the rankings will widen. From the late 1800s through the 1960s, the top two dairy slates accounted for about 20% of the nation's milk. In 1987, they had 30% of the U.S. to La I. By 2005 they may have well over one-third.

Today over half of U.S. milk marketings come from the top five states. Prior to the 1960s the second five had a share of slightly over 20%. In 1989 their share is less than 16%. The market share of the second five totals less than Wisconsin's and may continue to get marginally smaller.

Two-thirds of the U.S. milk supply comes from 10 states. None of the other 40 slates has more than a 2% share, and the average share for the lower 40 is less than 1 %.

Are there obvious regional patterns here? Yes and no. Growth in the West has obviously been the greatest. But it is not all downhill in the Midwest and Northeast. In fact, the intraregional differences are more intriguing than those across regions. In the Midwest, Minnesota and Iowa have shown much slower gains in production and poorer production per cow during the 1980s than neighboring Wisconsin. In the Northeast, Pennsylvania has shown healthy growth and enjoys good production per cow, but neighboring New York has a lackluster record.

The discussion here points out that the largest milk producing Slates are gaining market share, and this includes Slates in the Northeast, Midwest, and West. It also points out that states within regions have had rather different growth rates. We might also note that studies have repeatedly pointed out that differences between the growth rates across farms within a state or region are far more spread out than clifferences between regional averages.