National Milk’s Dairy Plan a Bit Schizophrenic
Jun 18, 2010
By Jim Dickrell, Editor, Dairy Today
I’ve said this before: There’s a lot to like in the National Milk Producer Federation’s new dairy plan, Foundation for the Future.
I’ve already written two editorials on it, in February and in May, and as details continue to emerge, I’ll probably be writing more. The reason: There is a very high probability that some form of Foundation for the Future will truly become the foundation for this country’s future dairy policy. With the lobbying muscle of NMPF, its 30 co-ops and 40,000-plus producers behind it, it has to be the odds-on favorite of some form of it getting passed into law.
I’m mostly positive about the plan because it positions the U.S. dairy industry to become a global player. It also moves away from dairy price supports and Milk Income Loss Contract payments and goes instead to a minimal level safety net of margin insurance.
Foundation for the Future also does away with cumbersome price formulas used to set minimum Federal Order prices. Based on a prices that proprietary cheese plants actually pay, the new price minimums should be more reflective of actual prices paid and shouldn’t have the time lags the old system has. That in itself should reduce, if not eliminate, negative producer price differentials.
But as the details on the Foundation Plan emerge, there’s at least a bit of schizophrenia built into it as well.
For example, the Dairy Price Stabilization portion of the plan will start withholding 2% from producers’ milk checks when the milk-feed margin dips below $6 for two consecutive months. The hope is that producers won’t want to ship milk they’re not getting paid for. That remains to be seen.
Even more money gets deducted as the milk-feed margin shrinks—4% (up to a maximum of 8% if the producer is above his/her base) if the milk-feed margin shrinks below $4. At the same time, however, the Margin Protection portion of the plan kicks in, paying the producer back to get him back to $4 on 90% of the farm’s production base.
Jim Tillison, NMPF’s Senior VP of Marketing and Economic Development, says the margin protection payments will only be paid out quarterly. The deductions from the Dairy Price Stabilization portion will happen immediately. “As one member of our board said, ‘When you’re taking 8% out of a monthly milk check, producers will adjust quickly.’”
Maybe. But maybe they’ll keep on milking knowing that the margin insurance will fill some of the debits.
NMPF is correct when it argues that the milk-feed margin concept is a better gauge of dairy profitability than milk price alone. That’s because the milk-feed margin can be affected by milk prices through over supply, lagging demand, or high feed prices.
The problem comes in when the Dairy Price Stabilization part of the program tries to solve all problems by cutting supply. In two out of three cases, it could actually make the problem worse. Why? If you cut supply, you raise milk prices. But if the problem is not over-supply but feed prices, you simply raise milk and cheese and butter prices and reduce demand, which in turn reduces prices which means you have to cut supply even further. The same thing happens when demand is the problem. By cutting supply, you raise prices and kill even more demand.
Yes, the NMPF plan would use money taken from producer milk checks to increase utilization through food banks, school nutrition programs and export promotion. The first two likely won’t build long-term demand if food is donated or highly subsidized. As for export promotion, here today/gone tomorrow rarely works.
I am not suggesting the solution to this conundrum is easy. If it were, commodity markets would have solved this problem centuries ago. But I am suggesting that this industry can get so immersed in the minutiae of solving one problem that the law of unintended consequences creates many multiples more.
Giving producers some level of government-subsidized margin protection is warranted, needed, necessary. That’s especially true if the government insists on funding and subsidizing biofuel production at the expense of feed. But I’m not sure the dairy industry really needs the Dairy Price Stabilization portion of NMPF’s plan. Simpler is better.