Op-Ed: The evidence is ‘suspect’

Study refutes ‘Foundation for the Future’ dairy supply management plan

By Dave Natzke

Some of the more vocal readers of Western/Eastern DairyBusiness magazines have painted me – for the most part correctly – as opposed to a national milk supply management program. I’ll get to that later.

First, however, I’d like to address a new economic study being distributed and – I believe – wrongly interpreted. The study, titled “Regional and Farm Level Impacts of the Foundation for the Future’s Dairy Market Stabilization Program,” was commissioned by the International Dairy Foods Association (IDFA) and conducted by Informa Economics. Results of the study were unveiled at the 2011 IDFA Dairy Forum, which I attended.

The study looked at one segment – and only one segment – of the National Milk Producers Federation’s Foundation for the Future (FFTF) dairy policy proposal, the “supply management” piece, called the Dairy Market Stabilization Program (DMSP). Simply put, during times of tight income margins for dairy farmers, DMSP withholds a percentage of milk payments from farmers who surpass their base production, as a market signal to reduce milk production.

Most dairy processors – of which IDFA represents – see dairy’s milk glass as half full, and I believe rightly so. Citing market growth potential in a (hopefully) improving economy, both home and abroad, anything seen as having the potential to limit an adequate, affordable milk supply would understandably be opposed.

However, the way this study is being interpreted and presented smacks of  selective reading, and would suggest a goal of perpetuating regional divisiveness among farmers.

Briefly, the Informa study concludes DMSP would have been triggered four times in the past decade (2000-2009), with milk payments withheld from affected dairy farmers during 18 months. Total dairy farmer milk payment withholdings in those months were estimated at $626 million. In 2009 alone, $390 million would have been withheld, with the majority of it, $236 million, coming from five states: Wisconsin, New York, Minnesota, Pennsylvania and Michigan. IDFA points out the payment withholdings occur in the most stressful periods to dairy farmers, depriving them of much-needed income.

Through extensive use of maps, the study attempts to declare winners and losers in the supply management debate and, perhaps not surprisingly, the losers would be producers in many states where anti-supply management sentiment is the strongest, adding fuel to the fire. Some dairy producer groups in those areas have already latched on to the study’s results.

I trust Informa’s math. However, the equation is not complete, and such a narrow interpretation – from my perspective – is disingenuous.

The 2011 Dairy Forum concluded with a discussion between IDFA’s Connie Tipton and NMPF’s Jerry Kozak. Tipton used the study’s results to suggest dairy farmers did not fully understand all the implications of a supply management program on their overall incomes.

Kozak countered the DMSP is but one piece of a bigger plan. He noted supply management deductions would not be implemented alone, but instead would work in concert with a Dairy Producer Margin Protection Program, which would provide income insurance payments in times of low margins. Those payments offset overall income declines focussed on by IDFA, likely narrowing any gap between perceived winners and losers.

Make no mistake, I still believe a national supply management policy is also divisive, creating winners and losers. It generally preserves the status quo, protecting current milk production bases, while limiting growth potential in new areas or by new farmers. It could, for example, limit the dairy transition back to the Upper Midwest, closer to feed supply sources, which could improve producer margins, given evolving U.S. energy policies and increased global feedstuff competition.

It also hurts a state such as Kentucky, which currently offers dairy farmers financial incentives to not only improve milk quality, but also to increase milk production, as a means to build a job-creating industry in a seasonally shorted milk supply region of the United States.

I also know of many smaller dairy farmers who would like to bring a son/daughter into their operation, but supply management would likely allow only a small percentage growth each year, not enough for a second family to earn a living from the family business. I’ve been told those farmers should view supply management as economic “insurance” for the new generation, preventing larger producers from getting even larger. I’ll buy that argument a bit, but insurance generally only protects current value. Nationally applied policy has little flexibility to serve the needs of an industry’s evolving individual businesses.

I get it that failing to “preserve and protect” in the economic climate of 2009 and 2010 destroys producer income and equity, also creating severe harm to potential growth. But while many argue supply management will only be triggered in the toughest economic periods, and will be flexible enough to adjust to market conditions, any national policy invariably creates bureaucratic lags – both on front-end and back-end triggers – to adequately read market signals and allow necessary flexibility to address them. It also fails to account for regional differences.

And, what happens when supply management is implemented while processors and farmers in one region of the country are short of milk, while all other areas are flush? Litigation, probably, with all the accompanying court rulings, extensions and appeals.

I do agree with IDFA’s Tipton in this regard:  In a perfect world, supply management would be localized, driven by cooperatives, processors and their producer suppliers, and dependent on their production and marketing ability, capacity and potential. Milk supply controls can be set by mutual agreement and contract. That rewards investment and innovation – especially in a growing global market.

Undoubtedly, the issue is even more complicated than what I have painted here. However, using select numbers to create acrimony by identifying “winners and losers” on one narrow piece of policy does no one any good, especially with consensus of the entire industry needed to create policies to help the U.S. industry thrive in the era ahead.

FYI

• To offer your own opinion or response, e-mail Dave Natzke, national editorial director, DairyBusiness Communications, e-mail: dnatzke@dairybusiness.com.


One Comment on “Op-Ed: The evidence is ‘suspect’”

  • Ted Foster February 3rd, 2011 4:35 pm

    If there is not a market for milk, then why should one be allowed to produce more milk without a payment into a system to increase the sales of milk in one form or another. Any other business that wishes to increase production of widgets must find a market for those widgets and not expect other makers of widgets to make room for them. We must produce for the market place and increase production only when we have increased the market to take the extra production

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