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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Informa Study Fires Up Dairy Debate

Jan 31, 2011

Which states would contribute more under the Foundation for the Future’s growth management plan? Time, place and circumstance all play a role – and controversy follows.

Headlines can be both truthful and deceiving-- at the same time. Case in point: Our January headline “NMPF Growth Management Plan Hits Midwest, Northeast Hard.
The headline (which I wrote) is accurate. It rightly describes the gist of an Informa Economics analysis of the growth management portion of the National Milk Producer Federation’s (NMPF) Foundation for the Future (FFTF) proposal had it been in place from 2000 through 2009. 
The study suggests that Wisconsin producers would have paid in $150 million last decade. Minnesota producers would have contributed $51.3 million; New York, $63.6 million; and Pennsylvania, $33.5 million. California producers would have contributed a “mere” $28.2 million.
Wisconsin, New York, Pennsylvania and Minnesota produce about 30% of nation’s milk. But these four states would have contributed nearly half of the $625 million in withheld milk payments under the plan. In contrast, California, which produces 20+% of the nation’s milk, would have paid in just 4.5% of the withheld payments.
But the headline is also deceiving. Just because the Midwest and Northeast would have paid in the most in 2000 to 2009, it does not mean these regions will be the biggest contributors going forward. Time, place and circumstance all play a role into which states pay and when they pay.
For example, in 2009, California producers had already cut back production because many of their plants were at capacity and had capped production. In addition, California producers buy much of their protein and energy. With high feed prices hitting them hard, they had already begun to scale back. So had the FFTF growth management been in effect, they would have already met the required 2% cutback.
In other regions of the country, high milk prices in 2007 and 2008 had encouraged more milk production. Plus, producers in these regions grow much of their own feed, usually only having to buy protein to balance rations. As a result, they were somewhat insulated from high corn prices and didn’t cut back as quickly. So when the production cutbacks kicked in, the Midwest and Northeast bore the full brunt of those deductions.
If you go back to 2003, however, the reason for FFTF going into effect was low milk prices, not high feed. Then, California would have paid in $14.6 million, or 13% of the nation’s total. Wisconsin, New York, Pennsylvania and Minnesota would have paid in $36 million, or 32% of the total. The biggest loser among this group would have been Wisconsin, paying in $28.2 million, or 25% of the total.
The biggest random effect that triggers whether a state’s producers will pay (or not) is weather, which, in turn, influences production per cow, says Nate Donnay, senior dairy analyst with Informa Economics. For example, had the growth management plan been triggered this past summer, Wisconsin producers might have gotten off scot-free in August and September when milk per cow was hammered due to high heat and humidity.
Season of the year also plays a role. If a growth management plan activates in May or June, most producers would likely have to pay in because June is a peak month as a result of the spring flush.
The International Dairy Foods Association (IDFA) would like NMPF to simply drop the Dairy Market Stabilization Program portion of the FFTF plan. But some very large co-ops are insisting a growth management plan be part of the total package.  
Plus, if the package does not contain some mechanism to restrain production, the margin insurance portion of the plan could become prohibitively expensive. The Informa Economics analysis shows milk production is highly inelastic. A 10% drop in milk price results in just a 0.75% drop in milk production one year later. 
In other words, if milk production keeps chugging along, prices won’t rebound. And if the margin triggers remain flipped for months and months because milk production is unrestrained, the cost of those insurance payouts could bust the federal bank (which, by all accounts, is already busted).
If, in the end, Foundation for the Future costs a penny more than the current program, it ain’t gonna happen. And then we’re left with the current mess – $10 support prices, complex Federal Order pricing formulas, make allowances and all the rest.
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COMMENTS (4 Comments)

James Maroney - Leicester, VT

March 17, 2011

Jerry Kozak, President & CEO
National Milk Producers Federation
2101 Wilson Blvd., Suite 400
Arlington, VA 22201

Dear Jerry:

In the March 2011 Farm Journal, OK Republican Chair of the House Agriculture Committee Frank Lucas says he will defend the farm industry against what he calls a “constant barrage of irrational and unworkable regulations from the EPA.” Mr. Lucas’ underlying premise is that regulations stifle productivity and productivity is what the farm industry needs above all else. I have also just read NMPF’s “Foundation for the Future,” which to take effect depends upon 58,000 dairy farmers reaching consensus on “growth management” and government mandated participation. These two obstacles are high; but if the prediction for $20-25/cwt comes true, the crisis is over and what little appeal “growth management” has to farmers at $16/cwt will quickly fade.

Dairy farmers if they want to survive have learned to strive for production gains; but it is an economic fact that before milk prices can rise, supply must be reduced. For the government, the easiest and most effective way to prevent commodity prices from rising is to keep supply in surplus. Indeed, the central tenet of the Capper-Volstead Act of 1922 was not, as is popularly thought, to grant farmers an exemption from the Sherman antitrust laws to fix prices but to prohibit them under Sherman from limiting production in order to raise prices. This injunction is unimportant to farmers, who are not disposed to work for their collective interests and who insist upon their individual right to make production gains year over year.

For example, in the “Report of the Dairy Industry Advisory Committee” (March 2011) farmers and their representatives ignore the force that individual overproduction—the one factor that is actually within the farmers’ control—exerts on their collective price. The Report concedes that farmers are producing more milk than ever but losing money: government proposes new and continuing mechanisms for relief. But there is no mention whatever of farmers voluntarily reducing supply and keeping it equal to or below demand so that prices will rise—and stay there.

