Price Volatility in Dairy Markets: A Story of Stocks?

The role of private, government and total stocks as determinants of price volatility in the dairy markets is analyzed based on monthly price data (U.S. geographic area average). Results reported here find no strong evidence that changes in beginning stock levels or beginning stock change have played a substantial role in contributing to price volatility in butter, cheese, or non-fat dry milk markets analyzed. These results are notable given substantial changes in government policy impacting these markets during the sample period. Each market was dominated by government purchases of stocks to manage the price. It follows by definition that these periods price induced ending period government stocks. However, this paper considered evidence concerning the hypothesis that when such government stock transactions were terminated, prices may have become more volatile. To focus on a possible causal role of stocks, we focus on beginning stocks and their role in determining prices formed at a later time. We find no role played by the levels of beginning stocks and very little evidence of a role played by changes in beginning stocks as determinants of volatility in monthly average key dairy complex prices. These results must be interpreted within the context of several caveats. First, monthly averaging and geographic averaging of prices may obscure important variation that would reflect evidence of a role of stocks. Second, data analyzed may contain systematic errors that occur a role for stocks