Commodity Price Cycles
The dairy, beef and sheep market cycles are driven by many factors. These cycles are a function of excess supply and excess demand, where markets are assumed to be constantly seeking a state where supply and demand are equal, or market equilibrium. Low prices are caused by excess supply, where too much milk, steers or lambs have come on the market versus the original projections. As these conditions come to light through lower prices, creameries and retail outlets should begin to purchase more, which increases prices. However, as supply rises, some farmers will reduce their herds and output as a reaction to rising costs and other factors of having too large a supply for the market. As this happens with increasing demand, prices rise and may rise too far. When this happens, there will be a drop in price again, and the cycle continues.
There are three primary components to these cycles: trend, seasonality and random factors or shocks. An example of trend is general inflation: it is rising over the long-term and affects all markets based on time. Seasonality is an issue that occurs because of the time of the year. For example, milk prices face seasonal volatility, but beef and sheep prices face more pronounced seasonality due to gestation cycles and timing of sales. Imports have made the seasons less of an issue for retail markets, but do not solve domestic seasonality issues. Shocks are considered to be random or out of control of those that participate in the market. A shock can be a new government regulation, subsidy, or new import or export markets. It can also be inclement weather, disease or a crop that was unexpectedly large. Forecasting beef, lamb, and milk prices required accounting for all these components.
Real-time Price Resources
California Department of Food and Agriculture Dairy Prices
Dairyline milk price summary
Dairy price stabilization legislation
American Sheep Industry Association market news
(Thank you to Dr. Robert Eyler, Professor of Economics Sonoma State University and John Harper, UC Cooperative Extension Livestock and Natural Resources Advisor for content contributions.)