Informa Study Fires Up Dairy Debate
Jan 31, 2011
Which states would contribute more under the Foundation for the Future’s growth management plan? Time, place and circumstance all play a role – and controversy follows.
The headline (which I wrote) is accurate. It rightly describes the gist of an Informa Economics analysis of the growth management portion of the National Milk Producer Federation’s (NMPF) Foundation for the Future (FFTF) proposal had it been in place from 2000 through 2009.
The study suggests that Wisconsin producers would have paid in $150 million last decade. Minnesota producers would have contributed $51.3 million; New York, $63.6 million; and Pennsylvania, $33.5 million. California producers would have contributed a “mere” $28.2 million.
Wisconsin, New York, Pennsylvania and Minnesota produce about 30% of nation’s milk. But these four states would have contributed nearly half of the $625 million in withheld milk payments under the plan. In contrast, California, which produces 20+% of the nation’s milk, would have paid in just 4.5% of the withheld payments.
But the headline is also deceiving. Just because the Midwest and Northeast would have paid in the most in 2000 to 2009, it does not mean these regions will be the biggest contributors going forward. Time, place and circumstance all play a role into which states pay and when they pay.
For example, in 2009, California producers had already cut back production because many of their plants were at capacity and had capped production. In addition, California producers buy much of their protein and energy. With high feed prices hitting them hard, they had already begun to scale back. So had the FFTF growth management been in effect, they would have already met the required 2% cutback.
In other regions of the country, high milk prices in 2007 and 2008 had encouraged more milk production. Plus, producers in these regions grow much of their own feed, usually only having to buy protein to balance rations. As a result, they were somewhat insulated from high corn prices and didn’t cut back as quickly. So when the production cutbacks kicked in, the Midwest and Northeast bore the full brunt of those deductions.
If you go back to 2003, however, the reason for FFTF going into effect was low milk prices, not high feed. Then, California would have paid in $14.6 million, or 13% of the nation’s total. Wisconsin, New York, Pennsylvania and Minnesota would have paid in $36 million, or 32% of the total. The biggest loser among this group would have been Wisconsin, paying in $28.2 million, or 25% of the total.
The biggest random effect that triggers whether a state’s producers will pay (or not) is weather, which, in turn, influences production per cow, says Nate Donnay, senior dairy analyst with Informa Economics. For example, had the growth management plan been triggered this past summer, Wisconsin producers might have gotten off scot-free in August and September when milk per cow was hammered due to high heat and humidity.
Season of the year also plays a role. If a growth management plan activates in May or June, most producers would likely have to pay in because June is a peak month as a result of the spring flush.
The International Dairy Foods Association (IDFA) would like NMPF to simply drop the Dairy Market Stabilization Program portion of the FFTF plan. But some very large co-ops are insisting a growth management plan be part of the total package.
Plus, if the package does not contain some mechanism to restrain production, the margin insurance portion of the plan could become prohibitively expensive. The Informa Economics analysis shows milk production is highly inelastic. A 10% drop in milk price results in just a 0.75% drop in milk production one year later.
In other words, if milk production keeps chugging along, prices won’t rebound. And if the margin triggers remain flipped for months and months because milk production is unrestrained, the cost of those insurance payouts could bust the federal bank (which, by all accounts, is already busted).
If, in the end, Foundation for the Future costs a penny more than the current program, it ain’t gonna happen. And then we’re left with the current mess – $10 support prices, complex Federal Order pricing formulas, make allowances and all the rest.