I added to my vocabulary this week ― this time, a word describing the volatile nature of milk and feed prices.
I already knew that people or groups could be dysfunctional. So, it only makes sense that price cycles can be dysrhymic.
According to economists at Rabobank, the U.S. dairy market can no longer depend on the predictable market cycles it had become accustomed to in the 1990s and through the mid-2000s. Hence, the term dysrhythmia.
It wasn’t that long ago that people described a four-year dairy profitability cycle where farmers would have a good year, a bad year and a couple of years in between. Now, the cycle has diminished. As U.S. Secretary of Agriculture Tom Vilsack noted at World Dairy Expo last week, the time interval between price spikes is shortening so that farmers don’t have the time to rebound from difficult years. Read more.
This isn’t new to anyone.
Yet, I would like to make a few observations on the volatility issue:
- I attended a really interesting talk recently by Christopher Wolf, professor of agricultural, food and resource economics at Michigan State University. Wolf had charts showing that the volatility in milk and feed costs started in the 1990s, but it wasn’t until 2007 that volatility really started to go crazy.
- The monthly volatility of the all-milk price doubled in the 2000-2012 time period compared to the 1990-1999 time period, according to Wolf’s calculations.
- Much of the volatility is due to increased exposure to the world marketplace. U.S. farmers are now subject to factors such as income growth in developing countries, dietary shifts and currency strength. Those factors notwithstanding, dairy exports have been a bright light. So far this year, U.S. dairy exports are on pace to set another record, with 13.5 percent of production going to foreign countries. But one must recognize there is inherent risk involved, especially if it involves a possible downturn in the global economy as happened in the latter part of 2008.
- A measure approved by the U.S. Senate and House Agriculture Committee this summer as part of the Farm Bill package would ease volatility by providing "margin protection" against unfavorable swings in feed cost relative to milk prices. Unfortunately, Farm Bill discussions are currently stalled in the House and won't resume until the congressional "lame duck" session between Thanksgiving and Christmas.
I tell my non-dairy-industry friends that dairy farmers make Las Vegas gamblers look like pikers by comparison, since dairy farmers have to deal with so much uncertainty.
Farmers do have the advantage of risk-management tools, and they can also stress-test their assets against different likely scenarios to see if they can survive a downturn.
Unfortunately, the downturns are becoming harder to predict.