Volatile Times Solutions offered to tamp down price volatility

April 14, 2010 11:50 AM

As dairy price support levels become less and less relevant to cost-of-production levels, milk price volatility has brought cash flows from booming highs to crushing lows.

A panel discussion at this year's Dairy Forum addressed this vexing problem. Here are the highlights:

Some volatility is actually not bad, because the overall price trend has been upward, says Cal Covington, former CEO of Southeast Milk. But it hurts dairy sales when prices get too high and leads to crushing losses when prices bottom.

The way Federal Orders set minimum fluid milk prices can exaggerate underlining price changes in cheese and powder markets. Minimums each month are set using just two weeks of prices. Rolling averages of monthly prices—from four to six months—would smooth out the changes but still give direction, Covington says.

Other commodities, such as coffee, chocolate and grains, have as much volatility or more as milk. But because there are direct hedging opportunities, producers and processors are better able to deal with price changes in these markets, says Mike McCully, director of dairy procurement for Kraft Foods.

The Federal Orders four-class system makes direct hedging of dairy products difficult. Complete deregulation is a nonstarter politically, McCully says. Going to a two-class system, as proposed by the National Milk Producers Federation, with fluid milk as Class I and all other products as Class II, would simplify hedging and managing risk.

Getting government involvement out of agriculture, not only dairy, would allow processors and producers to work more closely together, says Bob Naerebout, executive director of the Idaho Dairymen's Association.

Some milk buyers are interested in long-term price and volume contracts. Those contracts, however, would have to be indexed to reflect price changes for feed and perhaps other inputs. "If a customer wants to lock in prices for an extended period, we would like the regulations to allow us to do it,” Covington says.

"Quotas is an evil word, but what I think we need is structure that would allow for controlled growth. Without one, when prices increase, everybody chases those margins,” says Rob Vanden Heuvel, executive director of the California Milk Producers Council. That extra milk forces prices to crash, and the cycle of bust and boom repeats. "Each cycle gets more severe,” he says.

Now is the time for change, but consent is difficult. Idaho producers may support supply management if it were producer controlled, Naerebout says. In Florida, about a third of producers support a free market, another third support supply management and the remainder vary depending on prices and when you ask them, Covington says.

"The answers are there. We need leaders to push solutions,” McCully says.

"If in five years we don't see any policy changes, we'll still be discussing this,” Naerebout says.

Bonus content:

Radical New Plan - NMPF proposal would change

Holstein Association USA Dairy Price Stabilization Program


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