Better economy, slow dairy production are lapping up milk glut

Americans are consuming a lot more milk and dairy products this year. After several years of modest increases, 1984 sales through July are up a surprising 4.5 percent over the same period in 1983. More increases are expected before the year is out.

''We could see some additional (rise),'' says Clifford Carman, agricultural economist with the United States Department of Agriculture (USDA).

He predicts commercial dairy and dairy-product sales will reach 126.8 billion pounds - up 4 billion pounds from last year's total.

(The totals are measured on a ''milk-equivalent basis,'' the amount of whole milk it takes to produce cheese, butter, and other dairy products.)

Why this surge of interest in dairy products?

Economists point to an improved economy and lower unemployment. Consumer pocketbooks have grown fatter at a time when dairy prices have been rising more slowly than that of many other foods. It took the average manufacturing worker only 14 minutes last year to earn a pound of butter. In 1980, it took 15.5 minutes.

Dairy economists expect even more increase in consumption as a bevy of local and national advertising campaigns, started last month, begin to have an impact.

The one-year, $200 million promotion - paid for by dairy farmers and mandated by the government's milk-diversion program - more than doubles the total previously available for such campaigns.

''Almost anything that's done has a real appeal,'' says Truman Graf, professor of agricultural economics at the University of Wisconsin at Madison. Some research has shown that every $1 spent on dairy promotion generates more than $2 in increased revenues, he adds.

But other economists are skeptical.

''If we spend $100 million ... who's to stop Coke from spending another $100 million?'' Mr. Carman says. Farmers will get back their donation of 15 cents per 100 pounds of milk, he forecasts, but little more.

Even so, any consumption increases is good news for the dairy industry, which in recent years has found itself floundering in a growing pool of excess milk. But this year, it appears the government's controversial milk-diversion program, which pays farmers not to produce milk, is working.

''It has contributed greatly toward bringing this thing in balance,'' says Donald Ault, a vice-president with Land O'Lakes Inc., which makes dairy-based products.

Last year, the dairy surplus was so large that government was forced to buy the equivalent of 16.8 billion pounds of milk in the form of surplus cheese, butter, and nonfat dry milk. This year, economists expect those purchases to be halved.

The reason is the unexpected increase in consumption in a year when production is expected to fall by about 4 percent. Some of that decrease is only temporary, economists point out. The milk-diversion program will last only through March. After that, production is expected to go up, although not up to pre-diversion highs immediately.

Among dairy farmers, ''there's a mood of optimism,'' says Will Dahl, general manager of the Wisconsin Milk Marketing Board. This week he is attending the 18 th Annual World Dairy Expo in Madison, Wis. - the world's largest international trade show for dairy farmers.

The increased sales, falling production, and seasonally tight supplies have created spot shortages of milk in some areas. Producers of cheese and other dairy products have had to bid up the price of milk to keep their plants running at something close to efficient operating levels.

Mr. Graf expects the Minnesota-Wisconsin price for manufacturing-grade milk (used to make dairy products) to climb to $12.80 in October, up 71 cents from June, before easing downward again.

Some plants have had to extend their traditional seasonal closing or shut down completely. Dairymen Inc., a large cooperative based in Louisville, Ky., has closed five of its seven dairy-products plants. A few operations have been closed for good, a spokesman says.

The impact of these shortages differs by region, says John Siebert, dairy economist at the University of California at Davis.

In California, milk production actually has expanded 3.4 percent for the first eight months of this year, compared with the same period in 1983.

But production in the Southeast is down dramatically - in August, 9.1 percent below a year earlier, according to figures from federal marketing orders. Economists say the region's higher-than-average dairy costs have induced farmers to sign up for the diversion program in greater numbers than in other parts of the country.

''We've lost a lot of producers,'' says Al Ordigo, senior vice-president of marketing and planning at Dairymen Inc. Officials at the cooperative say they don't expect to return to 1982 production levels until 1986 at the earliest.

Mr. Siebert says 1985 will be a better year for dairy farmers, especially with the prospect of lower feed costs. But the industry is still in a growth phase, he adds, and production could begin to again outstrip demand, in 1986.

''A lot could depend on consumption,'' he says.

''The industry's got to spend more money on advertising,'' specifically brand advertising, to continue the boost in consumption.

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