Dick Groves
Editor, Cheese Reporter

 

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What If The US Still Had A Dairy Price Support Program?

Back on July 10th, the price of Grade A nonfat dry milk on the Chicago Mercantile Exchange’s cash market fell to 79.5 cents per pound.

This was a significant price for at least one key reason: it marked the first time that the price of a commodity traded on the CME cash dairy markets fell below the “old” Commodity Credit Corporation (CCC) purchase price since the Dairy Product Price Support Program was terminated last year.

And so it’s been interesting to see what’s happened, or hasn’t happened, since then. In 2014, in the months after the support program was terminated, CCC purchase prices were truly “out of sight, out of mind,” since market prices were, at least at times, more than twice the level of those old CCC purchase prices.

But dairy commodity prices have softened somewhat this year, particularly nonfat dry milk prices, to the point where, as noted above, the NDM price at the CME is now below the old CCC purchase price of 80 cents per pound. And this raises the question: what would have transpired after July 10th if the price support program was still in operation?

First, a bit of history. The dairy price support program was around for many years, but the program wasn’t really operating during its final years, so to industry newcomers, the dairy price support program is something they’ll never have to deal with. Lucky them.

But for those who have been involved in the dairy industry for a few decades, well, it’s hard to describe how important this program was at various times.

The dairy price support program was established on October 1, 1949, by the Agricultural Act of 1949, and was finally relegated to the scrap heap of dairy policy history last year, when President Obama signed the 2014 farm bill into law. So the price support program was 64 years old when it was terminated.

Over the years, the price support program ebbed and flowed in its importance to the dairy industry in general and to dairy markets (prices) specifically. Under the price support program, the CCC purchased surplus Cheddar cheese (40-pound blocks and 500-pound barrels), butter and nonfat dry milk at pre-announced prices; these purchases enabled processors to pay dairy farmers the mandated support price for their milk.

During its history, the support price ranged from a low of $3.06 per hundredweight to a high of $13.49 per hundred. Under the 1977 farm bill, the support price for milk was set at 80 percent of parity, and it had to be adjusted (raised) every six months (on April 1 and again on October 1) to reflect changes in prices paid by dairy farmers for production inputs.

In 1976, the CCC purchased around 235 million pounds of surplus dairy products, primarily nonfat dry milk.
By 1981, CCC purchases had climbed to 351.5 million pounds of butter, 563 million pounds of cheese and 851 million pounds of nonfat dry milk. CCC purchases of cheese and nonfat dry milk peaked in 1983, at 833 million pounds and 1.061 billion pounds, respectively, while CCC butter purchases reached 413 million pounds that year but peaked at 444.9 million pounds in 1992.

By 1990, the support price had been reduced to $10.10 per hundredweight, and the CCC became a less important buyer of dairy products, starting with cheese and nonfat dry milk, and later, butter.

Since then, CCC purchases have ranged from fairly low to non-existent. The most recent year in which the CCC bought any surplus dairy products was in the low-price year of 2009, when the CCC purchased about 182 million pounds of nonfat dry milk, 15 million pounds of cheese and 23 million pounds of butter (these are net USDA removals).

That brings us back to our original question: What would have happened over the last several weeks if the price support program was still operating? Our guess: at least four things in the short term.

First, it would seem likely that some dairy processors would have started selling nonfat dry milk to the CCC.
Back in 2009, when NDM prices were slightly above 80 cents per pound, the CCC was buying millions of pounds of surplus powder every week. Our guess is that the CCC would have started buying surplus powder a few weeks ago and would still be buying surplus powder today.

Second, nonfat dry milk prices would have stopped falling. Again back in 2009, NDM prices at the CME fell to the low 80s, but never below 80 cents per pound. This year, without the CCC as a buyer of last resort, the CME price for Grade A NDM has actually dropped below 70 cents a pound a few times.

Third, US exports of NDM probably would have declined. Less than a week after the CME NDM price fell below 80 cents, the average winning price on the Global Dairy Trade auction also fell below 80 cents per pound.

US dairy export statistics for July won’t be released for a few more weeks, but it seems that the US is in a better position to compete globally, because the domestic NDM price can fall below 80 cents, than it would have been had the CCC purchase price effectively floored the domestic price well above the world (GDT) price.

And fourth, sometime in the near future, USDA would have started trying to figure out ways to get rid of its surplus NDM stocks.

If the support program was still operating, milk prices might be a bit higher (at least the federal order Class IV and California 4a prices), but exports would likely be lower, and the market would have millions of pounds of surplus CCC-owned powder hanging over it.

Bottom line: the US dairy industry is better off without the dairy price support program. DG


 

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