Dairy Margin Insurance Making More Sense
Jan 16, 2011
It seems to me relying on milk price enhancement, tweaking MILC (Milk Income Loss Contracts) or enacting supply management schemes are not only insufficient, they are the road to ruin. Here’s why.
Last week’s crop report and news of Fonterra’s most recent dairy product auction all make one thing amazingly clear: We are in a world market.
What happens in Argentina and China and New Zealand all directly affect the dollars in your milk check and the numbers in your feed bill.
Two weeks ago, in New Zealand, Fonterra saw milk powder prices jump 10%. In reaction, butter prices in Chicago jumped to above $2. Powder prices followed, and cheese prices shot up as well. And this at a time of rising milk production here in the U.S.-- and cheese stocks at billion-pound-plus levels.
On the feed side, we have long blamed domestic ethanol credits (subsidies) for at least 50¢/bu. (Food and Agricultural Policy Research Institute estimates) to $1.50 (common sense math) for higher corn prices. To keep pace, soybeans are bid up to be competitive as is every other feedstuff. Now, strong demand from China is pushing prices even higher. Peter Georgantones with Abbot Futures Trading in Minneapolis says $16/bu. soybeans (and $7 corn) are a possibility.
In light of all this craziness, what dairy policy makes the most sense? It seems to me relying on milk price enhancement, tweaking MILC (Milk Income Loss Contracts) or enacting supply management schemes are not only insufficient, they are the road to ruin. Here’s why:
To keep pace with feed prices, milk prices will have to continue to increase and increase and increase. When you do that, particularly with fluid milk, consumers react. And not in a good way. Even in 2010, we were seeing continued slippage in fluid milk consumption. And that’s at moderate prices. Imagine what will happen if Class I prices again exceed $20?
Tweaking MILC triggers to reflect higher feed prices has already been done. And yes, more could be done to get more dollars back to producers. But these are mere pennies on the dollar, and then only 45% of the spread anyway, and on only the first 2.985 million lb. of annual production. What happens if/when Congress reins in USDA expenditures, perhaps reverting to 2007/2008 levels of 34% of the cost/price spread and 2.4 million lb. of annual production? If it does, even fewer dollars will be coming back through the MILC program.
Supply management is just another way to increase milk prices. But you have to unemploy cows to do so. And if you have the desired effect, and milk prices go up, you stifle demand, consumption falls and revenues follow. So then you have to unemploy even more cows to raise prices further, which stifles more demand, and the death spiral continues.
What makes more sense is LGM-Dairy (livestock gross margin insurance) and/or the Foundation for the Future plan (the supply management component not withstanding). Under these programs, producers insure themselves an income-over-feed-cost margin. With LGM-Dairy, the producer decides his/her level of protection. Under the Foundation plan, all producers are provided a minimal level of protection and can purchase more based on need and choice.
The beauty of these programs is that they guarantee IOFC protection if feed prices go up or milk prices come down. And they don’t rely on schemes that place dairy consumption--both domestic and export--at risk.