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May 2012 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Dairy Role Reversal

May 21, 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.

Senate Dairy Bill Less Onerous – or Not

May 07, 2012

New analysis suggests that the dairy market stabilization program, aka supply management, is not triggered nearly as often with the new provisions.

Modifications to the Dairy Security Act (DSA) included in the Senate Farm Bill may prove less onerous and odorous to opponents of supply management in the dairy industry. Or not.
 
New analysis suggests that the dairy market stabilization program, aka supply management, is not triggered nearly as often with the new provisions. That’s confirmed by both the Universities of Missouri and Wisconsin.
 
Recall that the Wisconsin analysis of the original provisions of Foundation for the Future, the framework for DSA, suggested the supply management program would have been triggered up to 45% of the time. Missouri analysis suggested supply management might be triggered up to 20% of the time.
 
The new analysis cuts those estimates of supply management triggers substantially. The reason for the reduction in the Wisconsin analysis is a change in feed formulas: “The formula for calculating feed ration costs was changed by lowering the feed parameters to 90% of the DSA levels. This seemingly small change increases the value of the margin calculation by a bit more than $1/cwt. when feed prices are at levels that have prevailed over the last four years,” says Mark Stephenson, a University of Wisconsin dairy economist.
 
As a result, he says, it’s harder to hit the $6 two-month trigger and $4 one-month trigger for supply management. In this new Wisconsin analysis, which is a retrospective going back to January 2006 through January 2013, supply management would have been triggered for 16 months. But two of those months would have been suspended because U.S. dairy prices would still have been higher than international prices. In the end, supply management would have been in effect about 20% of the months over the last six years. 
 
The Missouri analysis, done by dairy economist Scott Brown, suggests the Senate dairy bill would trigger the supply management program only 7.5% of the months from 2012 through 2022. The higher feed calculation is part of that, but much higher milk prices are also key. Brown’s analysis suggests the All-Milk price will average $19/cwt. throughout that period, which is midway between the Congressional Budget Office projection ($18.70/cwt.) and the USDA projection ($19.30).
 
The Missouri analysis suggests milk production will only be 0.1% lower during the period due to the supply management program, but milk prices will be a nickel higher. Exports of non-fat dry milk will fall a miniscule 4 million pounds over the period, or 0.3%.
 
While much of the debate has been over the dairy stabilization provision, little has been said about what the actual net return will be for dairy producers. The Senate dairy bill throws a whole new wrinkle into the equation. It offers one set of insurance rates for the first 4 million pounds of annual milk production, and another, higher set of rates for production above 4 million pounds.
 
The Wisconsin analysis incorporates all these rates to estimate what the final net payout would be. For supplemental coverage, producers can choose a margin level they wish to protect and the percentage of their production they wish to protect (from 25% to 90% of annual production history). And they can do this annually.
 
The Wisconsin spreadsheet takes into account premiums paid, indemnities received, milk losses from milk not sold and feed savings from that milk not produced to come up with a net total per farm and per hundredweight. It also looks at four farm sizes: small, 100 cows; medium, 250 cows; large, 500 cows, and extra-large, 1,000. And it looks at supplemental insurance coverage of either 25% or 90% of annual production, and assumes producers buy supplemental insurance throughout the six-year period.
 
“Because the premium levels are so high, it is unlikely that farms will purchase supplemental insurance at the $7, $7.50 or $8 levels of margin protection,” says Stephenson. “The $6 to $6.50 levels of protection probably represent the ‘sweet spot’ for participating producers—the best combination of cost and benefit.”
 
At 25% supplemental coverage at the $6.50/cwt. level, the net total return over the six years ranged from 10¢/cwt. for small farms to 8¢/cwt. for the extra-large farms. At 90% coverage, the net total return was 30¢ for small farms to 17¢/cwt. for the extra-large farms. 
 
The analysis also shows that margin insurance would have provided the most relief during the depths of the 2009 crisis—February through November. At a $6.50 supplement coverage, the indemnity payment would have averaged $2.10/month (from which premiums and milk withholds must still be deducted).
 
“In 2012, which is shaping up to the second worst year of the young century, the magnitude of the net benefit for farmers who buy up to the $6.50 level is more subtle,” says Stephenson.
 
This year, the $6.50 margin would have been triggered from April through October, with an average indemnity payment of $1.41 (less premiums and milk withholds).
 
The Wisconsin analysis can be read here. http://dairy.wisc.edu/PubPod/Pubs/BP12-05.pdf
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