The Hagstrom Report

Agriculture News As It Happens

Study: Supply management would cost dairy farms money


MIAMI — A dairy supply management program proposed by the National Milk Producers Federation would have cost dairy farmers $626 million in payments from processors if it had been in place from 2000 to 2009, according to a study released today by the International Dairy Foods Association, a processors group, at its annual Dairy Forum here.

National Milk, the nation’s largest organization of dairy farmers, defended the proposal.

In reaction to excess milk supplies and reduced dairy income in 2008 and 2009, National Milk has proposed a four-pronged reform of U.S. dairy policy. One item on that agenda — the dairy market stabilization program — would attempt to discourage excess production that leads to low prices by setting up a government-controlled program under which dairy farmers would establish a “base” level of production. If the margin between the government’s milk price and the cost of feed falls below a certain trigger, milk buyers would be legally constrained from paying the farmer for milk above the base production level. The milk buyer could buy the milk, but the money would go into a fund administered by the Agriculture Department and a producer panel. The panel would spend the money in an attempt to increase demand.

The study, conducted by Informa Economics, a consulting firm, found that farmers in the traditional dairy states of the Upper Midwest and Northeast would have had more money withheld than those in the growing western states because farming practices differ.

One of the reasons that the dairy industry fell into a crisis in 2008 and 2009 was that, while demand declined due to the recession and trade problems such as the discovery of melamine in Chinese dairy products, the cost of feed went up. The rising feed cost put more pressure on dairy farmers in western states such as California, Arizona, New Mexico and Texas, where farmers buy feed produced mostly in the Plains states. Dairy farmers in traditional dairy states such as Wisconsin, New York, Minnesota, Pennsylvania and Michigan grow their own feed. The study said the farmers in the traditional dairy regions would have had more money withheld because they did not feel the pinch of increased feed costs as quickly and continued to expand production.

“This report shows that [National Milk’s] growth management plan will take money out of dairy farmers’ pockets when they need it most,” IDFA President and CEO Connnie Tipton said in a release accompanying the report. “Margin insurance and other proposals where processors and producers agree should be part of that plan. Programs to limit milk supply or impose penalties on producers should not even be on the table in our industry discussion.”

But National Milk President and CEO Jerry Kozak, who is attending the Dairy Forum, said in a statement that the proposal, known as the Foundation for the Future, “has been carefully designed to offer protection for their hard-earned equity.”

“Dairy farmers in every state saw their collective milk income drop more than 10 billion dollars in 2009, which doesn’t even include billions more in lost equity,” the statement continued. “This catastrophe was the result of current dairy policy that doesn’t offer farmers of any size, in any state, the protections they need against catastrophic financial losses. While providing all farmers in all regions a better safety net, Foundation for the Future also discourages periodic marketplace imbalances that generate enormous volatility, hurting all dairy producers.”

IDFA has traditionally opposed any limit on milk production because it would raise prices and reduce the supply of raw materials processors need to enter growing foreign markets. National Milk has not expressed much enthusiasm for supply management in the past, but the dairy crisis has been so severe that farmers have put pressure on National Milk to put it into the proposal. Some dairy groups have said the National Milk proposal does not go far enough in supply management.

While Kozak was restrained in his criticism, Jaime Castaneda, a Washington lobbyist for National Milk who is also attending the Dairy Forum, called it “a sloppy study.” Castaneda urged policymakers to refer to a study by The Food Policy Research Institute (FAPRI), an institution jointly operated by the University of Missouri and Iowa State University. That study found that the program of withholding payments would not be in effect for as long a period as the Informa study said, because farmers would reduce production.

Castaneda also said that farmers’ production patterns would change in other ways if the entire National Milk proposal is adopted, saying that because the current price support structure and the Milk Income Loss Contract payments would be eliminated, the margin protection program would be introduced and federal milk marketing orders would be changed.

Nate Donnay, a senior dairy analyst for Informa Economics, told the processors that the study did not discuss how farmers might change their behavior because “we really don’t know how farmers would react.”

Patricia Stroup, a group manager for Nestle USA Inc., said that Nestle uses supply management when it tells farmers how much it will buy. “I am absolutely pro-supply management, private supply management,” she said.

Stroup said that Nestle views the United States as “the most interesting supply source in the world,” but that if Congress imposes a supply management program, the company would consider trying to develop sources in Indonesia and China where so much of its demand comes from.

David Ahlem, a vice president of dairy procurement for the Hilmar Cheese Company, said, “It is wrong to assume volatility will go away.

Ian Cumming, a dairy farmer, said he moved his operations from Canada to New York state to get away from strict Canadian dairy rules, but warned the processors that politicians make policy based on what is in the newspapers, and that low dairy prices make the papers. “If processors pay what they did in 2009 . . . you will have supply management,” Cumming said.

International Dairy Foods Association
National Milk Producers Federation