Letter: Time for co-ops to lead, not hold industry back
To the Editor:
U.S. dairy producers are getting very mixed signals as they look to the future of the dairy industry. Andrew Novakovic Ph.D. from Cornell University, who chaired the USDA Dairy Industry Advisory Committee, in a recent interview stated:
“We have a dairy industry with good talent and industry skills from the farm through the supply chain. We are not unique that way, but we are tough to beat in agriculture and dairy. One single thing to point to is that our agriculture is a tremendous resource base and it is the envy of anyone in the world."
In my personal view, we need to directly focus on this analysis as we look at the new emerging markets in the world, and as we develop policy and programs that help us compete.
The cooperative system has been a definite asset to producers in the past as we have balanced the challenges of the U.S. domestic dairy market. Since co-ops have always been the ones to balance the milk supply, they have utilized the simplest systems available to manage that milk for their member owners. Our co-ops balanced with cheddar cheese, butter, non-fat dry milk powder (NFDM) and whey – all products that establish our price and which are storable and easy to manage.
The current problem in this system is that co-ops have been good at what they have done in processing and marketing in the past, but are not necessarily good at looking into the future and developing a plan, to be a leader, as they move into the future of manufacturing and especially marketing products to meet world demand.
Having never considered world markets as being highly reliable, co-ops continue to look at them with that perspective, in spite of the current Bain Report and the recent 2012 Western United Dairymen convention, where Hilmar, Leprino and California Dairies shared all the things that are happening in world markets and the increasing values in dairy products in those markets.
This becomes more evident as we look to a rapidly growing world demand for dairy components. Most of those components are also storable to make distribution easier to those world markets. The challenge is those products are not necessarily American-style cheddar cheese, American-style butter and NFDM. Those markets would like cheeses that fit their consumers’ tastes, butter in their customary formula, and skim milk powder that is standardized, unlike our open standard NFDM, so it can be added precisely to food products. They also want the many differing varieties of milk component fractions of whey and protein. The co-ops should be rapidly developing and marketing these products to the customers asking for them. They are already in the business of making similar products.
Our co-ops are slow to address what much of our future may center around. In fact, they are supporting supply management plans that hamper production when demand is in a growing trend. They have also stepped away from any milk pricing reform that puts accountability in the formulation of a better pricing system that looks at the component value in our milk. They are correct in stating that we need a risk management program, but they are asking the government to provide a program that is based on national feed cost averages. They have definitely designed a one-size-fits-all type of program, and with that analogy there will be winners and losers.
The type of system that our cooperatives have designed, through National Milk Producers Federation (NMPF), will also continue to set a floor price on the world markets, keeping the U.S. as the balancer of the world supply, and not a true competitor in this growing market.
A true margin insurance, operated by a private insurer, would be a private program, known only to the producer and his insurance company. This would keep a U.S. base milk price out of the market.
Our co-ops are not helping to educate producers on these true margin insurance programs. One such program is LGM-Dairy, developed by Bruce Babcock from Iowa State University. It allows each farm to base their margin on their own personal costs of production. I recently heard the LGM-Dairy option suggested, not as a program, but as a technology that must be learned and adapted to our businesses, just like AI, sexed semen, etc.
The trouble is, LGM-Dairy is still technically in “pilot” status, as it has been for four years. This is why it has been available in the past on a funding-limited basis.
Professor Brian Gould, University of Wisconsin, in a recent article suggested that producers could pay the full cost of this program (without subsidies) and still gain great benefits from it.
Jamie Castaneda, from NMPF, recently suggested that the low participation in LGM during its early years was an indication that it was not a product dairy producers prefer.
All new technology has a learning curve, and to cite low participation in its early years as a reason not to expand and adopt this technology is unreasonable. LGM-Dairy certainly was not a low-participation technology in 2011, when it sold out quickly every time “pilot” funds were renewed.
Users and developers who are most familiar with LGM-Dairy note that it can easily be modified to meet the budgetary constraints placed by Congress on the dairy industry. Professor Gould actually suggested this in a published article; whereas Castaneda suggested that dairy producers do not want to deal with local insurance companies, so NMPF has what they feel is a better idea: Margin insurance no one has to think about. Margin insurance that is one-size-fits-all. Margin insurance that is tied to production controls being placed on every producer who enrolls.
I don’t see it that way. I see dairy farmers adapting LGM-Dairy and working with private insurers, because farmers already work with these insurance companies for their crop insurance.
Castenada also suggested that current LGM pilot programs are “sophisticated programs” that work very well during specific times and for specific producers. He didn't identify when those times were and who the specific producers are, but I assume he was suggesting that some of us are not able to manage the learning curve on how to best utilize these programs if LGM-Dairy moved from pilot status to a standard program under the USDA Risk Management Agency, similar to crop insurance.
I would suggest, If we as producers plan to stay in the dairy industry, we'll need all the knowledge we can gain on margin insurance, and it should be a program that can be modified to fit the way we manage our farms and the risk we have – individually – in the marketplace. It should not be a national program, and it should not be tied to supply management penalties.
Our co-ops should be the ones helping us learn about these programs, not discouraging their advancement in favor of a government-funded program that penalizes producers with production cuts and leaves taxpayers vulnerable without private insurers. Our co-ops should be encouraging Congress to move LGM-Dairy from a pilot program to a full RMA program. We have plenty of noted professionals suggesting we need to step up to the potential in the dairy industry, while our co-ops seem to hold us back in fear.
Dave & Helen Forgey
Forgey's River-View Farm Inc.