By Dave Natzke
It remains to be seen whether Congress will approve dairy policy legislation this fall. But, like a political campaign, the national debate continues. That discussion moved to the Midwest on Aug. 18, where the the Professional Dairy Producers of Wisconsin (PDPW) and Wisconsin Farm Bureau Federation (WFBF) hosted a Dairy Price Forum.
Kicking off the program, Bill Bruins, dairy farmer and WFBF president, said the major challenges facing the U.S. dairy industry include fixing domestic policy issues while addressing the potential for growing global markets.
“To do that, we need to be united,” he said. “For the past couple of decades, we’ve been entrenched in regional warfare over nickels and dimes.” he said.
Bruins said the dairy industry appears to be closer than ever on dairy policy consensus – or at least are in agreement current policies are not working. He also said a recent survey of his organization’s membership found two-thirds were “bullish” on the future of agriculture.
Shelly Mayer, Wisconsin dairy farmer and PDPW executive director, identified three things the U.S. dairy industry must do to move forward:
1) be a “transitional” industry, giving the next generation of producers, processors and allied industry the ability to serve the next generation of consumers.
2) be financially fit.
3) be socially acceptable, requiring education throughout the food chain, from producer to consumer.
All of this required one ground rule, Mayer said: “We have to look at our industry in a new way, looking for common ground. Our passion can often be our bottleneck. We must focus on our brand – milk. We have to learn, listen and lead, working together.”
Bob Cropp, University of Wisconsin-Madison dairy economy professor emeritus, provided an update on the USDA Dairy Industry Advisory Committee (DIAC). Cropp has participated on DIAC since the death of Rod Nilsestuen, Wisconsin ag secretary, earlier this summer.
Cropp said DIAC’s three subcommittees are scheduled to issue reports at the group’s next meeting, Sept. 23-24. Using recommendations from the DIAC, USDA secretary Tom Vilsack will issue preliminary policy recommendations by December 2010, with a final report due by March 1, 2011, to help direct dairy policy within the 2012 Farm Bill.
Given the diversity of DIAC membership, Cropp expects both a “majority” and ”minority” reports. In addition, he expects any final recommendations will not include any budget increases for dairy programs.
Tom Suber, president of the U.S. Dairy Export Council, provided a summary of the Bain Report, a study of U.S. dairy export opportunities discussed previously in Dairy Profit Weekly/Eastern DairyBusiness (http://dairywebmall.com/dbcpress/?p=4821). He said the U.S. dairy industry had the potential to take advantage of a growing world market, but indicated current dairy policies hinder that potential.
Addressing several topics in a question/answer session, Suber said:
• banning technologies such as recombinant bovine somatotropin might lead to small, incremental growth in export sales to the European Union and Japan, but would not result in long-term increases.
• a special federal milk marketing order milk class specifically for export markets would not be legal under World Trade Organization rules.
• the current dairy product price support program provides “disincentives” for dairy product innovation and marketing.
• the vast majority of dairy imports – but not all – meet U.S. standards. He said, however, costs related to 100% compliance would be prohibitive.
• while trade agreements are a step toward doubling U.S. exports, a goal of President Obama in his State of the Union message, trade treaties are political “hot potatoes” subject to “technical shenanigans.” He said the top two barriers to increased U.S. dairy exports are the complexity of the U.S. pricing structure and a pricing structure that does not provide incentives for innovation and marketing.
Foundation for the Future
Jerry Kozak, CEO and president of National Milk Producers Federation (NMPF), detailed provisions of NMPF’s Foundation for the Future (FFTF) dairy policy proposal (http://www.nmpf.org/washington_watch/ordersandpolicies/foundation_for_the_future). He noted that, with escalating feed and production costs, the program was designed to protect producer income margins, not raise minimum milk prices.
“We have to stop chasing price in our domestic policy,” Kozak said in defending the plan’s Dairy Producer Margin Protection program. “We have to shift focus to margin.”
FFTF would eliminate both the current Dairy Product Price Support (DPPS) and Milk Income Loss Contract (MILC) programs. Kozak said MILC pitted producer against producer.
“The most destructive issue in in our producer community is no longer regional,” Kozak said. “It is small vs. large. We are not going to change the natural evolution of the industry by placing limits on size.”
“When we look at the 2012 Farm Bill, we have to look at what is possible,” said Kozak, who noted federal budget constraints mean there will not likely be additional monies for dairy programs.
Kozak said no program could eliminate dairy price volatility, but FFTF attempts to moderate the extremes and develop tools to manage volatility.
Two panels – one processor panel, one producer panel – discussed the potential impact FFTF and other dairy policy proposals.
