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February 2013 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

A Tale of Two Economists

Feb 24, 2013

The two forecasters reached opposing conclusions looking at the very same set of economic data and job numbers. Who is right is critically important to dairy producers.

As Charles Dickens wrote in his epic, 1859 classic, A Tale of Two Cities, "It was the best of times, it was the worst of times."

Listening to two prominent economists at ag conferences last week, you’d get the impression that the U.S. economy is faltering along at a paltry 2% growth rate or is poised to finally break out of the doldrums after nearly five years of tepid growth. The irony: These economists reached these opposing conclusions looking at the very same set of economic data and job numbers.

Who is right is critically important to dairy producers. Which way the economy heads has everything to do with the demand for dairy products. As producers have proven, even through one of the worst droughts in 50 years, they can continue to produce ever more milk. The only way milk prices can maintain some semblance of strength is the industry’s ability to continue to sell the stuff. And that’s where economic forecasts and consumer psychology come to the fore.

The "glass half empty" economist is Martin Regalia, chief economist for the U.S. Chamber of Commerce. Regalia spoke last week at the Wisconsin Dairy Business Association’s Expansion Conference in Green Bay. "The economy is not performing like we expect it to perform," he says. "Normally, we would expect a U-shaped recovery and a quick snap back to normal growth rates of 3% to 4%."

In the 1991 recession, it took 23 months for the economy to recover. In 2001, it took 39 months. Today, we’re 40-plus months and still counting, he says.

The "glass half full" economist is Blu Putnam, chief economist for the Chicago Mercantile Exchange Group. Putnam spoke two days later at Intl FCStone’s Agricultural and Economic Outlook Meeting in Las Vegas. "The U.S. economy is maintaining a 2.2% growth rate in the face of head winds such as slower growth in China and a stagnant European economy. It’s a testament to the robustness of the U.S. economy," he says.

Regalia’s pessimism is anchored in the U.S. government’s inability to deal with its fiscal problems, deficits and long-term debt. Fixing those is largely tied to entitlement reform in Social Security and Medicare. Continued extension of unemployment benefits simply leads to more unemployment, he says. And he blames President Obama for his lack of leadership and unwillingness to take on Democratic Party intransigence on these issues.

Putnam’s tempered optimism is grounded in the underlying resilience of the U.S. economy and the entrepreneurial drive of American business. While a 2% growth rate may seem tepid, the U.S. economy outperformed its peer group (Europe, Japan) through this global recession, he says.

He thinks the worst is over. Why? China’s growth deceleration has ended. The danger of implosion of the European debt crisis has passed. The U.S. has avoided the worst of the fiscal cliff. And it will get by sequestration and the debt ceiling, too, albeit in a very messy manner, he says.

So who is right? Time will tell, of course. My key message, however, is that you need multiple sources of information to make your own assessment. Sole reliance on one source can lead to very different conclusions. Charles Dickens would likely agree.

No Slam Dunks in Dairy Legislation

Feb 10, 2013

Given the economic analysis, philosophical differences and Congressional paralysis, it’s difficult to see where dairy policy will end up.

The two major dairy policy proposals before Congress agree on the need for margin insurance. Virtually all of the debate has been on the merits and potential dangers of market stabilization program, a.k.a. supply management.

The Dairy Security Act (now part of the farm bill) bundles margin protection with market stabilization. In contrast, the Goodlatte/Scott amendment offers standalone, if more restrictive, margin insurance.

Which works better? According to preliminary analysis presented by Marin Bozic, a University of Minnesota dairy economist, it all depends on how producers use it.

Economists from Michigan, Minnesota, Ohio and Wisconsin have done a retrospective analysis using dairy prices from 2007 through 2012 to compare the Dairy Security Act (DSA) to the Goodlatte/Scott amendment.

For a 450-cow herd, Goodlatte/Scott provides more net revenue than DSA for basic margin insurance and supplemental insurance with coverage levels less than $6.50/cwt.

The biggest take home, however, is that when the economists looked at the "sweet spot" at which level of margin insurance was best, DSA and Goodlatte/Scott were nearly identical. Both provided very generous benefits to farmers. When margins were protected at the $6.50/cwt. margin level, DSA netted about $56 per cow per year. Goodlatte/Scott netted $58 per cow per year for $7 margin level.

But this all has to be taken with a grain of salt because the economists used retrospective prices. Consequently, there was no way to account for supply responses from production cutbacks from the market stabilization component in the Dairy Security Act.

Congress will ultimately decide which version will become the law of the land. "If the farm bill is going to see the President’s desk, it has to pass through the House [of Representatives] floor, including through the amendment process where all members have an opportunity to have input," says Tyson Redpath, senior vice president of government affairs for The Russell Group, Inc. Redpath lobbies on behalf of dairy processors and the International Dairy Foods Association.

"[But] only half a dozen House members understand dairy policy, and only a couple serve on the agriculture committee," says Harry Katrichis, of counsel, for The Advocacy Group, who lobbies for California Dairy, Inc.

As a result, lobbyists for farm and dairy policy must continue efforts to educate members of Congress and their staffs. Given the complexity of the issue, that isn’t going to be easy. Plus, the disagreement over supply management still splits dairy producer groups and dairy producers and processors.

Jackie Klippenstein, VP, industry and legislative affairs for Dairy Farmers of America, says the dairy stabilization program contained in the Dairy Security Act already is already the product of compromise. Originally, the stabilization program was mandatory along with minimum, $4/cwt. margin insurance. "The program might not be ideal for everybody, but it does suit the needs of the industry," she says.

But opponents of the stabilization program fear it could morph into something more onerous later. "What’s past is prologue," says Redpath. "The Northeast Dairy Compact became the Milk Income Loss Contract program and on and on we go."

Given the economic analysis, philosophical differences and Congressional paralysis, it’s difficult to see where dairy policy will end up. There is no slam dunk, easy answer.

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