2014: Real Reasons for Optimism
Dec 30, 2013
Dairy farmers, by nature, are a tempered-by-reality optimistic bunch. They have to be—or they wouldn’t spend hundreds of dollars for a bag of seed corn or hundreds of thousands on a milking system.
Farmers also know that Murphy’s Law is alive and well. If things can go wrong, they usually will. 2013 was one of those Murphy’s Law years. A cold, wet spring meant thousands of acres got planted late—or not all. Alfalfa winterkill in the Midwest left forage in short supply—and what there was, exceedingly expensive. And even though the U.S. harvested a record corn crop, it was often difficult to bid corn out of bins and into feed bunks for less than $5 per bu.—even though the CME said it was only worth that much.
Knowing that things will go wrong, I’m still pretty optimistic going into the New Year.
For one thing, milk prices are strong. USDA is projecting that they’ll remain strong. The 2013 U.S. all-milk price will average $20. For 2014, USDA says the all-milk price average will range from $19.70 to $20.50. Not bad, considering the aforementioned $5 per bu. corn. In fact, USDA projects corn prices to be in the $4.05 to $4.75 per bu. range next year.
Rabobank agrees, thanks to strong export demand from China. "We expect [dairy commodity] prices to hold around current highs before easing from mid to late 2014 with continuing supply growth in response to significantly improved margins," says Rabobank analyst Tim Hunt.
Other reasons for optimism:
• A new farm bill also might be in the offing early next year. The big sticking point is food stamps. The Senate is willing to cut $4 billion in Supplemental Nutrition Assistance Program funding; the House of Representatives wants to cut $40 billion. The compromise that is being discussed is $8 billion.
Lobbyists for the dairy industry continue to fight over what should be new dairy policy. Everybody agrees dairy price supports are outmoded, and income-over-feed-cost margin insurance makes much more sense. The sticking point is whether a dairy market stabilization program is needed along with margin insurance to avoid long, expensive periods of government indemnities.
I’m not convinced market stabilization is needed, on two conditions. One, premiums should be set at more actuarially sound levels. Two, sign-up dates should be set early (similar to crop insurance) so farmers can’t game the system.
• Immigration reform might also get some life in the House of Representatives this spring. The recent budget agreement may lay the groundwork for compromise. Don’t expect it to be as favorable as the Senate version, which allows current illegal workers to stay if they meet certain conditions and a method for new workers to come north. But Congressional leadership wants to get immigration reform done before the 2014 elections. Maybe, just maybe, Congress can get it done.
• The Trans-Pacific Partnership (TPP) trade agreement is also expected to be finalized in 2014. The agreement will still have to be approved by Congress—no small feat—and the other countries involved.
But the addition of Canada and Japan to the negotiations earlier this year "has created a new paradigm in the TPP negotiations that, if done properly, could provide a significant boost to the prospects of an overall net positive outcome in the negotiations," says Tom Suber, president of the U.S. Dairy Export Council (USDEC).
Canada is already our number 2 (sometimes #3) export partner. Under current Canadian law, our dairy sales to Canada fall under its Import for Re-Export Program, where Canadian companies can import our milk and dairy ingredients duty-free on the condition that the final product is exported and not consumed by Canadians. The TPP would, presumably, give the U.S. more access to Canadian consumers.
Japan is the second prize. Last year, it imported $284 million of U.S. dairy products, and a favorable TPP which lowers high tariffs and regulatory burdens would undoubtedly add significantly to that total, says Suber. The TPP, even if approved by negotiators in 2014, will take years to implement. But it would set the process in motion, perhaps cementing the U.S. role in global markets for decades to come.
All in all, 2014 could be a very pivotal one for the U.S. dairy industry. Happy New Year!