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A Week of Clarity

Protracted Dairy Policies Contrast Cheese Contest

Volume 132, No. 36 Friday,March 7, 2008

A record-setting World Championship Cheese Contest will take place as these notes reach readers nationwide. Each year, the clarity and finality of contest scores and outcomes contrasts with the protracted politics of dairy policy. Long live cheese contests.

A Price Increase In The Southeast
In a tentative final decision announced Feb. 29, USDA will increase Class 1 differentials in the three milk marketing orders that serve the Southeast US at the request of local producer cooperatives.

Cal Covington, CEO of Southeast Milk Inc., predicted this outcome last spring. “We got the attention of USDA,” Mr. Covington said at the Wisconsin Cheese Industry Conference last April, referring to meetings held in the Southeast to consider dissolving these federal orders.

USDA’s decision was quick - nine months from public hearing to the Feb. 29 announcement.

Rather than face the possible dissolution of these orders, USDA agreed to lift producer milk prices by raising Class 1 differentials throughout the Southeast. “Long-term, we could live without federal orders in our part of the world,” Mr. Covington said of his producer cooperative last spring. “Federal orders are a tool, and if they cannot be modified, we would make it without them.”

The decision issued for the Southeast orders last week proves that a) federal orders can be quickly modified when producer organizations threaten to dissolve the orders and b) those producers would rather see their milk prices lifted by federal price mandates than the free marketplace.

USDA’s relatively quick decision in the Southeast recalls the recent lawsuit brought against decisions in the Mideast federal order. Last summer, US district court judge Allen Sharp ruled on the lawsuit, declaring that USDA employees did not decide in favor of producers-requested changes to the order to save their own jobs.

“The fact that Dairy Program employees’ salaries are indirectly paid for by producers does not rise to the level of a ‘direct substantial pecuniary interest,’” the judge stated.
This, of course, also must be true for the USDA Dairy Program staff in the Southeast.

Make Allowance Stalemate
The second anniversary of the USDA public hearings to adjust make allowances for dairy products found in federal order milk price formulas has passed without a final decision.

USDA’s unwillingness to raise these make allowances to account for spiraling costs has real consequences. Cheese production data for 2007, released in February, offers a clear picture of an industry reacting to milk prices that offered no margin for cheese manufacture.

Overall cheese production grew 1.4 percent in 2007, compared with cheese production gains of 4.2 percent in 2006, 3.1 percent in 2005 and 3.2 percent in 2004. In recent years, flat cheese production growth, namely in 2001 and 2003, related to flat or declining milk production. But milk production grew a respectable 2 percent in 2007.
There was no lack of milk last year to make cheese.

Since 2000, cheese production growth outstripped milk production growth every year with two exceptions: 2005 and last year. Cheese production margins were in decline in 2005, rallied slightly in 2006 and plummeted deep into the red last year.
Simply put, U.S. cheese production slowed in 2007 because cheese was not profitable to make.

Bogged Down Security
Wisconsin’s torturous process to redesign a system to protect dairy producers from a milk buyer default continues in 2008: a textbook case of regulatory complexity layered over a marketplace.

Wisconsin regulators and industry have spent years in an honest effort to redesign a program that collects processor dollars for a “rainy-day” pay-out to producers. The program, initiated in 2002, quickly proved costly, cumbersome and inadequate to provide coverage for big-ticket defaults or a series of smaller defaults.

In 2002, Wisconsin unveiled a risk-based method of collecting dollars from milk buyers with the unintended consequence of declaring all debt risky. The result is a program that has financially punished dairy processors that acquire debt to grow or modernize their businesses.

The state program also promised strong payout levels for defaults, but never gained a major bond or insurance policy to cover defaults that could run into the tens of millions of dollars.

Wisconsin agriculture department regulators have spent years discussing fixes, most recently with a special “working group” looking to remodel the program. But the real solutions to amend Wisconsin’s producer security program are difficult to implement in a politically-charged environment.

The solutions are simple, and as precise as a cheese contest score sheet: the program should cost less and promise less, leaving milk producers to do their homework when selecting a milk buyer. For example, to replace 34 pages of statutes that govern the program, Wisconsin could simply tax dairy producers a penny a hundredweight and gather $2.2 million each year to pay out on defaults.

Beyond Politics
Each March, WCMA’s Championship Cheese Contests offer a week of excitement and clarity that overshadows politics and reminds industry of the real prize: award-winning quality. Good luck in the Contest.

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

 
Other John Umhoefer Columns

The California Whey
Success Despite Federal Orders
Modest, Affordable Producer Security
The Dry Whey Gap
Feeding Frenzy
Strategic Diversity In The Cheese Industry
Life After Federal Orders
Federal Orders: Enhancing Prices, Crushing Margins
What USDA Will Decide
Dairy Faces Structural Changes In Milk, Corn Prices
WCMA Chooses The Free Market
Stuffing Federal Orders

 

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