Dairy Role Reversal
May 20, 2012
A tale of two dairies–-from California and Wisconsin–-who are at opposite sides of the spectrum on 2012 survival, competitiveness and government supply controls.
You could not have had a more stark contrast. One dairy producer pleading for passage of dairy reforms including growth management, aka supply management; the other vehemently opposed even if he were guaranteed the plan would remain voluntary.
Also stunning was the contrast in geography. The dairy producer pleading for growth/supply management (GSM) was from Southern California. The producer saying “no way” was from central Wisconsin.
Twenty five years ago, California was unloading pot bellies of cheap heifers and feasting on even cheaper feed from the Midwest. Wisconsin, losing dairy farms by the hundreds, was almost happy California was buying its heifers even if they represented its lost future. California’s mantra was “Let the market rule.” Wisconsin was asking the last processor in the state to turn out the lights. No more.
Today, the shoe is on the other foot. Wisconsin has the comparative advantage. It wants to keep that edge, even build on it.
California is cutting production because its plants are in awash in milk. Feed costs are $11/cwt. of milk produced. Over-base milk is $13.50. Margins are barely enough to keep the milking machines running.
In Wisconsin, competitive milk markets and homegrown feeds mean most producers are weathering the current margin meltdown. In fact, the state recently announced plans to grow milk production 3% annually to 30 billion pounds/year by 2020.
Geoff Vanden Heuvel and Jerry Meissner reflect these contrasting
milk making environments. Vanden Heuvel has a total of 1,650 cows on two dairies in Chino, Calif. He is vice president of the California Milk Producers Council
. Meissner, with his brother, son and nephew, milk 2,400 cows, raise 2,300 replacements and farm 4,600 acres near Chili, Wis. Meissner is also president of the Dairy Business Association in Wisconsin. Both participated in a producer panel at the National Dairy Workshop in Salt Lake City, Utah, a few weeks ago.
“I can’t pay everything else on $2.50 margin,” says Vanden Heuvel. “How long am I expected to subsidize this market? I lost $1.2 million in 2009, some months I was losing $5,000 per day. I burned through 25 years of accumulated equity in one year.”
Vanden Heuvel says the industry needs some means to rein in milk production in times of surplus. “No one could have designed a more benign supply management program than Dairy Security Act (DSA),” he says. “The only time it kicks in is where there is a surplus.
“We need a mechanism to take out 1% or 2% of surplus milk. I can’t do it anymore. If this market doesn’t do me in this time, the next down turn will,” he says.
And Vanden Heuvel is not alone. “Are we willing to sacrifice 30% of California dairy producers?” he asks.
Meissner says supply management, even a voluntary program where producers opt in, is the wrong direction for a national industry beginning to export to the world. “It’s a red flag for processors. Export buyers will require assurance of supplies. And market share will be lost to more aggressive countries,” he says. “We should not punish success.”
He says Wisconsin is 10% to 12% milk deficit in current processing capacity, and the states 30X20 plan will build even more. “I feel there is so much potential – why inhibit our ability to compete in global markets? Our biggest impediment in the producer sector is our lack of the use of risk management tools,” he says.
Risk management is really the crux of the issue. Too few producers use the tools currently available—some out of ignorance, some out of fear, some because the tools don’t work for them because of their size or their markets.
DSA attempts to fix that, offering one-size-fits-all margin insurance at no premium for the basic program and at ridiculously low cost for moderate levels supplemental coverage. The price of these cost savings is the growth management program. If you sign up for the insurance, you must also agree to cut back production in periods of low margins.
And therein lies the rub. Western producers are desperate for relief, willing to succumb to government supply controls to bring their margins back to breakeven. In the Midwest, where there is strong competition for milk, over-order premiums and cheaper feed, government supply control is akin to moving to Canada.
You’d think producers of good faith could come to a reasonable compromise. But memories run deep. Twenty five years deep. Too deep.