Time for Balance, Not Balancing
Jerry Kozak,
President/CEO
Pity the poor guy who once made a living repairing typewriters, mimeographs or pinball machines. A generation or two ago, people in that line of work had skills focused on devices that time and technology have rendered quaintly irrelevant. The world has since moved on. And now we’re coming to a similar realization about the venerable dairy product price support program (DPPSP); it’s time for it to move on.
In the 12 years I’ve been CEO of NMPF, we have vigorously defended the function and importance of the price support program. It’s been as essential a focus for NMPF as any other single policy item. In the 2008 Farm Bill, we actually worked to make improvements in it, shifting the focus away from supporting a milk price, and toward supporting key commodity prices.
But at the end of the day, this question remains: is the dairy product price support program the best use of federal resources to establish a safety net to help farmers cope with periods of low prices? Is it effective? I believe, the answer today on both counts, is no. Here are the major reasons why:
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It reduces total demand for U.S. dairy products and dampens our ability to export, while encouraging more foreign imports into the U.S.
The price support program effectively reduces U.S. exports, by diverting some of our milk flow into government warehouses, rather than to commercial buyers in other nations. It creates a dynamic where it’s harder for the U.S. to be a consistent supplier of many products, since sometimes we have products to export, and at other times, we just sell to the government.
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It acts as a disincentive to product innovation.
It distorts what we produce, i.e. too much nonfat dry milk, and not enough protein-standardized skim milk powder, as well as specialty milk proteins such as milk protein concentrate, that are in demand both domestically and internationally. Because the price support program is a blunt instrument that will buy only nonfat milk – and because that’s what some plants have been built to produce, as opposed to other forms of milk powder – it puts the U.S. at a competitive disadvantage to other global dairy vendors.
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It supports dairy farmers all around the world and disadvantages U.S. dairy farmers.
Further aggravating measures, the current program helps balance world supplies, by encouraging the periodic global surplus of milk products to be purchased by U.S. taxpayers. Dairy farmers in other countries, particularly the Oceania region, enjoy as much price protection from the DPPSP as our farmers. Without the USDA’s CCC buying up an occasional surplus of dairy proteins, a temporarily lower world price would affect our competitors – all of whom would be forced to adjust their production downward – and ultimately hasten a global recovery in prices.
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It isn’t effectively managed to fulfill its objectives.
Although the DPPSP has a standing offer to purchase butter, cheese and nonfat dry milk, during the past 12 years, only the last of that trio has been sold to the USDA in any significant quantity. In essence, the product that the DPPSP really supports is nonfat dry milk. Even at times when the cheese price has sagged well beneath the price support target, cheese makers choose not to sell to the government for a variety of a variety of logistical and marketing-related reasons. We have tried to address these problems, but the USDA shows no inclination toward facilitating greater purchases of product by recognizing the additional costs required to sell to government specifications. Once purchased, powder returning back to the market from government storage also presents challenges, and can dampen the recovery of prices as government stocks are reduced.
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The price levels it seeks to achieve aren’t relevant to farmers in 2010.
Here’s where we really have to be honest about how the world has changed. Even though the $9.90 per hundredweight target was eliminated in the last Farm Bill, the individual price support targets: $1.13/lb. for block cheese, $0.85 for powder, and $1.05 for butter – essentially will return Class III and IV prices around $10/cwt. And in an era of higher cost of production, that minimal price isn’t acceptable in any way, shape or form. The government is not at all likely to raise the support prices (which would have negative consequences both for the burgeoning federal deficit, as well as our trade treaty limitations), and even if it did, we would likely will face the situation I described in #4.
For all of these reasons, what NMPF is now focused upon is a transitional process that shifts the resources previously invested in the dairy product price support program, to the income protection program that I have discussed previously.
In summary, discontinuing the DPPSP would eventually result in higher milk prices for U.S. dairy farmers. By focusing on indemnifying against poor margins, rather than on a milk price target that is clearly inadequate, we can create a more relevant safety net that allows for quicker price adjustments, reduced imports and greater exports. As a result of our DPPSP, the U.S. has become the world’s balancing plant. As time marches on, so, too, must our approach to helping farmers.
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