Why Our Domestic Dairy Commodity Prices Are So Low
Dec 03, 2010
By Randal Stoker, Woodbridge, Va.
The most commonly asked question of dairy industry marketing participants of late is, “Why are U.S. dairy commodity prices so low when compared with global dairy commodity prices?”
USDA answered this question more than 25 years ago when it stated, “Increasing Class I differentials beyond the cost-justified level increases fluid milk product prices and decreases fluid use. The drop in fluid milk sales, combined with increased Grade A milk production because of the higher price received by farmers, increases supplies of milk for manufacturing, lowering the manufacturing grade milk price. This lowers prices of manufactured dairy products.”
In other words the artificial support of the domestic fluid sector of our industry has the adverse side-effect of artificially lowering or depressing our domestic manufacturing sector of our industry and results in artificially low domestic commodity manufactured milk product prices.
It did not take the Australians as long to discover and correct their milk marketing dilemma. The Australian dairy industry, until deregulation, had a milk pricing system very similar to ours. They came to the realization that their artificially supported Class I revenues were:
1) being diluted and spread over larger and larger supplies of manufacture milk, and
2) were driving down their domestic dairy commodity prices that they needed to market globally.
For this reason, in Victoria, where the largest proportion of pooled milk consisted of non-Class I/manufacture milk, an overwhelming majority of dairymen convinced the State of Victoria to adopt complete deregulation. Victoria’s decision to deregulate then spurred the remaining Australian States to adopt nationwide deregulation. Australian Class I sales and manufacture prices increased immediately following deregulation.
Australia and other deregulated countries are now seizing their growing international dairy export markets at our expense.
Today, almost all of our domestic manufactured milk products are made from the same high-quality milk that qualifies for fluid milk products. Since the raw milk used to make both fluid milk products and manufacture milk products is now essentially the same, and since fluid milk prices are artificially supported through Class I differentials and over-order premiums, the price depression effects to our major utilization sector (the manufactured milk sector) are also increasingly evident.
What makes matters even worse is that the manufactured milk products we make from depressed domestic milk prices are more storable relative to fluid milk products. Therefore, when prices are most depressed, storable domestic dairy product inventories tend to build and result in even more severe and prolonged price depressions both domestically and globally.
We must deregulate and decentralize in order to:
1) compete globally;
2) discover accurate milk prices quickly and transparently;
3) maximize price stability and minimize price volatility;
4) maximize producer milk prices and minimize marketing inefficiencies;
5) quickly adjust to local and global circumstances and changing costs;
6) minimize market power and the associated unjust profiteering, and
7) maintain long-term sustainable balances and stability in local, regional, and global markets.
USDA and the Department of Justice (DOJ) have the authority to address our problem. USDA’s Agriculture Secretary has the authority to phase out centrally administered and mandatory classified pricing and revenue pooling by gradually suspending these AMAA provisions. DOJ has the authority to gradually sunset and phase out the antitrust immunity contained in the AMAA. Either or both methods would gradually deregulate and decentralize our milk marketing system.
Our centrally administered milk marketing system is now the root cause of most, if not all, of our frustrations. The 70-plus-year experiment with centralized administered milk pricing has now come full circle and is now working against us.
When will we come to the realization that we have sown the wind and are now reaping the whirlwind? Isn’t it time for real, fundamental, systemic, meaningful and sustainable milk marketing policy reform?