Why Do Milk Prices Spike And Crash? Because It's Like Oil

Milk prices are in the tank. You may not have noticed this, since prices in the supermarket have fallen only slightly. But on the farm, it's dramatic. Dairy farmers are getting about 20 percent less for their milk than they did last year; 40 percent less than when milk prices hit an all-time peak two years ago.

"We're losing money," says Dave Drennan, executive director of the Missouri Dairyman's Association. In Europe and Australia, dairy farmers have taken to the streets to protest their plight.

Big swings in milk prices aren't new. Prices were even lower in 2006 and 2009. It's remarkable, in fact, just how volatile the dairy business is.

But why? The number of cows and the amount of milk they produce don't change so quickly. These aren't wheat fields, which bad weather can destroy. And the amount of milk that people drink changes only gradually. So what makes milk prices soar and crash?

One reason: Milk is not, for the most part, something that people drink anymore. In the United States, only about a quarter of milk production now is sold as milk or cream. The rest is refined into a variety of other products. Cheese and yogurt are the best-known, but there also are a variety of dry products like milk powder, whey concentrate and special high-value proteins that are valuable byproducts of cheese-making.

Milk, in fact, is like crude oil. It goes into refineries and emerges in the form of products that are traded around the globe. The prices for these commodities can boom or crash because of political and economic storms on faraway continents.

Over the past few years, there have been storms a-plenty. Jerry Cessna, the milk expert at the USDA's Economic Research Service, ticks off some of them.

Two years ago, China was gobbling up milk powder, driving prices to all-time highs. Then the economy slowed, and Chinese buyers disappeared.

Russia used to buy a lot of European cheese. But after Western countries punished Russia with economic sanctions in 2014, it struck back with a ban on Western cheese. That left millions of pounds of dairy products looking for new buyers.

To protest against the falling prices of dairy and meat, farmers pour liters of milk in front of a prefecture in northwestern France in January.

Jean-Francois Monier/AFP/Getty Images

Meanwhile, the European Union decided to abolish a quota system that once regulated the amount of milk its dairy farmers could produce. The result was that farmers raced to produce more milk, especially in Ireland and the Netherlands, and the global glut of milk got even worse.

"It's a global phenomenon," Cessna says. All over the world, dairy farmers are suffering. Some are going out of business or asking governments to rescue them.

Last week, 60 members of Congress, mainly from big dairy states, asked the U.S. Department of Agriculture to step in. Their letter didn't say exactly what form that help should take; Drennan said that the USDA could buy more milk products to ease the oversupply and support prices.

The crisis doesn't affect all milk producers in the same way, however. Some may give up, but that leaves the survivors in a stronger position when prices recover. Historically, this process has driven the consolidation of farming into fewer and ever-larger operations.

Jed Stockton, a spokesman for one of the largest dairy operations in the country, Fair Oaks Farms of Indiana, wrote in an email to The Salt that "we have changed very little" as a result of low milk prices. "We are low-cost producers and by continuing our efficiencies we are able to weather the storm."

Dairy farmers do have the option of enrolling in a new, government-backed program that acts as an insurance policy against losses. Farmers pay premiums to participate, and they can get payouts either when milk prices fall or feed costs rise. This week, the USDA announced payments of $11.2 million to dairy farmers.

According to Cessna, there are signs that the crisis may be easing. New Zealand, the world's biggest exporter of milk products, has cut its production. And just in the past few weeks, the milk price did move up slightly.