Published on: 15:56PM Feb 25, 2011
The U.S. should do everything possible to become a consistent supplier to the growing world market. Supply management is not the answer.
Willow Bend Farm, Clifton Springs, N.Y.
The World Is Running Out of Food
Back in 1954, I was a young hired hand working for Law-nel Farms, a large, (for that era) 65-cow dairy farm. The owner, Nelson Smith, was a former county agent and I was a “green” college graduate. The breakfast table, after milking the cows, was always a feast of Rella Smith’s delicious breakfast and a treasure of Nelson Smith’s conversation and wisdom.
Indelible in my memory is the morning we discussed the possibility of food becoming scarce worldwide, and farmers receiving real good prices for their milk, meat, and grain. There had been a news article indicating such a coming scarcity. “All my life I have been reading of a coming food scarcity.” said Nelson. “I have been waiting for that promised day, but it never comes. I don’t believe it ever will. We farmers are just too good at what we do: producing the nation’s food.”
Later on during the 70’s, I remember reading a Kiplinger Report again claiming we were running out of food and good times were coming. Even our Secretary of Agriculture was urging planting “hedge row to hedge row.” That, too, passed, as the promise of higher prices brought on the needed production to meet all the demand the world could afford.
Still, today, 56 years later, Nelson Smith’s words still ring true, “We farmers are just too good at what we do: producing the nation’s food.”
This Time It’s Different
The world has changed dramatically these past 56 years. The U.S. used to be the world’s biggest exporter of manufactured goods. We laughed when the first foreign cars tried to invade our market. Who would ever buy a Japanese Toyota or Datsun, or, worse yet, a Korean Hyundai? My, how times change! Even the American flags in our Walmart Super Centers are now made in China. China now has a middle class of 300 million people that is equal to our total U S population. India is expected to surpass China in population and also has a strong growth of its middle class. For the first time in my life, the world is developing a strong middle class that has the money to purchase our excellent high protein dairy products.
How Important Are U.S. Dairy Exports?
The year 2009 was a very tough year for our dairy industry. Many well-run farms ended the year with a much poorer balance sheet in spite of their best efforts. The West Coast model of dairy farming was especially hard hit due to their purchasing all of their feedstuffs. Our lack of export ability had a lot to do with the depth and length of our low price period.
Peter Vitaliano, of the National Milk Producers Federation, reports that our dairy exports dropped 15% from 2008 to 2009 when world prices turned south. At the same time, increases were seen in New Zealand, up 38%; European Union, up 7%; Australia, up 12%; and Argentina, up 22%.
In this country, when the world price drops below our support price, we quit supplying the overseas market and sell to the government instead. Our support price, even though it is very low, still interrupts our supplying world markets. We thus have a reputation for being an inconsistent supplier and a last choice when a world customer is seeking a dependable supplier of dairy products.
Lately, exports have become the talk of our dairy industry. The futures market was predicting $1 lower mailbox prices for 2011, and now the futures market is predicting $1 higher prices for the year. What happened? Our export sales have been steadily increasing and running about 14% of our production. In December, I think I heard we exported 18% of our production. The speculators on the CME are beginning to notice the possibility that dairy products could be quite short this spring and the rest of 2011. Our export markets have become the key to good milk prices down on the farm.
Who Will Supply the World’s Dairy Products?
This is a wonderful opportunity for dairy farmers around the world. We in the U.S. should do everything possible to become a consistent supplier of this growing world market. If we are asleep at the switch, the increase in demand will be filled by Argentina, Brazil, Europe or the Ukraine. Australia and New Zealand are pretty well maxed out. We must not let this opportunity slip by. We must become a consistent supplier for world markets.
The Support Prices of Dairy Products Must Go
If our politicians and farm leaders insist in helping dairy farmers, they must find a different way than buying up our products when prices get disastrously low. Perhaps some kind of margin insurance or continued MILC payments to help the small dairyman? But we must eliminate the opportunity to sell our products to the government. When world prices get terribly low, we must continue to serve the world market and not have the option to sell to the government. Good customers will insist on a consistent supplier.
Beware of Supply Management Plans
As dairy farmers, we must learn to live with the higher volatility of world markets. The periods of high prices will make it well worth the effort to survive periods of low prices. We must be wary of those who are promoting supply management plans involving a quota system in return for price stability. Price enhancement is their real goal by cutting our supply of dairy products. Cutting our supply is no way to serve a growing and profitable (most times) world market.
We must get rid of this idea of gaining prosperity by cutting back on the supply. It didn’t work when President Roosevelt killed pigs during the Great Depression. It didn’t work by destroying perfectly good cars during the “Cash for Clunkers” program. Nor did it work by killing perfectly good cows in the “Whole Herd Buyout” program. Destroying perfectly good property is never a good idea. Neither is cutting back on the supply with a quota plan. Other countries like Argentina would be only too glad to fill the resulting shortage.
We must concentrate on serving the market and forget about manipulating the market. If we serve the market well, it will take very good care of us as we learn to live with its volatility. After all, it is volatile prices that regulate our amount of production. Low prices slow us down. High prices speed us up. There is no fairer system of regulating markets. Price volatility is our friend, not our enemy. Price volatility is our industry’s “messenger.”
The Foundation for the Future Plan
Our National Milk Producers Federation has the beginning of an excellent plan called “Foundation For The Future” (FFTF). It is a four-step plan:
1. Eliminate our Price Support Program. (I couldn’t agree more.)
2. We should institute better price discovery systems when we establish the Federal Milk Order prices of milk. (Not a bad idea.)
3. Replace the support program and MILC with a margin insurance plan subsidized by the federal government. (OK if that is the price for getting rid of the Support Price Program but very complicated. I have trouble justifying the taxpayer helping me with my milk income.)
4. Institute “Supply Management.” Quotas to be used only in periods of over-supply. (Terrible idea! We must not let supply management in the door. Volatile low prices will control the supply for us. Under any quota plan, there would be tremendous political pressure to use quotas to further cut the supply and enhance the price above what the market will bear. This is a terrible plan if we intend to serve a growing world market.
Time to Speak Out
I pray that some magazine will publish this little essay. We are at an important turning point in our milk industry. We are at a fork in the road. Many good people are crying out for a quota plan. (Left fork!) I sure hope our industry chooses the right fork, the road that leads us to prosperity by serving world markets. Please join me in asking National Milk to drop the quota idea from its FFTF plan. It is a well-thought-out plan if they will just stop trying to manipulate markets with milk quotas.
The time has come to speak up for free markets and not some freedom-restricting, market-distorting milk quota plan.