What got us into this mess

With cheese prices up notably and milk futures edging up, we may have begun the long-awaited turnaround needed to at least get back to break even on our farms. But we still have a long way to go.
A presentation by Tom Suber of the U.S. Dairy Export Council at the National Dairy Leaders Conference helped us see what got us into this mess and what is going to have to happen to get us back to positive margins again.
As shown in the chart, the problem started back in early 2008. There was strong food and fuel inflation, which raised the prices of many commodities including dairy products. Milk output was flat in the European Union and down in New Zealand and Australia due to drought. China's dairy product consumption was soaring.
But then, milk production came back in New Zealand, Australia, and South America. As food and dairy product prices rose, demand faltered. As demand softened, product inventories began to build up.
Then there was crash of markets and the housing crisis here and around the world started what became a global financial crisis. About that time, the melamine contamination hit China, and demand for dairy products there dropped drastically. That caused further buildups of dairy product inventories around the world.
As the world's credit sources shut down, no one had any money to do anything. For example, neither the grocery store chain in Egypt nor the firm that imported products for the chain could get financing. Without the loans, there were no sales.
This combination of factors is going to have to be reversed before we can get out of this mess. There is some evidence that economies around the world are strengthening. Credit availability seems to be improving.
Things are looking brighter, although we have a long way to go. The improving outlook is the topic of an editorial on page 654 of our October 25, 2009 issue.