“Is competition healthy enough to protect farmers, and if not, what do we do about it?”

Sen. Herb Kohl’s question at the USDA–Department of Justice hearing on dairy industry consolidation sums up a never-ending debate. There is serious concern among producers that competition among processors is lacking.
 

• Foremost Farms recently sold two fluid bottling plants to Dean Foods. In Green Bay, Wis., the Herfindahl-Hirschman Index (HHI), which measures market concentration, went from an already high 3,049 to 4,777.

• At the Chicago Mercantile Exchange, the two largest buyers of block Cheddar made 74% of all purchases between Jan. 1, 1999, and Feb. 2, 2007.

• Guaranteed make allowances are anticompetitive, some argue, because they guarantee cheese and powder manufacturers a minimum margin—regardless of what milk, cheese and powder prices are.

Now, flip to the producer side. Supply management advocates say there’s too much farm-to-farm competition and production must be capped. They want to set floor prices or income-over-feed-cost triggers to control supply.

But, as with make allowances, setting the level becomes a game. Set it too low and high-cost producers will continue to complain. Set it too high, and you’ll have to cut supply so much that it raises the cost of production.

Why? Producers will have fewer hundredweights over which to spread their fixed costs. That exacerbates the problem, causing cost of production to spiral ever upward.

Unfettered competition is bad when there is disproportionate market power. That’s why Federal Orders were created in the 1930s. But ever since, the industry has been arguing about what level of regulation is necessary. If it opts for supply management, we’ll be arguing the same kinds of supply-side questions for the next 75 years. 

Competition is good—for everybody.

Bonus Content:

CME, Deans Focus of USDA/Department of Justice Hearings
 
Experts Disagree on Co-ops Role in Milk Price Debacle
 
Dairy Consolidation and Monopoly Money