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Rich Posson: For dairy, production and price don't correlate

Agriculture.com Staff 07/27/2010 @ 11:00pm

By Rich Posson

Ag Financial Strategies Inc.

Milk production peaked relative to a calendar seasonal-trend and at a record level during the month of May. Monthly per cow production has also turned lower and with the humid and extreme climate of summer, it should be considered there is chance for more than the seasonal percentage decline of production.

The models for the most part have been bullish milk price for 2010 and until recently it was difficult to see evidence of a correct opinion. Trade had been sluggish and still made too big of a deal of poor economy news and seemed to ignore positive news. The trade made too big of a deal of the high milk production relative the economy. I have not revaluated an old study of production and price correlation, but years ago, I found near zero correlation of monthly milk production to monthly milk price and relative 6 months in the past to 6 months in the future for a 12 month span and this relative a decade or more of data. Zero correlation means production and price have nothing in common, they are random. So why the do we make such a big deal of production data.  Demand is the more powerful aspect the free market equation and subject more to humanistic persuasion than fundamental or economic input. The models are currently bullish milk relative an intermediate intra year trend, expect some consolidation soon and then still higher later this year.

I was recently a part of a milk market discussion group that wishes to remain anonymous and concluded the government should consider revaluation of all big businesses as to whether these are too big relative the desired US economy and free market system. In addition, milk does not seem to be a quality free market and so the US should consider elimination of current backward looking price formula and move toward a forward looking and more usual free market system. It may be impossible but the best method would be to force all milk to be sold on a national exchange and from the moment of acceptance from the producer. In addition, the US should consider forcing all businesses who pick up  milk from the farm to report the amount received with a daily deadline and daily online publication to the public, albeit a small fee could be charged to lower government cost. This would allow the free market system to have more timely and accurate information and could be a step toward a national system.

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