By DairyBusiness Staff
TULARE, Calif. – The debate surrounding supply management continues, months after the discussions began back in 2007-2008. While numerous dairy organizations have voiced approval of some of the proposals, nothing concrete has been enacted by the industry or government legislation.
One of the best attended seminars at World Ag Expo earlier this year was a panel of industry experts sharing their ideas and proposals. Here are some of what they had to say before a stand-room-only crowd.
DOUG MADDOX, Riverdale, Calif. dairyman and former president of Holstein USA.
Maddox, as moderator of the panel, set the stage for the discussion by bringing everyone up to date on how the industry got to where it is today. “What happened? $9 milk! Will it happen again?” he asked.
“The strategy for every successful dairyman: produce, produce, produce,” said Maddox. “Our dairy herds have better genetics, health, nutrition, equipment, facilities and management. We can make milk. That’s our expertise.
“The problem we have is volatility, but volatility is not new, but each cycle gets worse. Volatility really started in the 1990’s but greatly accelerated in the after the turn of the century…and it will not change on its own,” he said, referring to work done by Dr. Bill Herndon of Cornell University.
“People will tell you this is a 100-year aberration, a 100-year flood that won’t happen again. People, this is the fourth time (its happened) in 10 years! So its to the point that volatility is getting deeper, wider and worse. We are on about a three-year pattern resulting from supply and demand. We are dealing with a range of +3.5% to -2% change in milk production, according to Cornell calculations,” Maddox said.
Commenting on the work at Cornell, Maddox said that supply-demand imbalances of greater than 1% magnitude creates substantial changes in milk price (either + or -). That can amount to as much as 50% – 60%, or $3 to $4/cow/day. Supply and demand is the overriding factor in the volatility.
Maddox cited imports of milk protein concentrate that was at 16 million pounds in 2008, up from about 5 million pounds in 2004. The same scenario was seen in imports of butter and other fats and oils derived from milk. It went from 2 million pounds in 1999 to about 10 million pounds by 2008.
Maddox mentioned sexed semen “the real 800-pound gorilla in the room,” that will account for 500,000 extra heifers expected by 2010-2011. “Can CWT take care of it? Maybe. But I specialize in genetics, and think we can make ‘em faster than they can kill ‘em,” he declared.
Maddox outlined the following long-term options (with his comments in italic):
1) Two-tiered system like Canada/European Union with high price for quota milk, low price for surplus. “Will that work? You bet it will work. I was in Canada not long ago and talking with a producer. He compared his Holland, Canada 140 cows and 1500 cows in Nebraska…comparing Canada with US last 12 years, 75% of the time made more total profit on 140 cows than they did on 1,500 in the US.
2) Support Price – SB 1645 with price based on production costs. I support it and think it would fly. I’d love to have it based on my cost of production. It’s one of the programs out there.
3) “Free market” – National Milk Producers Federation and DFA has one similar to that aimed at the Global Market. They want deregulation and want to do away with support prices and MILC. I’m not against that, but smells like what we had before in California, which gives the milk processors control over the industry, and I don’t want to go back there.
4) Dairy Price Stabilization Program, which Syp will present, calling for all dairies to be involved and all dairies under the same rules.
5) Do nothing – maintain the status quo. The Baines report supports this. In the next 10-15 years, the world will be short of milk and if we are going to be a player, we need to gear up for that in the international market. I don’t deny that at all. However, I don’t want to produce milk before we have the market. Lets wait for the signals.
GARY GENSKE, a New Mexico dairyman and owner/partner in the accounting firm Genske Mulder & Co.
Through the year, Genske’s firm has produced a lot of cost studies with dairy clients doing business in 29 states. “In 2008, those clients averaged $17.53/cwt and lost money in the futures market. But what isn’t said is that producer costs were also at record highs. In that good year,” Genske said, “cost of production was $17.41/cwt, which netted dairymen an average of only $0.61/cwt.
“What the bottom line doesn’t tell you is that you needed $1.50/cwt just to service the principle debt and personal living allowances. So when some say we had a record year in 2008, we really did not.”
Genske pointed to milk prices from September 2009 in the Midwest at $12.74/cwt and a high of $11.80/cwt in the West, while cost of production figures were at a low of $15.59/cwt and a high of $16.99/cwt. Arizona had the biggest spread between milk price and cost of production at nearly $6/cwt.
Losses per hundredweight were averaging $3.40 in the Midwest and ranged from a low of $3.86 to a high of $4.98 in Western states. Genske estimated average yearend losses for 2009 at $4.05/cwt across the U.S. Some producers will do better, some will do worse, he said.
Genske’s 2010 projections: estimated an all-milk price of about $15.50/cwt with feed costs for hay and silage equivalents at $175 and grain at $200, still $8.05/cwt. However, looking at futures markets at the time of his presentation, he dropped the all-milk price estimate to $15/cwt, which increased projected losses from $1.14/cwt to $1.50/cwt range.
Genske said on California’s 1,700 dairy farms losses will amount to an estimated $1.9 billion.
In 2009, the losses to the U.S. economy, according to Genske’s calculations, showed 9 million dairy cows at $3/day equal $10 billion for the year. In synergy dollars equal nine times that figure or $90 billion.
He compared the dairy losses to the concern reported on various media outlets for a week or so that the Florida citrus industry could potentially lose $2 billion if they experienced a freeze.
“You never heard anything about the devastating losses the dairy industry was actually experiencing. We lost $10 billion and haven’t seen us on the news at all,” Genske declared.
At the end of his presentation, Genske pointed out that if producer milk prices had kept pace with retail milk prices, dairymen would be receiving $20.33/cwt today, instead of the $12.74/cwt they actually receive.
