Support Demand, Not Price

Intervention Only Delays Recovery

Volume 134, No. 10 Friday, September 4, 2009

What is more unsettling to a marketplace than the anticipation of government intervention?

The cash cheese market in Chicago has sagged in recent days under the weight of heavy Cheddar inventories, finding its way back to the temporary support price of $1.31 per cheddar block imposed by USDA Secretary Tom Vilsack in July.

The secretary’s price support increases (an 18 cent increase in the block and barrel Cheddar supports and a 12 cent increase for nonfat dry milk) will end October 31 and either the agency, or Congress, will likely step into the marketplace again. The anticipation of more government intervention leaves producers, buyers and futures markets uncertain and unsettled.

Government intervention in end product prices is a disruptive strategy providing no permanent fix. Higher price supports delay a correction in milk production, lower the potential for dairy exports and build government stores of dairy products (namely nonfat dry milk) that will return to the marketplace in the future and dampen demand.

Yet this criticism of USDA’s price support action must be tempered by the reality of 2009’s price trough. The price paid to dairy producers has remained low for eight months, and may remain low enough throughout the year to snap the lines of equity and credit that are holding many producers above water.

This price trough is reminiscent of 2002-2003, when the Class III milk price averaged $9.71 per hundredweight over 12 months. But, as University of Wisconsin economist Dr. Ed Jesse notes in an August Dairy Situation report, in 2003 Wisconsin corn averaged $2.35/bushel during the first six month of the year and in 2009 the cash corn price ranges between $3 and $4. Soybean prices today range around twice as high as prices in the first half of 2003.

According to USDA’s Economic Research Service, dairy producers in Wisconsin experienced negative returns of -$2.81 per hundredweight over feed costs in January through June 2009, and western dairymen face similar daily losses. The red ink and the pain on dairy farms is real.

In Wisconsin, state and federal legislators have held listening sessions and producer organizations have gathered to look for solutions to low milk prices. One advocacy group, Wisconsin Farmers Union, has asked state legislators for a moratorium on permits for Wisconsin dairy CAFOs (concentrated animal feeding operations).

But the decline in dairy markets and prices is global, not local, brought on by worldwide recession. US dairy exports have experienced both reduced demand and increased competition from New Zealand. In the first six months of 2009, US dairy exports dropped about 50 percent compared to records set in 2008. But the export picture is a mixed bag.

The lead US export, nonfat dry milk, is off 55 percent compared to 2008 (January to June) and 15 percent compared to the first half of 2007. Cheese exports are off 23 percent in the first half of the year. Dried whey exports are less than half of the peak export year of 2007 (looking at January to June data).

Only whey protein concentrate exports are relatively healthy, down 16 percent from 2007 and 14 percent from 2008 (comparing January to June.)

Loss of demand means milk production that came on line in 2007 and 2008 is not clearing in the marketplace, and prices are depressed. In his Dairy Situation, Dr. Jesse estimates that lost exports will result in 5.7 billion pounds of milk that found a home overseas last year needing to be absorbed within domestic markets in 2009.

The US dairy industry has mechanisms to address price troughs: USDA’s MILC program; the herd retirements executed by Cooperatives Working Together; milk and feed price hedging and dairy product price supports. And while all these mechanisms are active today, continued low prices will likely push Congress to consider additional funding for MILC or further alterations to price supports.

The best solutions revolve around demand. Congress could mandate increased use of dairy products within food assistance and military food programs and could increase assistance for dairy exports.

If needed, temporary financial assistance offered directly to producers or their lenders could salvage a portion of dairy producer equity and provide a bridge to 2010.

Today’s inflated price supports are sending false signals to dairy producers, dairy buyers and international markets. Ultimately the marketplace must balance supply and demand, and the secretary’s good intentions will delay recovery.

In a search for solutions to the great dairy recession of 2009, government should place price intervention last on the list. r

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org

 

Other John Umhoefer Columns

Dairy: A Good Bet in a Bad Economy
Wisconsin's Future: Growth
Keeping Sustainability Real
Nose Dive
Dairy Dives into 2009
UnCOOL
Consider This...
 Fulls Vats
Implement Make Allowances ASAP
Security Reforms
Spring Forward
A Week of Clarity
The California Whey






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