Foundation Starter: NMPF’s Policy Proposal Seen as Part of Future

The author, a Wisconsin dairy farmer, shared her thoughts on dairy policy at a recent Professional Dairy Producers of Wisconsin/Wisconsin Farm Bureau dairy  forum. Excerpts of her comments follow.

By Miranda Leis

If anyone would have told me three years ago that I would be discussing supply management in the dairy industry, I never would have believed them. I would have said I truly believed in the power of the free market,  and the occasional bumpy ride is part of the business. Who could have predicted the rollercoaster the next three years would send us on?

Miranda and Corey Leis operate Leis Farms LLC – a 300-cow, 800-acre dairy and small custom harvesting business – in partnership with Corey’s father, Wayne, near Cashton, Wis. They have three daughters, (left to right) Katherine, Grace and Brianna. (Photo courtesy Krystal Muellenberg Photography)

In 2007, we were told we were living in a new world and that inflated prices and overextended demands were the new normal. Along came the second half of 2008, and the milk price crash which spurred the discussions we’re having today.

Over-supply alone, of course, did not cause the price crash. The seemingly insatiable export markets shriveled. Record supply sent dairy markets crashing, eventually reaching lows not seen in recent memory. We were receiving less for our milk than my father received in 1989. The sharp rise in input costs sent many producers into negative margin situations.

With some good forward milk marketing, locking in input costs, some cost reductions, and the diversified nature of our farm, we were able to remain profitable in 2009. It wasn’t easy, but it is something my husband is proud to say.

However, it begs the issue: Just the mere act of remaining profitable was a shining achievement for 2009. This hard truth left my husband and me unnerved for the future of our farm.  We want to make sure our farm is there for our girls, should they decide to take that path in life.

As 2009 ground on and the pain did not let up, the “q” word – “quota” – began to be uttered at our dinner table. The stability a quota system would bring became grudgingly palatable.

However, the looming concern of what that would mean to producers trying to enter the business and those trying to expand was more powerful. It would stifle expansion and severely impede our ability to establish our position as a premier world supplier. When the demand cycle reaches its peak, we must be able to respond with supply, or other markets will, and we will be left with limited market share. And if expanding a current operation requires acquiring capital to purchase quota in addition to fund the expansion, then why take on the extra risk?

We dismissed feelings that quota programs were a viable solution for our future, or for the future of the American dairy industry.

So what are we left with? With the current system, we can see very pleasing and comfortable profits.  But if we are not properly protected – or if we simply are the victims of bad timing – we can see lows so devastating that we may be forced to exit the business.

Exiting a farming business is not a matter of changing jobs or even changing a career. It is a complete change of life, something that should be done on the terms of the producer – not due to financial necessity.

I was skeptical when first reading the National Milk Producers Federation’s “Foundation for the Future” document. The more I read, the more it began to break down my defenses.

One of the programs goals is to rid the market of direct dairy payments and government purchases of dairy products. This is music to my ears. I don’t want to sound unappreciative of the assistance, as it has helped our operation in the past. But those types of programs are simply Band-aids and don’t do anything to fix the real issue. Uncle Sam’s money could be spent in ways which would still help the dairy industry, but would do so more productively.

One issue with the current Milk Income Loss Contract (MILC) program is the payment cap on 2.985 million lbs. of milk. Our current annual production is around 9 million lbs. We estimate when the payment will be put to best use and let the program work as designed. It was helpful in the sense that it allowed us to pay in advance for inputs or other expenses, but I do not feel it helped solve any industry problems.

In addition, as estimated by NMPF, these programs – particularly the Dairy Product Price Support Program (DPPSP) – have probably been more beneficial to outside markets than to our own. I am not sure we can continue affording to be such good neighbors.

Another goal of the FFTF is to redirect the money previously spent by the government on the DPPSP and MILC to a new Dairy Producer Margin Protection Program (DPMPP), a creative program designed to protect margins. It proposes a base level of protection, allowing producers the flexibility to purchase additional margin protection. By the estimates of both NMPF and the Food and Agricultural Policy Research Institute (FAPRI), this program should be budget neutral. I feel this program, once established, may indeed be a better expenditure of dollars than the current Band-aid approach.

The system does place some limits on new producers by only allowing them to apply for base protection until the passage of a new Farm Bill. Due to the length of Farm Bill cycles, I do question potentially leaving new producers in a lurch when they are least able to afford margin shocks. As FAPRI points out, the margin level at which base DPMPP kicks in is very low.

