Time To Raise The Support Price

For about half a year now, cheese and milk prices have been in the tank. By “in the tank,” we mean at nor near the support purchase prices for cheese, and at or near the support price for milk.

And after watching cheese and milk prices barely budge for half a year now, we’ve reached the conclusion that it’s time for USDA to increase the support price. And the sooner the better.

Before getting into the reasons why this is a good idea, a couple of caveats are in order. First, USDA can no longer technically increase the support price for milk, since the 2008 farm bill changed the program to the dairy product price support program and established purchase prices for cheese, butter and nonfat dry milk. There is no longer a support price for milk.

Second, this shouldn’t be taken as an endorsement of the dairy product price support program. For well over a decade now, we’ve advocated scrapping the price support program, and we still feel the industry would be better off, in the long run, without this program.

To its credit, Congress did try to end the price support program, in the 1996 farm bill, which called for phasing out the support program at the end of 1999. But Congress got “cold feet,” kept extending the program, and the support program will now be with us at least until the current farm bill expires in 2012.

So why is now a good time to increase the support purchase prices for cheese, butter and nonfat dry milk? We’ll offer three reasons, the first of which is perhaps overly simplistic, the second of which represents a bit of a gamble, and the third of which is more symbolic than anything else.

Reason one to raise the support price is simply because it’s time to do so. Under the 1996 farm bill, the support price for milk was reduced from $10.35 per hundredweight to the current price of $9.90 per hundred by 1999.

Think about that for a moment. The support price for milk was reduced to the current level of $9.90 per hundredweight on January 1, 1999, and has remained at that level ever since.
That’s over 10 years at the current price. In fact, the support price hasn’t been above $11.00 per hundred since 1989. That’s some 20 years at the current support price or barely above the current support price.

Since USDA no longer supports the price of milk but instead supports the prices of several dairy products, what the agency could do is raise purchase prices, maybe by a dime per pound on cheese, and then maybe 10-cent increases on both nonfat dry milk and butter. This would raise the support price for milk to close to $11.00 per hundred, a support price that hasn’t been seen since 1989.

USDA appears to have the ability to do this under the 2008 farm bill, which requires cheese, butter and NDM to be purchased at not less than specified prices. And if USDA ends up buying massive quantities of surplus dairy products (highly unlikely), the farm bill includes language allowing the agency to reduce purchase prices temporarily.

The second reason USDA should hike the support price is a bit of a gamble. That reason is: by raising the floor price of milk (and floor prices for cheese, butter and NDM), maybe USDA will also reduce dairy price volatility, at least somewhat.

Everybody in the dairy industry is way too familiar with price volatility, which has been a constant, or near-constant, factor in the industry for at least a couple of decades now (coincidentally, since about the time the support price fell below $11.00 per hundred).

And if anything, dairy price volatility is getting worse. After all, Cheddar blocks reached a record high of $2.2850 in late May 2008, then fell to $1.0400 in early January 2009. Cheese prices have had their ups and downs over the years, but nothing compares to what happened from May 2008 to January 2009.

With that in mind, what would happen if the support purchase price for blocks was raised to, for example, $1.25 per pound? One thing that wouldn’t happen is that cheese prices wouldn’t suddenly be “floored” at that price.

As the cheese industry has seen several times in recent years, the CCC purchase price for cheese represents a pretty soft “floor” under prices. This year, the block price fell below the CCC purchase price by nine cents. The block price also fell several cents below the CCC purchase price every year from 2000 through 2003, at least briefly.

So what raising the block purchase price to $1.25 might do is “floor” the block price at around $1.15. And that, in effect, might “floor” the Class III price at around $10.00 per hundred, which seems extremely low, but keep in mind that the Class III price has actually dropped below $9.90 per hundred twice this year, including $9.31 back in February.

What about the upper end of cheese prices? Will raising the support purchase price by a dime or so mean that cheese prices will reach $2.40 or more when they go through the next “up” cycle?
Obviously that’s possible, for the simple reason that, if prices can fluctuate from $2.2850 to $1.0400 in about seven months, they can probably also fluctuate from $1.1200 to $2.4000 in seven months.

But there’s also the view that cheese prices go sky-high because they reach rock-bottom, and that cheese prices hit rock-bottom because they go sky-high. So if “rock bottom” is raised a bit, maybe “sky-high” will be lowered a bit.

Finally, a hike in the support purchase prices might provide a bit of a lift for financially battered dairy farmers. Since early this year, we’ve read countless stories about how dairy farmers are suffering under extremely low prices. USDA has taken several actions, the net result of which has been, well, the net result has been blocks at $1.1200 per pound as of today.

Raising the support price might also serve to raise the spirits, and the incomes, of dairy producers.

Cheese Reporter welcomes letters to the editor. E-mail your comment to Dick Groves at dgroves@cheesereporter.com.

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