REBUTTAL TO EDITORIAL: A Note on Decoupling Fluid Milk
Volume 132, No. 2, Friday, July
13, 2007
Record low cheesemaking margins and record high dairy
product prices are crashing against the drafting of a new five-year
US farm bill and the formation of a two-year state budget in Wisconsin.
It’s a feeding frenzy for lobbyists. Some conclusions:
Forward Contracting
This week, the chairman of the US House Agriculture Committee, Rep. Collin Peterson, introduced his proposed version of farm bill language on the eve of a Committee vote on the bill. The representative included several ideas to modify the notion of a permanent forward contracting program for the dairy industry.
In May, the House Subcommittee on Livestock, Dairy and Poultry had proposed that the forward contract pilot program which ran from 2000 to 2004 could be made permanent in this farm bill. This week, Chairman Peterson added several wrinkles to their simple concept, including language to sunset a forward contract program on Sept. 30, 2012 (with existing contracts allowed to run through Sept. 30, 2013) and language to assure that contracts are entered voluntarily.
Then the representative added this sentence: “Any offer of a forward
pricing contract under subsection (a) by a milk handler to a producer
or cooperative association shall include, as an alternative, an offer
to receive and purchase the same volume of milk under the same terms,
except at the minimum prices otherwise applicable under the Federal milk
marketing order.”
The language is confusing: is this alternate offer to buy milk at federal
order class prices a second choice for the producer, or does this alternate
offer supercede the contract price offer? In any case, a requirement
to offer producers a market-based price, or the federal order price,
seems to negate the very purpose of a contract.
A contract must agree on one price, not two, or the milk buyer won’t
know the price they are agreeing to. This sentence appears to be a poison
pill for forward contracting.
State Budget Relief
Meanwhile in Wisconsin, state legislators are discussing tools to assist
the state dairy processing industry as months of red-ink margins continue.
The state is now crafting its two-year budget, and both Democrats and
Republicans have offered ideas to provide state income tax credits to
dairy processors that spend money to expand or modernize their facilities.
It’s a rare and welcome bit of bipartisanship in a budget process that
will consume months of debate.
Make Allowance Relief
USDA, however, is responding with calm indifference to the worst cheesemaking
margins in modern dairy history. On June 29, Wisconsin’s congressional
representatives drafted a letter to USDA Secretary Mike Johanns urging
action.
Wisconsin Cheese Makers Association asks other states to join this effort by recruiting additional congressmen to address this issue with USDA. The Wisconsin letter to the Secretary states:
“In February, the Department announced an interim final decision to change make
allowances in the Class III and Class IV milk price formulas. The make allowances
announced were lower than dairy manufacturers had requested, stressing the financial
position of these manufacturers.
“This year, a new concern is adding additional stress to the bottom line of dairy
manufacturers across the nation. The rising value of dry whey powder has inflated
the Class III milk price. As you know, the price of dry whey is built into the
Other Solids price in the Class III formula. And this Other Solids price is at
record levels.
“Nearly all medium and small sized cheese manufacturers in the US do not manufacture
dry whey. These manufacturers make whey protein concentrate or sell liquid whey
to other processors. These whey markets do not offer the returns that dry whey
now earns, and manufacturer margins are strained.
“This is a significant issue for the dairy industry. Dairy manufacturers that must pay the minimum classified milk price are facing diminished or negative margins. We are concerned that USDA’s classified pricing may cause cheese manufacturers to fail, and reduce markets for dairy producers’ milk.
“Therefore, we urge you to amend the interim final decision on manufacturing
allowances. The hearing record on these make allowances could not anticipate
the recent, sudden increase in the dry whey price. An increase in the make allowances
for cheese and dry whey will stabilize the cheese industry, stem widespread losses
and assure orderly marketing of milk.”
Current activity in Congress, USDA and state government has the opportunity to assist the dairy industry. Thoughtful and expedient action is needed before negative margins decimate the cheesemaking industry.
REBUTTAL TO EDITORIAL A Note on Decoupling Fluid Milk
In his June 29 editorial in the Cheese Reporter, Dick Groves argued that Class I milk should be decoupled from other milk prices. It was an argument based mainly on the demand for fluid milk, i.e. why should the price of milk oscillate wildly when demand is flat? The answer lies in the supply of milk.
In addition to demand, the cost of finished goods has to reflect supply. And as it takes rolled steel to produce a car, it takes raw milk to produce fluid, bottled milk. When the price of steel or the price of raw milk rises, the cost of the finished product must change.
There’s only so much milk in the world. And if China and Japan want
more and more dairy ingredients for animal feed or baby formula, then
the supply will tighten and the price of raw milk will rise. Shielding
one particular dairy product, such as bottled milk, from free market
forces of supply and demand is an idea even worse than federal milk marketing
orders. •
John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at
jumhoefer@wischeesemakersassn. org
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