CEO’s Corner: A Crisis Should Bring Opportunity – Not Opportunism
October 1, 2020
There’s an adage applied often in politics that “in the midst of every crisis lies great opportunity.” And while no one would ever wish for what’s happened in dairy markets over the past several months, this crisis does provide opportunities – to reaffirm the importance of cooperatives in marketing producers’ milk; to appreciate robust risk management protection initiatives like the Dairy Margin Coverage program, for which 2021 signup starts Oct. 12; and to remember the power that dairy has when it works together, both to stabilize markets and reassure consumers who turn to it in troubled times.
But it’s also important to distinguish between opportunities — which come from the lessons of a crisis — and opportunism, which exploits a crisis to push policies that may not lead to real improvements or prevent a similar crisis in the future. That contrast is important to remember when discussing what’s been a hot topic in dairy the past few months: the negative Producer Price Differentials that have resulted from the wild gyrations in markets, understandably frustrating farmers who don’t feel they’ve captured the full benefits of the market rebound we’ve seen.
Negative PPDs – which happen when milk-price swings among component classes fall out of sync — create an ugly accounting deduct line on a milk check. They’re frustrating, but they’re rare – in fact, negative PPDs have occurred during only 16 months out of the past 10 years. The ones we’ve seen recently have been based on extremely unusual circumstances, specifically the unprecedented price collapse that accompanied the COVID-19 pandemic and the impact of other factors, including the federal government’s response, which combined to whipsaw dairy markets.
When the pandemic hit this past spring, the nation’s foodservice industry ground to a halt, kneecapping a market that traditionally absorbs well over a third of total U.S. dairy sales and sending commodity markets into a tailspin. NMPF efforts weren’t limited to helping farmers with direct payments; NMPF and allied organizations also pursued federal government support to step in to purchase displaced dairy products and provide them for donation to those in need. Those efforts were hugely successful; they will result in hundreds of millions of dollars in federal government dairy-product purchases provided to food banks and other outlets, feeding families and buoying markets.
It’s important to keep in mind that while the federal government’s purchases of dairy products for donation contributed to bringing about the negative PPDs this summer, that outcome was vastly superior to the alternative of no government and industry action. The intervention sharply raised farm milk prices from catastrophic lows. Without this intervention, we were facing a sustained collapse of the U.S. dairy market, with ongoing massive losses within both the farm and processor communities.
While the government has purchased a variety of dairy products, the largest purchases have been for cheese. Those purchases, along with strong export sales, quickly and forcefully lifted commodity cheese markets from $1 a pound to nearly $3 a pound. That undoubtedly kept cheese plants open and saved family dairy farms – it also, in turn, dramatically boosted Class III milk prices. Meanwhile, the government to date has purchased limited amounts of butter and very little nonfat dry milk. That has resulted in much smaller increases in Class IV prices and created a large gap between Class III and IV.
That gap, along with the Federal Milk Marketing Order program’s standard advance pricing announcement of Class I fluid milk, led to high levels of Class III milk being de-pooled from federal orders rather than pay into the pool to share the revenue across the market. For co-op cheese plants that de-pooled, the revenue stayed within their farmer-owned operations and benefitted their members. Proprietary cheese plants may or may not have shared those monies with their farm suppliers.
The large amount of temporary de-pooling that occurred has certainly raised concerns in some markets. Those concerns could be addressed by looking at whether stronger pooling requirements are needed, something that is available and could be looked at on an order-by-order basis within the FMMO system.
Other, related issues could be examined as well — the FMMO system is always an area worthy of careful thought and consideration. But changes to a system that’s managed milk pricing for generations shouldn’t be the result of a knee-jerk reaction prompted by extremely rare, black swan events. Any suggestion otherwise isn’t one that’s seeking a genuine opportunity – it’s opportunism in a crisis, and it’s an approach of which dairy farmers should be wary.
We all know that making long-term policy changes in response to short-term disruptions and unprecedented conditions, even if challenging, rarely results in good policy. Instead, it can lead to longer-term unintended consequences that could permanently reduce farmer income without remedying any fundamental market shortcomings. Preventing negative PPDs can sound like a good idea – but how might a “fix” affect milk checks in more-normal times? Those are the questions that need to be explored. Concern with negative PPDs is understandable. But negative PPDs will largely go away once markets return to normal function, which ought to be our underlying goal.
At NMPF we are engaged in an ongoing review of the federal order system to identify areas for potential improvement, and for discussion with our members as we examine ways to create consensus among the nation’s dairy farmers and their cooperatives. We welcome input and ideas, and especially appreciate the thoughts expressed by our member cooperatives that so effectively represent their members’ collective judgment. This is what ensures that real opportunity is pursued.
This industry has been through a lot these past few months. Let’s use the time ahead wisely, gaining the most from the lessons we have learned as we seek together to benefit most from the opportunities that are certain to arise. These decisions should be made in a deliberate and organized manner, with dairy farmers and their cooperatives leading the effort.