WASHINGTON (AP) _ The sharp drop in milk prices is taking a toll on dairy producers, but Agriculture Department economists say farmers have been slow to reduce output.

''Milk prices are dramatically lower than a year earlier and are expected to erode the expansion in milk output as 1991 progresses,'' the department's Economic Research Service said. ''However, the adjustment probably will be gradual.''

According to the agency, dairy farmers ''entered 1991 in a stronger financial position than at any time'' in the last decade.

''The relative lack of immediate debt problems will tend to slow producers' responses to lower returns,'' it said. ''Ample supplies of replacement heifers, improved forage supplies and relatively unattractive off-farm employment opportunities will help sustain milk production growth.''

Milk output per cow in the first quarter of 1991 was up 2 percent from a year earlier, but high feed costs relative to milk prices are expected to trim this production rate of gain in the second half of the year.

The lower returns are discouraging dairy expansion and are ''accelerating farm exits from the dairy industry,'' said the report in the June issue of Agricultural Outlook magazine.

''Early this year, milk cow numbers slipped below a year earlier and are expected to continue sliding,'' the report said. ''By late 1991, cow numbers are projected to be about 1 percent below last year.''

Returns to dairy farmers above feed-concentrate costs are expected to drop more than 20 percent to the lowest level since the late 1970s.

One indicator is the milk-feed price ratio, which expresses in pounds the amount of mixed dairy feed equal in value to one pound of milk. Last year, the ratio averaged 1.72 pounds.

But in 1991, according to the report, one pound of milk will buy less than 1.5 pounds of feed.

''At year end, milk production is expected to be barely higher than a year earlier,'' the report said. ''However, gains early in 1991 will result in the annual total rising 1-2 percent to a record.''

Faced with growing pressure in Congress to do something about the crunch on dairy farmers, USDA is expected to make recommendations by mid-month on a program for ''inventory management'' of rising milk surpluses and to ease price declines.

The National Milk Producers Federation said the department's recent study of several options showed that an all-milk price of $11.28 to $11.70 per hundredweight would stabilize dairy markets and assure consumers adequate supplies.

In May, the all-milk market price was about $11.30 per hundredweight, compared with $13.50 a year earlier.

But the federation said that at such levels ''milk prices will be below the costs of production for a significant proportion'' of the nation's dairy farmers.

The federation said dairy farmers in 1989 averaged $13.55 per hundredweight of milk. It said USDA economists reported that nearly 44 percent of all dairy farms in 1989 received insufficient income to cover all their farm and family expenses and debt repayment.

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WASHINGTON (AP) - Exports of peppermint and other ''essential'' oils that smell good are increasing at a steady clip, but an Agriculture Department analysis shows that imports are catching up rapidly.

In 1990, the department's Foreign Agricultural Service said, U.S. essential oil exports were valued at a record $154.8 million, up almost 8 percent from 1989.

But imports also surged to an all-time high of $151 million last year, a 14 percent increase.

Essential oils are obtained from natural raw materials by distillation or through mechanical pressing. The oils are widely used in perfumes, cosmetics and pharmaceutical products, and to flavor food and soft drinks.

''Consumer preference for natural flavorings and fragrances continues strong, but synthetic flavorings and ingredients still command a significant segment of the market because of their wide availability, lower cost and more stable pricing,'' the report said.

Exports last year included $82.5 million worth of mint oils, up from $73.3 million in 1989. Those reflected strong sales of peppermint and spearmint oil to the United Kingdom, Germany and Japan.

Crops of peppermint and spearmint are grown primarily in Idaho, Indiana, Michigan, Oregon, Washington and Wisconsin.

Imports of lemon, grapefruit, cassia and spearmint oils were up sharply in 1990, while modest gains were reported for lavender, clove, caraway, geranium, lime, orange, patchouli, peppermint and ylang ylang.

''An industry study last year projected the U.S. flavor and fragrance industry to grow at an annual rate of 8 percent through the year 2000, with sales hitting $9 billion,'' the report said.

The essential oil portion of the total market was projected to expand at an annual rate of 10 percent, reaching nearly $600 million by the turn of the century.