Fixing What’s FixableJerry Kozak,
President/CEO The depth of the dairy recession last year has created dissatisfaction with just about every aspect of how milk is produced, priced, and marketed. It’s been said we shouldn’t let a crisis go to waste; at the same time, however, a crisis like the one we’ve experienced often lays waste to entire business models.
As I’ve discussed previously in this forum, NMPF is working to address the entire milk pricing system, and has focused its efforts now on a plan we call Foundation for the Future (more about that in a moment). One of the big concerns that we’ve repeatedly heard is the issue of price volatility: markets are moving too quickly, too violently, too unpredictably. And tackling the matter of dairy price volatility has to be part and parcel of the overall effort we’re making to improve the entire pricing system. But let’s be clear up front that no commodity pricing regime, even with the heavy hand of government involvement, is going to magically wipe away the prospect of price movements. Since dairy by its nature is an inelastic product, little swings in production and consumption can create big swings in price. Beyond that, as the U.S. dairy sector becomes more integrated with global markets, the world-wide factors that affect supply and demand will tend to magnify volatility. Like it or not, it’s important to recognize that reality. And it’s also important to recognize that the past 12-15 years of demonstrably greater price volatility also brought with them higher overall prices (and yes, sometimes lower prices as well). Back in the 1980s, when the price support program was set at $13/hundredweight, farm-level prices hewed closely to that government threshold. Prices didn’t move down, but they didn’t move up, either. Since the early 1990s, prices have moved far more quickly and dramatically, but the clear trend line is toward an overall higher price level. That’s the good news, and hopefully, the not-so-hidden benefit, behind the economic dynamic in dairy in recent decades. Nevertheless, even record high prices of recent years don’t seem as sweet when they’re coupled with the abysmally-low prices of 2003 and 2009. The lows leave a more bitter taste than the highs can mask. And our Foundation for the Future program, in looking at changes in the Federal Order system, in producer safety nets, and in the role of CWT, is addressing volatility as part of its overall package. There will always be volatility in commodity prices; the key is moderating price swings, and providing tools to manage it. In fact, as unpopular as it may sometimes be, a certain degree of volatility can be healthy for all parties. Here are some of the ways that our multi-faceted approach can address price swings: Federal Orders. Under the current system, manufacturers base the price for which they sell cheese and butter on thinly traded markets which are potentially very volatile. The prices they receive on a weighted average basis, in turn, become the product prices the federal orders are required to use in the Class III and Class IV milk price formulas. Small wonder the milk price producers received during that period swung madly as well. By accelerating the time frame in which pricing signals are sent, necessary reforms in Federal Orders will directly affect the speed and duration of prices movements, while encouraging new product development and allowing U.S. manufacturers to be competitive in international markets as well. It will also impact the feast or famine mentality producers have developed as a result of the extreme volatility: adding cows when prices are high because they won’t stay there for long – resulting in production growing faster than demand, leading to lower prices. Cooperatives Working Together. With increased membership participation, this voluntary supply and demand balancing program can help reduce volatility. Well-timed herd retirements in 2003, 2004, and 2005 resulted in a period of 19 consecutive months, from July 2004 thru January 2006, when All-Milk prices ranged between $14.50 and $16.50 per hundredweight of milk. The three herd retirements just last year helped reduce U.S. dairy production, hastening a price recovery by at least six months. To address price volatility and make CWT more effective, a subcommittee of NMPF’s Strategic Planning Task Force is in the process of evaluating modifications to the existing herd retirement and export assistance programs, as well as new programs, aimed at stabilizing producer prices and profit margins. Dairy Producer Income Protection. The other element of NMPF’s Foundation is formulating a new safety net allowing farmers to insure against not just low prices, but negative profit margins. By reducing the dependence on existing government assistance efforts like the MILC and dairy product price support programs, market signals will move more quickly to the farm, and we would face less price-dampening competition from foreign dairy exports. Both will help address the volatility dilemma. All of these potential changes will ultimately require a new way of thinking about dairy economics, and we shouldn’t underestimate the size of that attitudinal shift. But we need to begin taking those steps now as the industry focuses on the volatility issue. *Anyone is welcome to post comments. Comments must be approved before appearing on the page. All effort will be made to publish every comment, provided that each comment is respectful and directly addresses the issues discussed in the column. Readers are encouraged to respond to the comments of others. Comments |
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