It’s the Margin, StupidJerry Kozak,
President/CEO Why was 2009 such a terrible year for dairy farmers? Perhaps this sounds like a stupid question, but the answer is a bit more complex than simply acknowledging that prices were in the dumps. That’s true, but there’s more to it than that. In fact, prices last year between January and October were low by historic standards, but not as low as the prolonged milk price trough during 2001-2003 (when the Class III price was below $12 for 21 straight months) – a period that, in retrospect, was bad, but not as bad as last year. So the low milk price is the truth, but not the whole truth, when it comes to answering my initial question. What made last year such a disaster was low prices, coupled with high input costs. Feed grain prices in 2009 were significantly above the level of six and seven years earlier (rising from around $8/cwt. in 2002, to $10-12/cwt. last year). So answering this question completely involves more than just accounting for the revenue side of the farm ledger; input costs are also crucial. It’s important to acknowledge the existence of this twin-headed monster in order to find a way to slay it. Fixing just the price problem is only half the battle, in the same way that focusing just on either supply or demand only deals with half of any product’s price. And that’s the problem with our current dairy safety nets: the product price support program, and the MILC program. Both are designed to augment the price that farmers get for their milk. Both are oriented to a target price for either manufactured commodities, in the case of the price support program, or the monthly Class I base milk price, in the case of the MILC. But other than a feed adjustor recently added to the latter, neither of these programs battles the other head of the monster. So that’s why NMPF’s long-term approach to helping reform dairy economics is focused on margins, not prices. In last month’s column, I briefly mentioned how our Dairy Producer Income Protection Program (DPIPP) is intended to help confront the core of the issue, which is when negative profit margins eat away at hard-earned equity, threatening the viability of a farming business that must borrow to keep going. Although it’s still a work in progress, the value of a new safety net that addresses margins, not just prices, is increasingly obvious. First, our new approach acknowledges that dairy farmers have a new cost of production dynamic, driven by increased competition for feed grains and petroleum products, that is both global and permanent. The days of sub-$2/bushel corn are in the rear view mirror. Second, it acknowledges that the pricing targets for the product price support program, and the MILC, are inadequate, as are the fundamentals of each program. The former creates artificial demand for nonfat milk powder and detrimentally impairs the ability of the U.S. to clear its markets; the latter discriminates against farms based on their size. Third, it acknowledges that we can’t sustain another year like 2009. The DPIPP, as we’re designing it, would help our industry move beyond these dilemmas. As a substitute for the other two safety nets, it would involve two levels of insurance against red ink margins. The first would be a base level of coverage, subsidized by the government that covers a portion (but not 100%) of a farm’s historical annual milk production, and protects against a modestly negative margin between milk prices and feed costs. The second level would be optional, and allow a farmer to purchase a greater level of coverage, still with some amount subsidized by the government. This approach is really no different than the concept of private property or auto insurance, where premiums adjust to the coverage desired. But under the DPIPP, the base level of coverage would be the government’s obligation to fund, while the supplemental coverage would be a combination of farmer and government cost. And nowhere in here is there a price assurance; the goal is margin insurance, an important distinction. Some of the skeptics of our proposal have said that such a program would stimulate overproduction and be too generous. This simply is not true. The program is designed to address overproduction by only guaranteeing a payment during catastrophic conditions such as those seen in 2009. The program does not cover new production, but it also does not stop new growth nor penalize new growth like the government-mandated supply management proposals that are floating around. It simply allows the new production to be at the risk of the farmer. A future safety net focused on margins, not milk prices, will require a significant shift in the collective mindset of the dairy producer community. But if there’s any lesson to be learned from the presidential campaign victory by Bill Clinton in 1992, which generated the phrase “It’s the Economy, Stupid!”, it’s that new thinking about dairy economics is imperative – and today, it is all about margins. In fact, if you think about it, the safety net for dairy farmers should have always been about margins, and not price. *Anyone is welcome to post comments. Comments must be approved before appearing on the page. All effort will be made to publish every comment, provided that each comment is respectful and directly addresses the issues discussed in the column. Readers are encouraged to respond to the comments of others. Comments |
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