There are, without resorting to dumping, many ways for farmers to control milk supply—voluntarily adjusting the SCC standard, voluntarily and proportionately culling the national herd, voluntarily and uniformly abstaining from the use of rBST, sexed semen Lutalace and other yield-boosting technologies—but these actions would require planning and collusion would invite federal scrutiny under Capper-Volstead.

Farmers want higher production, higher prices, lower volatility and margin insurance all without supply control or “irrational” regulation. Government wants surplus production in order to maintain low consumer and manufacturer prices and a reduced exposure to MILC payments: so the “Foundation for the Future,” the Sanders/Costa Plan and the Specter/Casey Bill are drafted to allow farmers to expand production with marginally higher trigger prices. Government and farmers will have expended tremendous effort and gained nothing.

But if every dairy farmer’s first and most important objective is a higher, industry-managed, free market price, if as the “Dairy Industry Advisory Committee Report” says there is general agreement that for prices to rise it is essential to align milk production with commercial market needs but debate about how this is to be accomplished, if as virtually every dairy economist attests a reduction in supply of only 2½ % would double the FMMO price and if, as Farm Journal reports, the EPA’s regulations are such a potent threat to farm production, why not advise dairy farmers to take the path of least resistance and act in their collective, economic interests by supporting the EPA’s effort to regulate the industry? Be certain that regulation reduces production not 5% but 10% and cause the 40/60 utilization to shift supply out of low-paying Class II, III and IV markets into higher-priced Class I markets.

What is the point of NMPF spending millions to fight the government to get the status quo or of farmers spending hundreds of millions more to restart ever-escalating debt and ever-expanding capacity? For little or no expense farmers could enjoy a substantial price rise provided by their traditional adversary, which could not prosecute them under Capper-Volstead for conforming to the Clean Water Act. Why not go a step further to improve consumer milk quality by voluntarily culling chronically high-count cows from the herd to adjust the SCC to 150,000/ml, lowering veterinarian, feed and pharmaceutical costs and restoring the farmers’ beleaguered debt to equity ratios into the bargain? Might not the money thus saved and earned be better allocated to a public relations campaign to convince an increasingly skeptical public that milk prices are moving up because the industry cares about product and water quality?

Sincerely yours,

James H. Maroney, Jr.

7:58 AM Mar 29th

I agree with cow land. The FFTF is for the future of NMPF, not for the future of dairy farmers.

Six major complaints against NMPF and why NMPF should be abolished:

1) During most of 2008 there were many opportunities for dairy farmers to lock in a milk price from $18-$20/cwt for ALL of 2009. Not ever, not even once, in any 2008 newsletter or communication from NMPF, did they educate or encourage farmers to hedge at those prices, which were historically in the very top percentile. NMPF didn't even mention it.

2) Then in 2009, with catastrophically low milk prices NMPF did not volutarily reduce their mandatory cut from dairy farmers milk checks. NMPF talked a lot about how much money farmers were losing, but they didn't volunteer to take a cut as well. Many vendors, especially grain dealers, and also banks, waited to be paid by struggling farmers. NMPF did not.

3) Now, with dairy exports rebounding strongly due to high demand in Asia, a weak dollar, and competitive US milk prices, NMPF is asking farmers to pay them .02 cents/cwt so that NMPF can give coops money (incentives) to encourage them to export. This makes no sense. If an export market is strong, there is no need to incentivise coops. They will export anyway because there is strong demand. The .02 cents/cwt export program is a complete waste of dairy farmers' money.

4) Furthermore, while ethanol, (now mandated at 15% blend in gasoline) is using 50% of US corn production, causing skyrocketing feed prices and starvation, NMPF has done very little to nothing to lobby against subsidies for ethanol. In fact, to add insult to injury, at the NMPF upcoming annual meeting, taking dairy producers on a tour of an ethanol plant is on the schedule!

5) The dairy market stabilization program will destroy any chance the US dairy industry has of competing in and profiting from the world dairy market. An NMPF board member actually said (from an article in this magazine) that (and I paraphrase), "we'll see if those dairy farmers keep producing milk after we take 7% of their production..." So, by the NMPF's own admisstion, the dairy market stabilization program is a mechanism to steal farmers' milk. NMPF hopes to so cause farmers enough pain to force them cut back on milk production. This NMPF board member comment, besides being cruel and immoral, is also wrong. In 2009 we saw that milk prices that were $4.00 below the cost of production did not encourage farmers to cut back, why does NMPF think producers will cut back because of the dairy market stabilization program? And why should farmers that are suffering economically donate milk to government feeding programs? Why should consumers pay even more during times of rising food prices? And is there going to be any accountability to the farmer that the "percentage of the milk not paid for" that is, "stolen" is actually going to goverment feeding programs? What's to stop a coop from selling the milk? Who will audit this massive transfer of milk from the farmer to the government via the processors?

6)Despite many "experts" saying that they will know when to cut back on milk supply, due to some "average margin", it is not possible to successfully predict what the supply of milk should be because the market is international and there are too manyunpredictable factors influencing supply and demand. Anyone who thinks they can balance supply and demand of milk to "always ensure a positive margin" for dairy farmers isstraight up lying. The free market will successfully balance supply and demand if government regulations and the silly ideas of the NMPF do not stand in the way.

Since NMPF is mandatorily funded by dairy farmers, NMPF has no risk and no consequences for poor performance. No matter what they do, dairy farmers keep paying them. NMPF is essentially a useless economic drain on all dairy farmers and should be abolished and replaced with an accountable entity that receives performance-based funding.
9:26 PM Feb 5th
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