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The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1893

October 1997

AgLetter
MILK PRODUCTION UP THIS YEAR
Milk production has exceeded year-earlier levels since last
fall, recovering from the 1 percent decline that occurred in
the 1995/96 dairy marketing year. The gains in milk production widened considerably during the spring and summer months as milk per cow recorded large increases
relative to the depressed levels of the year before. The
inventory of milk cows on farms still lags the year-ago
level, with the decline especially apparent among states
comprising the Seventh Federal Reserve District. Milk
prices, although trending upward this summer, fluctuated
widely over the past year. Nevertheless, the $13 per hundredweight average price estimated for September was far short
of the all time record high of $16.50 recorded one year earlier.
The resulting squeeze on earnings and forthcoming changes in the dairy support program are no doubt causing
many dairy farmers to exit the industry.
September marked the twelfth consecutive month in
which milk production (daily average basis) in major dairy
states exceeded the year-earlier level. During that span,
which coincides with the 1996/97 dairy marketing year,
milk production nationwide reached 156.5 billion pounds.
That marked a 1.6 percent rise from the previous marketing
year and was 0.6 percent above the former high set two
years ago. The year-over-year rise was especially large
during the summer months—averaging 3.6 percent from
June through September—as milk per cow recovered to
more typical, trend-adjusted levels. A combination of high
feed costs and poor quality hay and forage triggered a rare
downturn in milk per cow during the spring and summer
quarters of last year. Largely because of that downturn,
the year-over-year rise in milk per cow averaged more
than 4 percent during the last two quarters.
Milk cow numbers continue to trend below year-ago
levels. Among the 20 major dairy states tracked monthly by
the U.S. Department of Agriculture, the number of milk cows
in September was estimated to be down 0.7 percent from a
year ago and down 1.6 percent from two years ago. Stable-todeclining dairy cow numbers characterize a large majority of
the major states, including the five states—Illinois, Indiana,
Iowa, Michigan, and Wisconsin—that comprise the Seventh
Federal Reserve District. The inventory of dairy cows in District states in September was down more than 3 percent from
a year ago and down 6 percent from two years ago.

The decline in dairy cow numbers evident in most
states is partially countered by an uptrend in a handful of
other states. Among the major dairy states, gains in cow
numbers this year are occurring in Arizona, California,
Florida, Idaho, and New Mexico. Among those five “growth
states”, the inventory of dairy cows in September was up
nearly 4 percent from a year ago and up 6 percent from
two years ago.
Other comparisons between the five District states
and the five growth states provide a reminder of the Midwest’s problems in maintaining its share of milk production while the industry continues to go through a major
restructuring. For example, the inventory of milk cows in
District states in September was 7 percent more than that
for the growth states. Yet milk production in District states
in September was 11 percent less than in the growth states.
Those differences translate into 20 percent more milk per
cow in the five growth states as compared to the five District
states. The added output per cow reflects the greater production efficiencies typically associated with larger dairy
herds which are more prevalent in the growth states. The
average dairy farm in District states last year had about 55
cows. In comparison, the average dairy farm in the growth
states had nearly 340 cows. The ongoing restructuring in

Utilization of U.S. milk supply, 1996
(154.5 billion lbs.)

Fluid products
37.9%

Cheese
34.9%

Manufactured
products
59.3%

Butter
13.8%

Source: U.S. Department of Agriculture.

Frozen
products
8,5%

Residual
2.8%
Other
2.1%

the dairy sector is reflected in USDA estimates showing
the number of dairy farms declined by half over the last
ten years while the number of dairy cows retreated by a
more modest 13 percent. As the structure of the industry
shifted toward larger dairy farms, the share of U.S. milk
production coming from farms in District states declined
from 27 percent a decade ago to 23 percent so far this year.
During the same period, the share of milk produced in
the five growth states increased from 17 percent to nearly
27 percent so far this year.
The upturn in milk production this year accommodated a modest recovery in commercial disappearance of
milk. It also led to a rebuilding of stocks and triggered
renewed price support purchases of manufactured dairy
products by the Commodity Credit Corporation (CCC).
Continued economic growth has helped to under-pin consumer demand for dairy products. However, high retail
prices during the early part of this year may have trimmed
the recovery in the amount of milk absorbed through commercial market channels. Despite fluctuations in the monthly
year-over-year trends, commercial disappearance of milk
in all forms (milkfat basis) during the first seven months of
this year was up about 1 percent. In terms of production of
manufactured dairy products, the pattern has been somewhat mixed. Production of selected frozen dairy products
through August was down slightly, both from the year before and from two years ago. Butter production, after falling considerably last year, continued to lag year-earlier levels
during the winter months. But subsequent gains pulled
butter production through August about even with the
lower year-ago level. On the other hand, nonfat dry milk
production (for human use) through August was up about
16 percent from the year-earlier pace but still short of two
years ago. With continuing growth from new plants, total
cheese production through August was up about 2 percent
from last year’s pace and nearly 8 percent above the same
8-month period in 1995.
With milk production rebounding more than commercial disappearance, stocks of most manufactured dairy
stocks turned up this year. Commercial stocks of American
cheese as of the end of August were a fifth higher than last
year and more than a fourth above the last five year average. Similarly, stocks of nonfat dry milk were 2.3 times the
very low level of last year and about a third above the prior four year average for August. The rebuilding in stocks
has weighed on prices of some components within the dairy
complex, triggering larger government price support purchases. Last year, CCC net removals of milk from commercial market channels through purchases of manufactured
dairy products fell to almost inconsequential levels as
reduced milk supplies led to tight product markets. Net
removals turned up early this year but remained very low relative to historical standards through the first half. However,

