Hello and happy Friday!
Well, it may or may not be too happy depending on where you live considering much of Wisconsin is currently experiencing more of Winter 2.0 (brrrr). Thankfully, I’m here to tell you this newsletter is not about the weather (yay!).
This week, we’re breaking down an issue that affects nearly everyone but most people probably haven’t thought about too much: what determines the price of milk.
Yes, we live in the Dairy State. Yes, we love cheese. And yes, milk is a staple in many households across the nation. From the outside, it may seem like business as usual for dairy. But in Wisconsin, dairy farmers are struggling, owing to factors that compound the current low price and vast supply of milk.
Last week, we looked at Wisconsin Public Television’s new documentary Portraits From Rural Wisconsin, which highlights human impacts of the dairy industry’s struggle in the state.
This week, I talk with WisContext associate editor Will Cushman about the deceptively complex matter of milk pricing and the ripple effects it has on the dairy industry.
Hayley: Why is milk pricing so complicated?
Will: That is exactly the question I had as I started reporting this story. A lot of the coverage I’ve seen about the dairy crisis points to low milk prices as a primary driver, but then sort of glosses over how those prices are determined. Now I understand why, because it is indeed really complicated!
In a nutshell, milk is a unique commodity: it’s constantly produced, has a short shelf life and is bulky (i.e., heavy) and expensive to ship. All of this makes producers vulnerable to being forced to accept ever-lower prices from competing processors. Enter U.S. federal regulations, which have evolved over the decades, but generally try to maintain a floor beneath milk prices with the use of classified pricing and price pooling.
What are the biggest factors that go into milk pricing?
The biggest factors include:
- Classified pricing: The price of milk depends on its end use (e.g., fluid milk, cheese, yogurt, etc.) because those uses have varying processing costs and consumer demand.
- Price pooling: Fluid milk typically gets higher prices than milk processed into other products. To make sure there’s an adequate supply of milk for all those products, most processors participate in regional price pooling so farmers in a region receive the same price for their milk no matter what its end use is.
- Component price calculations: The value of milk’s component parts (i.e., protein, non-fat solids, butterfat and other solids) also play a role in pricing. These values are determined by very specific and standardized dairy products. For instance, the value of protein depends on the fluctuating price of standard weights of cheddar cheese. Up to 90% of the milk produced in Wisconsin goes toward cheese, meaning these valuations are pretty important to the state’s industry.
- The price is also affected by the simple economic rules of supply and demand. Softening demand can lead to oversupply and depress prices. Because American dairy products are now a part of the global marketplace, export demand plays a larger role in milk prices than it did in the past.
Wisconsin is been dealing with devastating closures of dairy farms across the state. Is this a new phenomenon? How can struggling dairy farmers in Wisconsin look to the future?
Wisconsin has been losing dairy farms for decades, but generally at a fairly low and steady pace. That changed beginning in 2015, when milk prices plummeted. They still haven’t recovered, and more and more dairy farmers are dropping out of the business, so much so that 2018 saw record loss of dairy herds. There have been previous downturns, but none of them were as persistent as what farmers are currently experiencing.
Do "non-milk beverages" (aka almond, soy, cashew, etc. “milks”) play any role in milk pricing, or the vitality of the dairy industry?
Overall, no. On the other hand, some observers believe that these milk alternatives have depressed demand for traditional dairy products. Still, the experts I’ve spoken to do not think milk alternatives are having that great an effect on the current situation. Weak export demand is much more important.
What about cheese — won't people always want to buy it and therefore stabilize milk pricing somewhat?
As long as I’m alive there will be at least some demand for cheese. Kidding aside, you’re right that there will always be a market for dairy products. What’s happening currently is that the supply/demand relationship is pretty out of whack — the U.S. cheese surplus is currently the largest it’s ever been — and prices probably won’t recover until that surplus is drawn down.
What's your favorite dairy product?
At the risk of coming across as pandering, I am a dairy lover across the board. That said, I love some intense blue cheese, and I’ve really been digging kefir lately.
Anything else you want to add?
The last few years have been enormously stressful for a lot of dairy farmers who are struggling to weather the downturn, and I know from the reporting I’ve seen that mental health challenges are on the rise. UW-Extension has some great resources for managing stress.
Anyone dealing with a mental health crisis can call a 24/7 hotline:
To learn more about milk pricing, check out Will’s new report, which goes into detail about the issue. If you’re more of a visual learner, his story about factors contributing to the dairy crisis has six charts and a map that break down complex trends within the industry over the years. And if you’re hungry for even more information on the shape and struggles of Wisconsin’s dairy economy, we have a series for that.
Until next week,
Hayley Sperling
Engagement editor, WisContext
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As always, if you have questions about this email or an idea you’d like to see put into action, I want to hear from you. Send me a message at hayley.sperling@wiscontext.org, or find me @hksperl on Twitter.
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