Highly variable prices or excessive volatility? Is a supply management program warranted? An Extension Dairy Economist’s Perspective

During the past decade the U.S. dairy market has been subject to periodic swings in dairy commodity and milk prices. The U.S. All Milk price reached an historic high of $21.90 (nominal dollars) per hundredweight in November, 2007 before retreating to a low of $11.30 recorded in June of 2009. This rapid decline in milk price has become the focal point for the claim of ‘excess volatility’ in milk prices and a call for the introduction of a federal government mandated supply management program for U.S. dairy production sector. This program, if adopted, would be included in the next dairy title of the 2012 agricultural farm legislation, and is outlined in two bills, the Costa bill HR5288 and the Sanders bill S-82010. The intent of these proposed programs would be to greatly diminish this perceived ‘volatility’ in milk price. The research approach will be to use modern time-series modeling techniques to determine the nature of the ‘volatility’ versus ‘variability’ in milk and dairy product prices over the past ten years. The empirical analysis will assess the variability for both dairy commodity prices (butter, cheese, nonfat dry milk, and whey), and a proxy for the Federal Order 33 Blend Price. The results of this empirical investigation reveal that while dairy commodity prices exhibit significant periods of volatility and volatility spikes, there is no evidence that this volatility is growing over time. Following upward swings in volatility dairy prices and the farm milk price return to lower levels represented by the long run variance for each price series.