removals continued to rise somewhat contra-seasonally during the summer quarter, reaching a ten-year high on
a milk equivalent skim solids basis and a five-year high
on a milkfat basis.
The upturn in government price support purchases
adds to the debate on the likely consequences when the
current dairy price support program expires in the year
2000. The Farm Bill legislation enacted last year required
a scaling down in the support price of milk used for manufactured products from the then prevailing $10.35 per hundredweight to $10.20 this year, $10.05 in 1998, and $9.90 in
1999. Thereafter, the CCC’s current practice of purchasing
dairy products to maintain the support price during periods
of excess production will be replaced by a loan program
designed to help processors carry an inventory of dairy
products. The loan rates (the amount of loan funds the
CCC will extend per unit of dairy product) will be set in a
manner that will reflect an equivalent $9.90 support price
for milk. However, the new support program is not likely
to be as effective as the current program. Although the loan
will offer a subsidized interest rate, the processor—unlike
under the current program—must cover all charges associated with carrying the inventory. Moreover, the maturity
of the loan, unless granted an extension of up to one year,
may not extend beyond the end of the fiscal year in which
the loan was made. More importantly, the new CCC dairy
loan program will only offer full recourse loans which require
repayment in full plus interest. (Non-recourse loans, which
are used by the CCC to support grain prices, give the borrower the option of transferring the commodity collateralizing the loan to the CCC as payment in full). For these
reasons, the forthcoming CCC dairy loan program is not
likely to be as successful as the current purchase program
in making the support price for milk an effective floor price
during periods of excess production.
The developments of the past year or so left many
dairy farmers with some difficult decisions. The tight conditions that led to record-high milk prices a year ago were
short-lived. The subsequent decline in milk prices proved
steeper than many observers had expected and it coincided
with continued high feed costs and tight supplies of good
quality hay and forage. The resulting downturn in dairy
sector earnings hit many dairy farmers hard. Yet milk production rebounded, paced by continued growth in a few
states. Clearly, some producers were willing to expand
despite what proved to be disappointing dairy markets
for many producers.
The changing market conditions of the past year, the
downscaling in the support price of milk through 1999, and
the likelihood the new dairy support program starting in
2000 will be less effective in maintaining the support price
during periods of surplus production add to the ongoing

Milk pices received by farmers
dollars per cwt.
17

1991-95 range
1996
15

1997
13

11
Jan.

Mar.

May

July

Sept.

Nov.

Source: U.S. Department of Agriculture.

restructuring in the dairy industry. Many, typically smaller,
dairy farmers continue to exit the industry while a few others
are expanding in hopes of achieving lower per unit costs of
production. This restructuring continues in an environment
where the growth in milk per cow historically has exceeded
the growth in market demand for milk, resulting in a
steady decline in the number of dairy cows. A domestic
market whose needs can be met with fewer dairy cows
held by lower-cost producers implies the restructuring
process will continue, at least until export markets open
up more and the U.S. is able to establish a foothold as a
low-cost producer for world dairy markets.

TRACTOR AND COMBINE SALES STILL RISING
Reports from the Equipment Manufacturers Institute
show the uptrend in unit retail sales of farm tractors and
combines gained momentum this summer. Paced by especially large gains in both July and September, unit retail
sales of farm tractors (40 or more horsepower) in the third
quarter were up 22 percent from the same period a year
ago. The strong third-quarter performance pulled the
year-to-date gain for farm tractors up to 14 percent. The
rise is especially noteworthy for the large, four-wheel drive
tractors which recorded a year-to-date gain of more than
a third through September.
Unit sales of self-propelled combines also surged
this summer, more than reversing a slight first-half decline.
During the seasonal upturn this summer, unit retail sales
of combines exceeded the year-earlier pace by 30 percent.
The large summer increase boosted year-to-date combine
sales 10 percent above last year ’s performance.
The strong summer gains increase the likelihood that
1997 will mark the fifth consecutive year of an upturn in tractor and combine sales. And based on the rise in combined

