WCMA Notes: Modeling Changing Times for Dairy

A new Administration in Washington DC means change is here, and the best antidote for business uncertainty inherent in change is data. 

Charles Nicholson, Associate Professor and PhD Agricultural Economist at the University of Wisconsin-Madison, offered new analysis of modeled impacts of potential new federal polices at the Renk Ag Outlook Forum in Madison January 21. His talk offered preliminary data – look for his final conclusions online at DairyMarkets.org soon.  

Here’s a topline of his January 21 data as you prepare for change. 

Modeling New Tariffs 

Dr. Nicholson focused on the potential for new tariff skirmishes with Mexico, Canada and China, three countries which purchased more than 40 percent of the total value of U.S. dairy exports in 2024.  If the U.S. increases average tariff rates by 25 percent on dairy product imports from those countries, Dr. Nicholson proposed, and these countries respond with similar counter tariffs on dairy goods coming from the U.S., then the “Dynamic Global Dairy Supply Chain Model” at UW-Madison draws these conclusions: 

• A $2.4 billion reduction in cumulative U.S. dairy farm net income; 

• $34,000 reduction in cumulative income for the average-sized Wisconsin farm; 

• $0.83/cwt reduction in the milk price; here in the Upper Midwest where milk for cheese is more important, the Class III milk price would be $1.24/cwt lower; 

• $5.8 billion reduction in the value of U.S. cheese sales; 

• $20.3 billion reduction in the value of U.S. dairy product exports; 

• $0.15/gallon reduction in the average price of a gallon of milk at retail; 

• $0.05/lb reduction in the average wholesale price of cheese. 

Modeling Labor Changes 

Dr. Nicholson then turned his model on the issue of labor supply in the dairy industry. He told the Outlook Forum audience that data from USDA’s Economic Research Service indicates that for the U.S. as a whole, labor accounts for about 25 percent of a dairy farm’s operating costs and more than one-third of operating costs on larger dairy farms.  Non-U.S. citizens, Dr. Nicholson noted, provide a large share of hired labor on dairy farms. 

Any negative change in labor supply can increase wage rates and lower productivity per worker during transitions, and Dr. Nicholson derived cost impacts from changes to these labor variables: 

• A $4.4 billion reduction in cumulative U.S. dairy farm net income;  

• $150,000 reduction in cumulative income for the average-sized Wisconsin farm; 

• $0.23/cwt increase in the US all-milk price; here in the Upper Midwest where milk for cheese is more important, the Class III milk price would be $0.05/cwt lower; 

• $ 5.7 billion reduction in the value of U.S. dairy product exports; 

• $0.16/gallon increase in the average price of a gallon of milk at retail. 

In conversation with Dr. Nicholson, he noted that the best use of this modeled data is to note the trends in prices and values, rather than the absolute values.  

Modeling Nutrition Programs 

Dr. Nicholson applied the university model to food and nutrition programs, including Supplemental Nutrition Assistance Program (SNAP), Women Infants and Children (WIC), School Lunch and Breakfast Programs, and the Healthy Fluid Milk Initiative.  He estimates that just under 10 percent of fluid milk in the U.S. is consumed through school-based programs.  Fluid milk and cheese are the most frequently purchased dairy products under SNAP. 

To analyze the impact of financial cuts to these programs, Dr. Nicholson selected a reduction of 50 percent in these programs, or 4 percent of demand for fluid milk and cheese, yielding: 

• A $3.6 billion reduction in U.S. dairy farm net income;  

• $0.43/cwt reduction in the milk price; here in the Upper Midwest where milk for cheese is more important, the Class III milk price would be $0.55/cwt lower; 

• $5.1 billion reduction in the value of cheese sales; 

• $4.3 billion reduction in the value of U.S. dairy product exports; 

• $0.07/gallon reduction in the average price of a gallon of milk at retail. 

Placing all of these variables in the model together, Dr. Nicholson reported these outputs: 

• A $5.5 billion reduction in U.S. dairy farm net income; 

• $145,000 reduction in cumulative income for the average-sized Wisconsin farm 

• $0.99/cwt reduction in the milk price; here in the Upper Midwest where milk for cheese is more important, the Class III milk price would be $1.47/cwt lower; 

• $8.5 billion reduction in the value of cheese sales; 

• $19.2 billion reduction in the value of U.S. dairy product exports; 

• $0.02/gallon reduction in the average price of a gallon of milk at retail; 

• $0.05/lb reduction in the average wholesale price of cheese. 

While no model can predict the future dairy economy with certainty, learning trends and trajectories for prices and earnings is useful fodder for planning in times of change.