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April 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.

Congressional Dairy Debate Begins in Earnest

Apr 23, 2012

The dairy policy rhetoric ratchets up this week amid tightening margins and rapidly expanding production. We’re in for a long, hot, nasty summer.

 
After nearly two years of discussion and argument on future dairy policy among dairy farmers and processors, the real debate that matters begins in Congress this week.
 
The Senate will begin mark-up of its version tomorrow, and the Dairy Security Act (DSA) of 2012 as we all know (and love or hate) it, will likely be tweaked. That’s almost a certainty on the House side, where Speaker John Boehner has been quoted as saying DSA is dead on arrival if it contains supply management provisions. The House of Representatives’ Agriculture Subcommittee on Livestock, Dairy and Poultry will hold hearings on dairy policy Thursday.
 
In dairy country, the rhetoric has already ratcheted up. A few weeks ago, the Dairy Business Association in Wisconsin claimed that had DSA already been in effect, dairy stabilization provisions would already be requiring participating producers to cut production or forfeit a portion of their milk checks due to low margins.
 
“Not true,” counters Jim Tillison, National Milk Producers Federation Senior Vice President of Marketing and Economic Research. “Based on the numbers as DSA is currently proposed, the dairy stabilization program would go into effect in May. But it’s also true producers would be receiving margin payments for the previous two months, depending on the level of supplemental margin insurance they signed up for.”
 
Dairy programs actually in place, the Milk Income Loss Contract program (MILC) and Livestock Gross Margin-Dairy (LGM-Dairy), are currently sending real dollars to producers who have signed up for these programs. The MILC program is paying producers 39¢/cwt. for February milk production, the first time MILC payments have been made since April 2010. Projections, based on current futures prices, are that MILC will make significant payments—$1/cwt. or more in June and July—through August.
 
LGM-Dairy is also paying indemnities, reports Ron Mortensen, with Dairy Gross Margin, LLC. If producers had signed up for the insurance for January, February and March with zero deductible, the indemnity would be 81¢/cwt. less the 63¢ premium, netting 18¢/cwt.
 
And then there’s localized supply management. Last week, California Dairies, Inc., issued a press release that it might have to impose penalties for members who ship more than their assigned baseline limits. It has not done so since May 2009, but increasing milk volumes might necessitate the reactivation of the program.
 
Land O’Lakes has already activated its base plan in California, noting the huge increase in daily deliveries that is overwhelming processing capacity and the prohibitive cost of hauling surplus milk to other plants.
 
The point of all this is that Congress will be debating new dairy policy in the midst of tightening margins and rapidly expanding production. Note: February milk production was up 4.3%, March production was up another 4.2%.
 
Existing programs are attempting to deal with this conundrum. Opponents of DSA would like to gut supply management from the program. But that throws budget savings and control out the window as well.
 
Some are already girding for failure. Sen. Patrick Leahy, D-Vt.), Sen. Bernie Sanders, (Indep., Vt.) and Rep. Peter Welch (D-Vt.)  introduced legislation that would continue the MILC program at current levels until Sept. 30, 2013. (Current legislation expires Sept. 30, 2012. )
 
But in order to enact that legislation, the Vermont Congressional delegation will have to find offsetting budget savings. And that would be on top of the $3.32 billion in annual savings agriculture must contribute to budget reconciliation after the so-called “Super Committee” failed to reach agreement last fall.
 
No one can predict how any of this will turn out, of course. What is clear, given the tenor of the times and the debate so far, is that we’re in for a long, hot, nasty summer.

Another Take on Dairy Reform

Apr 09, 2012

Apart from the dairy stabilization (aka supply management) component of the dairy reform package, the most hotly debated issue is whether the program would actually save or cost dairy farmers money.

Back in December, we dutifully reported  an analysis by Chuck Nicholson and Mark Stephenson. Chuck Nicholson is a dairy economist at Cal Poly; Stephenson is a dairy economist at the University of Wisconsin.
 
Their economic model shows that the Dairy Security Act of 2011 (DSA) could significantly reduce milk price volatility, but that reduction would come at a price of nearly $1/cwt. reduction in the all-milk price. The Stephenson/Nicholson model also suggests the dairy stabilization program would be in effect 40% to 45% of the time, and net farm operating income would be reduced by 32% to 48%.
 
Opponents of DSA immediately grabbed onto those numbers. And frankly, who wouldn’t? These are some unsettling outcomes, to say the least.
 
But proponents of DSA point out, rightly, the Stephenson/Nicholson model does not include any correlation between feed prices and milk prices. In other words, there is no mechanism in the model that says as feed prices rise, less milk is produced, which in turn eventually drives milk prices higher. DSA proponents say this is a critically missing link in any analysis of DSA because the program hinges on the margin between feed and milk prices.
 
Scott Brown, a dairy economist with the University of Missouri, completed work on the feed-milk correlation this winter. His results confirm there is a fairly strong correlation between feed and milk prices—in the neighborhood of 0.45. (No correlation would be 0.00; a perfect correlation would be 1.00.)
 
“I was surprised at how strong the correlation is, even in the shorter term,” he says. “But feed is a big driver to milk production costs—65% of production costs are wrapped up in feed.”
 
And so the correlation between feed costs and milk prices becomes important, especially if you’re receiving government payments based on the marginal difference between the two. “The chances of high feed costs and low milk prices are lower than the chances of low feed costs and low milk prices,” he says.
 
“As a result, margin payments may not trigger as often as you might think. There certainly is a lower probability,” he says. And if there’s a lower probability of margin payments, there is also a lower probability of the dairy stabilization program kicking in.
 
Brown’s model suggests all-milk prices would have also been about $2/cwt. better in 2009—not dipping nearly as low as they did, and rebounding more sharply—had the DSA been in place.
 
Brown ran 500 iterations of his economic model for each year from 2012 through 2020. His results show that there is very little difference in the all-milk price between the current dairy program and the Dairy Security Act of 2011 as originally proposed by U.S. Rep. Collin Peterson, D-Minn., last fall. In fact, there is not a nickel’s worth of difference in any of those years.
 
If you look at 2015, for example, there’s only a 10% chance of a margin payment at the base program rate of $4/cwt. margin. And even at the $6.50/cwt. supplemental margin, there’s a probability of a payment only a third of the time.
 
All of this, of course, depends on what the final details of the reform package are, if it passes and how many dairy producers then opt in.
 
Opponents of DSA will cling to the Nicholson/Stephenson results as to what DSA could bring. Brown acknowledges the Nicholson/Stephenson scenario is a possible outcome even in his model. But it’s only one of 500 possible outcomes.
 
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