Supply Management Programs Leave Sour Taste
Oct 04, 2010
“Supply management schemes are very sweet at the beginning, but taste more and more bitter with each passing year and end up as poison when they are dissolved.”
That provocative statement comes not from a free-market Kiwi, but from Torsten Hemme, an economist and chairman of the International Farm Comparison Network (IFCN) based in Kiel, Germany. He made the comment—and an hour’s worth more—last Friday at one of World Dairy Expo’s Education Seminars.
IFCN is a dairy analysis group covering 86 countries, 95% of the world’s milk production and funded by some 70 companies, including milk processors, dairy equipment manufacturers, feed suppliers, animal health companies and other dairy related businesses.
Hemme’s point is simply this: Quota systems are very easy to establish but very difficult to abolish. And once in place, the higher milk prices they offer are quickly capitalized into quota value or other dairy assets, be they cattle, facilities or land. For example, in Germany, the value of quota is 1.5 times the milk price. In the Netherlands, it is three to four times. And in Canada, it is seven times.
Another way of looking at it: The total asset value on a Canadian farm is about $170 per pound of milk produced. But quota value makes up $113 of that, or two thirds of the value. Still another way of looking at it is milk price net quota value. In Canada, that figure is about $11/cwt. In the U.S., which currently doesn’t have quota, the figure is $18.
Once you abolish quotas, the remaining assets in a dairy farm also lose value and often are not large enough to cover the equity embedded in the quota. Unless the farm is completely debt free, lenders become nervous that the remaining equity is not large enough to support the farm’s debt. “When I came here, I was really surprised by your discussions in the United States of going to supply management,” says Hemme.
Analysis done by IFCN shows that U.S. cost of production falls in the mid range of countries world wide. Canada and the Nordic have the highest costs; Argentina, Belarus and the Ukraine the lowest.
While U.S. cost of production hovers at about $16/cwt, the next tier of competitors such as Australia, New Zealand and Venezuela average about 20% less. But these countries have less ability to expand production without increasing their costs of production.
In addition, the U.S. milk-feed ratio, which traditionally hovers around 3.2 and collapsed to 1.5 in 2009 and 2010, is still higher than New Zealand’s 1.2 ratio. That suggests the U.S. is still in a competitive position to expand production if world demand calls for it. Note: Between 1996 and 2009, the average growth in annual milk consumption and production was 12 million metric tons, more than the average milk production volume of Australia.
Hemme also notes that volatility is not only a U.S. or European problem. It affects every country. “We do not live life on an island any longer. We are all connected. When something happens in Russia or China, it affects us all,” says Hemme.
He suggests a global dairy stock buffer program (where not only governments but perhaps dairy companies contribute to support it) needs to be considered. After all, one in eight people on the globe live on dairy farms. That’s a huge number of dairy families depending on an increasingly volatile market. It is something to think about.