tractor and combine sales through September, this year ’s
rise may be larger than any of the previous four. Several
factors no doubt contribute to the prolonged upturn. In
particular, farm sector earnings last year rose to a new high,
with crop farmers capturing most of the rise. The latest
estimates from the U.S. Department of Agriculture indicate
that net cash farm income in 1996 reached $59.9 billion, up
from $51.2 billion the year before and the 1990-94 annual
average of $53.6 billion. Most of last year ’s rise in net cash
farm income came from a surge in cash receipts from crop
sales, reflecting the tight world grain markets and the
record-high feed grain prices that characterized much of
last year. And unlike in some past years, the fixed government price support program transition payments enacted
with last year ’s Farm Bill held total government payments
to farmers in 1996 at a fairly high level despite the strong
rise in crop receipts. Together, crop receipts and government payments to farmers totaled $116.7 billion last year,
up from $108.0 billion the previous year and the 1990-94
average of $95.3 billion.
Other factors helping to sustain and strengthen the
rise in farm tractor and combine sales include the second
consecutive year of expanded crop plantings and, in most
areas, expectations of above average harvest prospects.
Nationwide, the acreage devoted to principal crops in
1997 is estimated to be 334 million acres, unchanged from
last year but up 5 percent from two years ago. In addition
to the large acreage base, crop prospects during most of
the 1997 growing season held up reasonably well, providing some added incentives for farmers to upgrade their
harvesting equipment. A bumper winter wheat harvest
in the Southern Plains probably helped firm combine
sales in that region. The same is likely true with respect
to the record soybean harvest now drawing to a close here
in the Midwest.
Gary L. Benjamin

AgLetter (ISSN 1080-8639) is published monthly by the Research
Department of the Federal Reserve Bank of Chicago. It is prepared by
Gary L. Benjamin, economic adviser and vice president, Mike A. Singer,
economist, and members of the Bank’s Research Department, and is
distributed free of charge by the Bank’s Public Information Center. The
information used in the preparation of this publication is obtained from
sources considered reliable, but its use does not constitute an endorsement of its accuracy or intent by the Federal Reserve Bank of Chicago.
To subscribe, please write or telephone:
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Federal Reserve Bank of Chicago
P.O. Box 834
Chicago, IL 60690-0834
Tel. no. 312-322-5111
Fax no. 312-322-5515
Ag Letter is also available on the World Wide Web at
http://www.frbchi.org.

SELECTED AGRICULTURAL ECONOMIC INDICATORS

Percent change from
Latest
period

Value

Prior
period

Year
ago

Two years
ago

Prices received by farmers (index, 1990–92=100)
Crops (index, 1990–92=100)
Corn ($ per bu.)
Hay ($ per ton)
Soybeans ($ per bu.)
Wheat ($ per bu.)
Livestock and products (index, 1990–92=100)
Barrows and gilts ($ per cwt.)
Steers and heifers ($ per cwt.)
Milk ($ per cwt.)
Eggs (¢ per doz.)

September
September
September
September
September
September
September
September
September
September
September

108
115
2.47
101.00
7.02
3.62
99
51.70
66.90
13.00
69.6

0.0
–1.7
–1.2
0.0
–3.2
1.7
0.0
–7.5
0.5
2.4
9.6

–7
–8
–30
10
–10
–17
–6
–6
–1
–21
–8

3
0
–8
25
17
–20
6
5
8
2
5

Consumer prices (index, 1982–84=100)
Food

September
September

161
158

0.2
0.2

2
2

5
6

September 1
September 1
September 1
August
August
September

884
132
2,073
2.22
1.35
10.8

N.A.
N.A.
N.A.
–1.5
–0.1
–4.2

108
–28
20
–2
–3
3

–43
–61
10
–4
–10
2

Receipts from farm marketings (mil. dol.)
Crops**
Livestock
Government payments

June
June
June
June

13,382
5,738
7,618
26

0.8
0.2
1.2
30.0

–10
–11
1
–97

1
–8
10
–84

Agricultural exports (mil. dol.)
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)

July
July
July
July

3,998
97
23
95

–3.2
–13.9
–28.0
41.3

–10
–34
–50
–14

1
–49
–44
2

Farm machinery sales (units)
Tractors, over 40 HP
40 to 100 HP
100 HP or more
Combines

September
September
September
September

6,337
4,084
2,253
1,177

30.0
14.9
70.7
82.2

33
25
51
31

39
27
69
34

Production or stocks
Corn stocks (mil. bu.)
Soybean stocks (mil. bu.)
Wheat stocks (mil. bu.)
Beef production (bil. lb.)
Pork production (bil. lb.)
Milk production* (bil. lb.)

N.A. Not applicable
*20 selected states.
**Includes net CCC loans.
AgLetter is printed on recycled paper
using soy-based inks

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