On the processor panel, Dave Fuhrmann, president of Wisconsin-based Foremost Farms cooperative, said the Upper Midwest’s reluctance to fully accept supply management proposals is due to the fact there is regional dairy reinvestment and expansion, making up for losses in the past. Nonetheless, Fuhrmann said he accepted National Milk’s Dairy Market Stabilization Program because it was less intrusive than supply/growth management measures offered in other proposals. As a supply management tool, FFTF would be more effective in sending market signals to dairy farmers, he said.
Fuhrmann, who served on an NMPF federal milk marketing order task force, said federal order reform is difficult, due to the system’s complexity and regional differences, as well as the resulting unintended consequences. While not advisable, Fuhrmann said the Upper Midwest would be well suited to survive complete dismantling of the system.
Fuhrmann said he knows of one Midwest company looking at building a processing center for milk protein concentrates, but that investment is too risky under current federal order pricing formulas.
Mark Schleitwiler, vice president of BelGioioso Cheese, headquartered in northeast Wisconsin, said FFTF’s margin insurance and voluntary export assistance provisions offered better policy direction than current federal policy. Reforms that increased dairy product innovation would benefit the producer and consumer, he added. Schleitwiler said any dairy policies that increased taxpayer costs would not likely be accepted.
As a cheese processor/milk buyer, elimination of end-product pricing would create competitive pay prices and higher milk prices paid to farmers, Schleitwiler said. He added that his company would eventually like to see just two classes of milk under federal orders: one for fluid milk and one for milk used for all manufactured products.
Mike North, senior risk management advisor with First Capitol Ag, said he was happy to see FFTF’s emphasis on margin insurance, because it would call greater attention to “business” management. He also favored eliminating the DPPS and MILC programs. He suggested margin protection would drive risk management, and steps to include supply management would be counterproductive.
Cashton, Wis. farmer Miranda Leis said the dairy economy of 2009 was stressful on her young family and dairy, which marketed about 9 million lbs. of milk last year. Although careful attention to marketing enabled her dairy to be profitable last year, she said current policy does not provide adequate protection. In addition, she said bankers are becoming leery of lending to dairy farmers, especially young farmers.
Unlike many other industries, dairy producers cannot turn production off and on or change jobs. “It’s not a change of careers, it’s a complete change of life,” she said.
After extensive study, Leis said FFTF appears to be a viable solution to the future of her farm. “The more I read the program, the more it broke down my defenses.” She said current dairy policies were no longer effective, and that FFTF was a creative, budget-neutral attempt to address policy problems.
Leis said she fears anything resembling a quota, because it would stifle the industry’s ability to expand and serve a growing global market.
Mel Pittman, Pierce County, Wis. dairy farmer, said he still had several questions regarding FFTF, especially how milk produced over the “base” would be handled, and whether current federal funding would be adequate to fully fund the base margin insurance program. He said margin insurance was more attractive than the current DPPS and MILC programs.
“We’re going to have to live with some volatility, and we need to participate in the world market,” he said.
Linda Hodorff, who operates dairy farms in Wisconsin and Nebraska, said she supported current efforts for mandatory price reporting of dairy product prices. She is luke-warm on publicly-funded margin insurance, saying she and her husband already insure margins through private means, including forward contracting both feed and milk.
Hodorff said she favors reforms of the federal order system, but noted previous reforms have often resulted in unintended consequences.
While her dairies lost equity in 2009, she has concerns regarding supply management, noting quota systems in Canada have not preserved farm numbers. Additionally, while other emerging dairy regions of the world seem to be moving toward freer markets, supply management runs counter to that trend.
Hodorff, who also markets dairy genetics, said U.S. dairy cattle are desired worldwide for their productivity and efficiency, and wonders whether supply management would alter U.S. genetic selection.
She echoed comments that unity was required. “Our perfect storm is forcing us to work together to get over our differences,” she said.
Finally, Mark Stephenson, former Cornell University dairy policy specialist who recently moved to the University of Wisconsin-Madison, described historical milk pricing patterns, noting several economic “shocks” impacted milk prices simultaneously entering 2009. He warned forum participants to not overreact with supply management and other policies based on those shocks.
Stephenson provided analysis of both FFTF and, to a lesser extent, Costa-Sanders legislation, which is similar to California Milk Producers Council/Holstein USA growth management proposals. While more detailed analysis will be provided in the coming weeks, Stephenson said both would help reduce volatility, although in different ways.
“Our modeling shows that both programs work,” he said. (FFTF) would be more reactionary to low-margin situations, and doesn’t kick in until there is a crisis, but it hits the problem hard and prices could recover quickly. The Costa/Sanders bill acts more like a governor on an engine.” He warned that market access fees – taken from farmers who increase production beyond their base and paid to farmers who don’t – could create another wedge between producers.