Farmers and the milk price: this is how markets are supposed to work


We've another of those pieces complaining about the fact that dairy farmers cannot make money producing milk these days:

As I write this, the future of our dairy farm is bleak. It must be a crazy concept to keep borrowing money to produce something that almost all of us use and which is, somewhere along the line, making money for somebody. But farmers’ lives and homes are so entwined with the production of food that they continue doing it when most serious business people would have thrown the towel in. As a result, they are exploited. How long will it continue?

What is being missed is that this is exactly how markets are supposed to work. There is, as there has been for some time, a surplus of milk production around the world. More people are willing to produce it at current prices than are willing to consume it (or perhaps, volumes produced and consumed) at this current price. Thus some of the people who are currently producing it at this price should stop doing so. And that farmers cannot make money at this price is the incentive, the impetus, for some to stop doing so.

Making a loss really is the market's method of telling you to go do something else with your life and capital. This is true whether you produce milk, wheat, jet engines or buggy whips.

As to who benefits from these current low prices obviously that's the consumer. And given that the aim of having an economy at all is so that the consumer is able to satisfy as many wants an desires as possible given the scarcity of the factors of production this is just fine. In fact, more than just fine, this is the point of the exercise.

Milk can be sold for less than the cost of production? Then stop producing milk then.