Life without Order(s)
Jun 15, 2012
While the dairy industry continues to ruminate over possible changes in the Federal Order system, a Cal Poly study gives food for thought.
The International Dairy Foods Association (IDFA) has proposed eliminating minimum prices immediately and phasing out Class I differentials over the next five years as part of its farm bill/dairy reforms initiative.
While the idea was a non-starter with dairy cooperatives, the industry continues to ruminate over what changes are needed within the Federal Order system.
Chuck Nicholson, a Cal Poly dairy economist at San Luis Obispo, has done some preliminary “food for thought” analysis of what the elimination of differentials would have on milk prices, cumulative revenues (if milk prices go down, consumption goes up), exports and government expenditures.
He looked at two scenarios: The immediate elimination of differentials in July 2013, and a four-year phase out beginning in July 2013. He compared both to the current (baseline) program.
He also assumed the Federal Orders would maintain minimum pricing for each class of dairy products, with the “higher of” Class III and IV used to determine the Class I and II price within each Order. His findings:
• “Eliminating differentials reduces the All-Milk price, slightly increases price variation and lowers revenues.” His baseline All-Milk price comes in at $16.22/cwt. An immediate elimination would drop that price to $15.95 and a phase-out would drop the price to $16.13.
These are not large drops, but when applied to all milk produced, cumulative producer revenues drop from $180.3 billion to $174.9 billion for immediate elimination to $177.5 billion for a phase-out. And this is on a national basis. Areas of the country with large Class I sales would be hit hardest, Nicholson notes.
• “Eliminating differentials has the potential to increase government expenditures under current programs due to lower average prices, especially during price troughs,” he says.
He projects government expenditures under current programs to total $1.51 billion between 2012 and 2018. An immediate phase out of differentials would trigger government expenditures of $3.31 billion and a phase out would cost $2.51 billion. Neither increase would make up for the loss in producer revenues from the elimination of the differentials.
• “Eliminating differentials decreases Class I prices, increases fluid milk sales and decreases fluid milk revenues (due to lowering price for an inelastic product),” says Nicholson.
The Class I price under the baseline would be $17.26/cwt. compared to $14.75 with an immediate elimination of Class I differentials and $15.68 for phase-out. Cumulative fluid revenues would fall from $76.1 billion to $70.3 with an immediate elimination of Class I differentials and $72.6 for phase-out.
• “Eliminating differentials increases Class III prices, decreases cheese sales and increase cheese revenues,” says Nicholson.
The Class III price would rise from a baseline of $13.96/cwt. to $14.38 with an immediate elimination of Class I differentials and $14.27 for phase-out. Cumulative cheese revenues would increase about $1 billion with immediate elimination and $750 million with a phase-out. Cheese exports would also be reduced due to higher prices, he says.
The bottom line, says Nicholson, is that Federal Orders still matter. “But the impact on producer revenue is smaller now, perhaps 1.5% to 3%, then it would have been in the past,” he says.
Without Federal Orders, fluid milk consumers would be the big winners. But people who love cheese and ice cream would pay more.