Dairy Farmers Would Make More Money Without Orders
Volume 131, No. 44, Friday, May 4,
2007
The dairy industry had a chance to rail against
costly and slow federal order hearings at a meeting of the US House of
Representative’s Agriculture subcommittee on livestock, dairy and poultry
April 24.
The committee chairman, Rep. Leonard Boswell, found industry united for change. But at the hearing, USDA rejected the idea of timetables and deadlines for federal order hearings and decisions.
All this hand-wringing over the deep flaws in federal milk marketing orders is needless: If the dairy industry would sweep away all federal orders this year, the industry would face one year where the US all-milk price would drop 17 cents and a second year where the price drop would by a mere five cents. By year five, six, seven and eight dairy farmers would actually make more money without orders.
Who’s spreading this milk price heresy? None other than Scott Brown, program director at USDA’s
Food and Agricultural Policy Research Institute (FAPRI) at the University
of Missouri-Columbia. Dr. Brown joined other nationally recognized economists
and dairy leaders for a panel exploring life after federal orders at
the Wisconsin Cheese Industry Conference April 19, LaCrosse.
Admittedly, asking an economic model to predict a deregulated dairy industry
is difficult, but FAPRI is USDA’s own impartial, non-partisan partner. Under a “no federal orders” scenario,
Dr. Brown and other experts reasoned that premiums paid for Class I (bottled)
milk would weaken, but remain at levels of 50 cents to $2.00 around the
nation.
He noted that given today’s strong dairy markets, this analysis found prices declining much less and showing positive gains faster than previous “deregulation” scenarios
he ran in 1995 and 2003.
Ken Bailey, associate professor of dairy markets and policy at Penn State
University, joined Dr. Brown at the Wisconsin Cheese Industry Conference
and he’s ready for change: “There is growing frustration with the current [federal order] system. The time for change is here,” Prof.
Bailey told an audience of about 150 cheese industry representatives.
Dr. Bailey suggested replacing milk price formulas with free market pricing based on good information. Milk buyers, like the meat industry, could submit to daily (blind) reporting of dairy product sales. This national sales information would be shared instantly, creating a benchmark for pricing dairy products and milk.
Cal Covington, with Southeast Milk Inc. in Belleview, FL, told the conference
that federal orders have failed to adapt to the unique marketing conditions
in the Southeast. “Long-term, we could live without federal orders in our part of the world,” Mr. Covington said. “Federal
orders are a tool, and if they cannot be modified, we would make it without
them.”
An attendee at the conference commented that this group of like-minded
leaders made strange bedfellows. So be it.
Federal orders are inept in a myriad of ways. In the Southeast, fluid milk is king, making up 85 percent of order sales. Population is increasing, but milk production is declining. Southeastern processors concerns, Mr. Covington said, are balancing milk supplies with no balancing plants within 750 miles, handling seasonal variation in production, paying to transport milk long distances and hosting distant milk on their order.
After regional meetings to discuss dissolving two Southeast orders, “We got the attention of USDA,” Mr.
Covington told the audience. USDA quickly called a hearing for this month
(May 21), and area milk producers will testify in favor of higher Class
1 differentials, lower diversion limits and increased transportation
credits.
Dr. Brown’s FAPRI model for eliminating federal orders finds that fluid
milk sales increase, milk production drops slightly, cheese prices rise
three to five cents per pound and butter increases 10 to 18 cents per
pound compared to the status quo.
Interestingly, the model predicts that Florida’s all-milk price would decline by about $1.20 while Wisconsin quickly recovers. After one year with a five cent loss, Wisconsin dairy farmers would see a seven-cent increase in the state’s
all-milk price year after year. California also gains higher milk prices
without federal milk marketing orders, according to Dr. Brown.
Eliminating federal orders would sweep away price formulas that force
the cheese industry to produce commodity products, Jon Davis, vice president
of Davisco Foods, told the audience. Davis lamented the high price of
commodity dry whey embedded in the Class III milk price formula.
Today, higher value whey products such as whey protein isolate will not
generate the dollars necessary to cover the Class III milk price. “All the nutrition science, all the branding and marketing, all our investment in value-added whey products has to stop, because the government is telling processors to pay producers the dry whey price,” Davis
said.
Bob Wills, president of Cedar Grove Cheese in Plain, WI, is no fan of
federal orders and described to the audience a unique advantage of the
free market. “One benefit of the demise of the orders would be an improvement in cheese quality,” Wills
said.
Under the market order, he said, companies have no incentive to improve
the quality or service of commodity cheese, especially Cheddar. Expenditures
on quality that result in price premiums feed back through the NASS price
survey and result in higher milk prices for Cheddar and all other dairy
products.
With fixed make allowances that do not distinguish quality, Mr. Wills
said, the primary objective for cheese makers is to lower prices by using
the lowest cost ingredients and highest moisture to stretch the yields.
After orders, Mr. Wills said, “producers will be able to make great cheddar cheeses” without
the fear of lost margin.
It’s time to replace milk marketing orders with modern information and
risk management tools, and the free market. •
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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