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The Rain in Spain

January 3, 2011

It used to be that forecasts for rain in Iowa and Illinois during the summer months could move crop markets: a little rain pushed prices down, but forecasts of too much rain could make traders nervous, and boost prices higher.

These days, rain in the forecast can still move markets…but the forecasts, in this case, have to do with prospects for precipitation in Argentina and Brazil. Such is the state of world grain trade that stormy weather in Asia, or South America, affects the value of a bushel of corn in Nebraska. And these days, the value of those bushels also affects the bottom line of dairy farmers across the country.

As we begin 2011, the weather forecast in the southern hemisphere isn’t the only stormy outlook. Milk futures have dropped from their peaks of recent months, and combined with rising grain and oilseed prices, dairy producers are again getting squeezed on both fronts. That’s not a great way to begin a new year.

On the other hand, the good news is that we continue to make progress in building a case for policies that address this kind of vise-like pressure on margins. I’ve written previously about the need for Foundation for the Future’s comprehensive changes in dairy policy, and in particular, a focus on how to indemnify farmers against not just low milk prices, but destructively-low margins. Current events – in the form of flooding in Australia and droughts in South America – are again demonstrating the value in this kind of approach.

We also have to acknowledge that our domestic biofuels policy is another factor behind the run-up in corn and soybean prices. Just before Christmas last month, Congress basically left intact the subsidy regime that helps create ongoing competition between ethanol distilleries and livestock producers. NMPF is concerned with ethanol’s impact on the livestock sector, but rather than focus our resources on rolling back ethanol policy – a long-shot prospect at best, particularly now that the new tax deal is signed, sealed and delivered – what we are doing is focusing on altering dairy policy to address the fact that corn and soybeans are not going back to price levels we saw 10 years ago. And that’s not just because of the growth of ethanol.

Agriculture markets and, ultimately, consumer markets have greatly evolved in the past decade. Asian demand for grain, and meat and milk, are roiling markets for all kinds of commodities. India and China today each has a middle class that is larger in size than the one we have in the U.S. Biofuels plants are an aggressive competitor compared with traditional uses for feedstocks. Lastly, the weather has gotten more volatile, creating price volatility with each change in the weekly forecast.

It would be folly to believe that the U.S. dairy industry will be insulated from the impact of these changes on the cost structure of the entire farm complex. We are now trying to revamp dairy policy to address margins, not just milk prices, precisely because input costs are going to be more volatile in the future, and our dairy program needs to reflect that reality.