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July 2011 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Compromise Essential to Dairy Reform

Jul 19, 2011

Last week’s release of draft legislation on the National Milk Producers Federation’s (NMPF) “Foundation for the Future” (FFTF) already shows that compromise will be required to pass this program—or likely any dairy reforms.

In the original FFTF plan, the hope was to provide 90% coverage of catastrophic income-over-feed-cost margin protection (pegged at $4/cwt) of a producer’s base level of milk production.  The draft legislation, released by Cong. Collin Peterson (Dem., Minn.) last week, would provide catastrophic loss protection on only 75% of a producer's base. The reason: Congressional Budget Office scorers found that a lower level of protection is needed to keep the proposal within the current budget baseline.

Many smaller producers scoff at margin insurance, and this reduced level of coverage won’t help matters. These producers much prefer Milk Income Loss Contract (MILC) payments. 

Keep in mind, however, that on Sept. 1, 2012, the Milk Income Loss Contract  program is scheduled to revert to covering just 34% of the difference between the Class I base price and $16.94, (down from the current 45%) and the maximum production covered will decrease from 2.9 million pounds to 2.4 million pounds annually. And if you’ve been paying any attention to what’s been happening in Washington lately on debt ceiling talks, it’s not at all certain that even a scaled back MILC program will escape the budget machete.

The other highly controversial part of FFTF is the market stabilization portion of the program. Processors hate it. As long ago as last November, at Dairy Today’s Elite Producer Business Conference, Jerry Slominski with the International Dairy Foods Association (IDFA) called it a deal breaker.

Many producers here in the Midwest also oppose market stabilization, saying it smacks too much of supply management and interferes with a producer’s ability to manage his/her business without government interference. One Midwest dairy leader told me he and his organization would oppose FFTF if there’s even a hint of a suggestion of a requirement that would impede expansion.

Without market stabilization in FFTF, two things could (will?) happen:

First, the cost of the margin protection part of the plan will skyrocket out of control. There will be nothing to put the brakes on falling prices except for falling prices. As a result, the government-paid portion of catastrophic margin protection would have to be reduced to even less of producer’s production. Or the level of margin protection itself would have to be reduced to something less than $4/cwt.

• Second, there is a real possibility milk prices would dive below the depths of 2009 if there is another melt down in global markets. Remember, FFTF does away with dairy price supports and minimum prices for Class III and IV products. So you could see real prices dip below $9 or $8 or whatever level it took to clear surpluses.

Some producers who oppose FFTF say the status quo is just fine. There’s only one problem: The status quo will soon no longer exist. Pressure on Congress to reduce expenditures, driven by my own Congresswoman Michelle Bachmann and her buddies in the Tea Party, is becoming overwhelming. 

If dairy producers and processors want viable, sustainable dairy policy, they will have to compromise. It’s just that simple. It’s also just that critical.

Happy Cows and Nervous Nellies

Jul 04, 2011

Although positive news abounds, it may be prudent to lock in some of these better prices on at least a portion of your production. The good times of early summer might not last.

In June, a bevy of USDA reports and news out of Congress should put smiles on the faces of dairy producers nationwide.
• The U.S. All-Milk price for June came in at $21 per cwt., 40¢ higher than May and up $4.60 from a year ago. This is the highest All-Milk price since the second half of 2007.
• Planted corn acres came in at 92.3 million acres, up 5% from 2010, and the second highest since World War II.
• Corn stocks were reported at 3.75 billion bushels, down 15% from a year ago. But in the whacky world of the grain trade, this was actually received as bearish because the trade expected even lower levels. The result: Corn futures initially dipped 30¢ to 70¢ per bushel last Thursday when the grain stocks report was released.
• The U.S. Senate voted 73-27 to eliminate the 45¢ per-gallon ethanol credit. Though part of a larger bill that was not certain to pass, it appears the ethanol credit is destined for the dust bin of dubious subsidies as Congress and President Obama wrangle to cut the federal deficit.
All this good news could make a dairy producer downright giddy. But, per usual, there are a few flies in the vanilla milk shake. Soybean acres are down 3% from 2010, even though some non-traditional soybean states such as New York and North Dakota report record acreages. (Heck, even a 27-hole golf course a few miles west of my office was torn up and planted to soybeans this spring.)
Alfalfa acres are also down 3%. West Coast producers continue to pay well over $200 per ton for alfalfa. And while cotton acres are up by 25%, drought from Georgia west through New Mexico scorched the crop and hopes for lower prices.
And then there’s the weather. Crop analysts on repeatedly warn that weather through the rest of the growing season will continue to drive markets. Late planting across the Corn Belt means farmers will need a dry and late fall to get the crop out.
For dairy producers, the key message from our own analysts and market bloggers is to hedge your bets. Mike Hogan, with Stewart-Peterson, reported last week on that milk prices are at the top of a three-year cycle. While he’s not predicting a crash like we saw in 2009, he is warning that price declines could be in the offing as we roll through the rest of the year and into 2012.
Right now, there may be some pricing opportunities. Good milk prices today make for some fairly strong futures prices through the rest of the year.
If your balance sheet can’t withstand a downturn in milk prices, it may be prudent to lock in some of these better prices now on at least a portion of your production—through options, fence strategies, even booking with your milk co-op.
Locking down feed prices is more problematic. But if you can protect some level of income-over-feed-cost margin—it may be the prudent thing to do. The good times of early summer might not last.
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