“We produce milk from 9.2 million cows…and have to ask ourselves a question. Do we keep things the way they are, or at times cutback 1 or 2% when all told to do that? A cutback at the proper time could mean a profit of $3/cwt rather than loss of $4 or $5/cwt.
SYP VANDER DUSSEN, president of Milk Producers Council, Chino, Calif.
No one here is unaware of the financial chaos we are experiencing. We’ve seen ups and downs and keep thinking things will get better, or we’ll let the market work. Well, why did it always get better in the past? Why did it get better? The numbers may stun you.
Total U.S. dairy producers in 1982 numbered 297,800. By today, that number has dropped to 62,000, an 80% reduction in the last 27 years. That’s an average of 161 dairies leaving the industry every week.
“Always have dairymen to sacrifice during the down times as they exit the industry,” he said. “We reduce the milk supply a little and prices recovered. We thought that was the market working, and it was as far as sacrificing dairymen goes. In the last eight years, more ups and downs.”
All extra milk must, by definition, flow to the lowest value, in that the higher valued product demand is satisfied. So, that extra tanker of milk presents to the pool a $10/cwt value, but the producer will receive the blend price ($15/cwt?). That loss of $5/cwt is borne by all producers in the pool.
Cooperatives simply do not have any incentive to resist that overproduction because: 1) Producers demand of their co-ops to take all the milk they wish to produce. 2) The co-op makes its money on the “Make Allowance.” 3) When the blend price goes down, it affects only producers, not co-ops. 4) It makes sense for producers to produce all they want, all the time, regardless of demand, because the price decline caused by overproduction is imputed to all producers.
So those who do not grow are unfairly affected, Vander Dussen said.
While MPC came up with a supply management plan several years ago, with milk prices at $20/cwt, the proposal didn’t find traction among dairy producers. However, interest in the supply management concept showed a sharp increase when milk prices bottomed out at $9/cwt.
MPC’s Dairy Price Stabilization Program has a “base.” The word “base” is misleading. There is no restriction in this program on how much a producer may produce “base” is really just a number from which fees and receipts are calculated, he explained.
Base will be the highest of 2007, 2008 or 2009 – producers’ choice. Base never goes down. It will always be the higher of:
• What you recently produced, or,
• Historical base
“No Producer is prevented from producing however much he wants. No restrictions. There is only a disincentive and an incentive,” Vander Dussen said. “The disincentive is more severe when milk is not needed. The incentive is more attractive when milk is not needed.”
All money collected from those who pay the market access fee goes to those who did not exceed allowable growth.
A board of 12 producers will set the market access fee and the percentage of growth allowed. Vander Dussen gave three examples:
Situation 1: Too much milk nationally.
Market Access Fee: $1.50/cwt on all milk when base is exceeded.
Allowable growth: 0%
Situation 2: Production/Demand in line
Market Access Fee: $.50/cwt on all milk when base is exceeded.
Allowable growth: 3%
Situation 3: Not enough milk nationally.
Market Access Fee: 0
Allowable growth: Unlimited
For More Information, Vander Dussen suggested visiting: www.MilkProducers.org and www.StableDairies.org.
MARVIN HOEKEMA, founder and president, Dairy Decisions Consulting, Visalia, Calif.
“For the record, growth management programs (GMP) may or may not work,” said Hoekema.
• A key functional component of the GMP’s is to determine supply/demand balance in setting growth.
• Regardless of the layers, understanding balance requires a functioning and transparent price discovery system.
• Oligarchies (a handful of firms pricing product) are not efficient at setting prices. The GMP’s have not addressed this fundamental problem.
The milk pricing discovery system is dysfunctional.
• Continued lift in manufacturing make-allowances and FMMO consolidation (supported by Stephenson…one of the GMP price modelers) has shifted nearly all of the pricing risk in the supply chain to the milk producers.
• Dairy product pricing is now set by a handful of firms and their behavior moves the market.
• The USDA system is now full of non-reconciled reports (milk production, NASS pricing surveys, among others) and continued low-ball price projections.
• Unregulated milk product imports (MPC’s) continually flood the market, not just when the price is high.
Fix the system!
• Roll-back a portion of the make allowances to distribute a greater share of pricing risk throughout the supply chain.
• Address pricing power consolidation by replacing FMMO’s in some regions with co-op owned MAC’s which can much better send regional balance signals and able to write direct priceXsupply contracts.
• Require quarterly milk-flow reconciliation by NASS and the inclusion of 100% reporting on dairy commodity price points.
• Require a quarterly sources/uses report on the who and where of milk pooling.
• Use the CWT tax to fund a New Zealand-style export board to actually sell product instead of coddling NFDM exports with the competitor, Fonterra.
Major GMP critiques:
• Why will use of the USDA to forecast and price milk market balance work any better with another layer of bureaucracy? Why expand a broken price discovery system?
• Controlling supply is just another lethargic price distortion the market will price around unless the price discovery system is fixed.
• Milk pricing does not happen in a world market vacuum. GMP does not address currency cross-rates nor unregulated MPC imports. (Will Fonterra be charged a market access fee?)
• The Nicholson-Stephenson model analysis has several unanswered questions and troublesome assumptions, the greatest of which is how it can project a flat-line price.
• I expect GMP to further consolidate pricing power because this is not recognized as a core problem. This means price risk will overwhelmingly remain at the farm level.
For more information on Hoekema’s analysis, visit his website: http://milkmarketwatch.com and for an updated milk market newsletter, blog, and fundamental analysis, e-mail: firstname.lastname@example.org.
For the complete panel discussion via podcast, please visit www.DairyLine.com and click on “Dairy Profit Seminars.” Then click on “WDB Seminar #2: Is Supply Management the Answer?”