Lenders have become extremely, even harshly cautious about lending to farmers in general, but to young dairy farmers in particular. Although, technically, lending to a young producer under the FFTF program would be less risky than today, I fear it may not be enough to put lenders’ minds at ease.

Very closely tied to the DPMPP is another goal of the FFTF program: Dairy Market Stabilization Program. This piece of the plan truly involves dairy supply management. It establishes minimum margin thresholds at which producers will “feel the pain” through milk check reductions. The lower the actual national margin, the more severe the payment reductions.

The intent is to encourage producers to reduce the milk supply quickly. The money from the payment reductions would go to purchase dairy products for Women, Infant and Children (WIC) and school nutritional programs, as well as efforts to increase exports and new product development.

A second element of this program is to begin a Voluntary Sales Assistance Program, designed to cultivate new export markets. This program would be operated on a bid basis with individual producers, in a similar fashion to the way Cooperatives Working Together is currently managed.

The supply management program sounds harsh at first read. As someone who is partial to the free market, this is the portion of the plan which gives me the most reason for pause. Even before the actual payment reductions are enforced, we would adjust the ration to pull the herd back. We would plan for more culling to bring our production to near base levels, hopefully reducing the shock of the reduced milk check once the program is triggered.

The market reaction to reduced supply never happens quickly enough. However, I feel the intention of the plan is good, and a solid starting point for working through the legislative process.

The ramifications of the market conditions in 2009 cannot be ignored. Many producers are still suffering the effects, and some may not recover. FFTP is a creative and innovative program, and its time for consideration has come. I support moving this program through the legislative process. I will be following it closely in the coming months.

When I look into the eyes of my children, I am not content to let this current system – which does not serve farmers – continue to exist unchanged. If we do not at least attempt to enact change, I can’t say with any certainty that there will be a place in the market for my children. I want to help Brianna, Grace and Katherine follow in Daddy’s boots.

One Comment on “Foundation Starter: NMPF’s Policy Proposal Seen as Part of Future”

  • Lydia November 22nd, 2010 11:41 pm

    Miranda, although you say you were a free market person, but became unnerved by difficult times in 2009, it is not realistic to support the free market system only when your dairy is profitable, or times are good. If you believe that a supply side management program is going to help preserve your family farm for future generations, why has supply management caused an acceleration in dairies exiting the business in places like Canada and Europe? Through the Dairy Market Stabilization Program, when producer profit margins, (not milk price) fall below a certain level, your processor will begin to NOT pay you for up to 20% of the average amount of milk you produced in the previous three months. Your milk will still be picked up and processed, but you won’t be paid for it. Why do you think that only paying dairy farmers for 80% of their milk will cause them to cut back and reduce supply when the incredibly low prices in 2009 barely caused producers to cut back?
    Why would you want to give away up to 20% of your milk when you were able to successfully manage your dairy to be profitable in 2009? Do you realize that if you lock in your margin and are making a profit when the “average producer margin” (whatever that is) falls, that you won’t be paid for all the milk you are producing?
    Also, supposedly the “excess” milk will be processed at cost by processors and donated to the government for feeding programs. Who is going to audit this process? How will a producer know that his “excess” milk (that he or she is give away for free to the government) will not be sold by the processor? Will there be a receipt for the excess milk? And what if supply is not the problem? What if there is not “too much” milk for the market, but what if the margin is squeezed because of high feed prices, inflation, a terrorist attack, or some other unforeseen (as was 2009) circumstance? Will it be conscionable then to cut back on supply when people need food? When things are uncertain it is easy to run to a “program” that is going to supposedly solve the problem of volatility. It is human nature to want the profit, but not “too much” risk. But, how much risk is too much is subjective, and just because the majority, but not all dairy farmers, are having a hard time, doesn’t mean that there is something wrong with the free market that needs to be “fixed”. You and your husband were able to manage through 2009, we did as well, with 500 cows in Idaho, and many other dairy farmers
    Although many dairy farmers believe that they have the right to dairy until they don’t want to any longer, exiting the dairy business is not any different from exiting any other business. It is not a way of life, it a way to make a living. If you cannot make a living at it, then other people, whether they are taxpayers or other dairy producers, do not have to make sure you are profitable. That is your job.