Is dairy policy uncertainty really such a bad thing for dairy farmers?
Probably not. But it may prove to be a royal headache for Agriculture Secretary Tom Vilsack and the USDA-the prime movers (along with National Milk Producers Federation-NMPF) for the Dairy Security Act and its self-serve-style of proposed supply management.
Congress recessed this week without passing a new Farm Bill. Some folks (mainly Ranking Member Collin Peterson and Senate Ag Committee Chairwoman Debbie Stabenow) are making dire predictions about how U.S. farm policy will revert to “depression era” tools and percent of parity pricing.
Oh, the horrors.
The price tag of $38-milk is being bandied about as a sort of cattle prod to get the likes of IDFA and those rebellious dairy farmers to get in line behind NMPF’s Dairy Security Act and its version of supply management.
But the $38-milk “scare-tactics” did not motivate Speaker of the House John Boehner to rush the Farm Bill to the floor before recess.
And, I suspect the $38 talk is worth about two-cents, really.
Experts like Dr. Andy Novakovic point out the “hoops” and “loops” that USDA and product manufacturers would have to go through and around to implement and fulfill the terms of the underlying law’s milk support price at 75% of parity.
Frankly, with the sad shape of our government debt and deficit being laid on the shoulders of our children and grandchildren, I find it highly unlikely-under any scenario-that the government would come up with the money to buy cheese, butter and powder at prices more than twice what they are today and quadruple what they are at the expiring support levels... to achieve that percent-of-parity-support-priced $38-milk.
As the 2008 Farm Bill dairy policy expires at the end of this month (Sept. 30), the result is dairy farmers will lose their MILC payments, unless Congress includes provisions-and funds-for MILC in a continuing budget resolution when they return after the elections.
It also means the Dairy Product Price Support Program, which has been tweaked and renewed every five years at lower and lower support levels, would revert back to the original law supporting the milk price at what would be $38 for 2013.
But USDA would have to write the “buy offers” and implementation rules and figure out where the money to buy the products is coming from. If a new Farm Bill is not passed by January 1, 2013, USDA would ostensibly have to show it is at least “working on” supporting the milk price $38.
That is not the same thing as setting the Federal Order price at $38. The old 1940’s law simply states that USDA support the price at that level with product purchases.
USDA could make the product specifications very tight to discourage processors and cooperatives from making those products to sell to the government. And, honestly, why would they sell to the government? If there is not an excess of bulk commodities lying around, and if dairy product prices continue to rally on the fear of short supplies, why would anyone making dairy products want to risk losing future market share by selling to the government instead of their customers?
Why, indeed, when they know full well, a sale of product to the government at those prices, means they have to pay dairy farmers that much more for their milk used in making other products for the market.
It is a catch-22, that’s for sure.
Here’s the silver-lining around this cloud of uncertainty over future Farm Bill dairy policy. The uncertainty is having an effect on the dairy markets, which affects the milk price. Market forces do what market forces do, and now-in the background -is this idea that the government “could” become a buyer at significant prices. This, in effect, can heat up the market with at least another supply and demand factor for consideration by the purveyors of market forces.
‘Almost too absurd to imagine?’
Cornell University professor and noted dairy policy and economics expert Dr. Andrew Novakovic posted an information letter last week at the Program on Dairy Markets and Policy website, run by the University of Wisconsin-Madison. The letter-found online at http://dairy.wisc.edu/PubPod/Pubs/IL12-06.pdf -asks this question: Is reverting to the 1949 Agricultural Act really a possibility for dairy price supports?
Not really. In fact, Novakovic says that is “almost too absurd to imagine.” But the operative word may be “almost.”
On page four of his five-page document, Novakovic writes the following explanation in his answer to the question posed:
“So, should farmers expect that the Secretary would announce that $38 support price at the beginning of 2013? This is a tricky bit of business for the Secretary.
“The law is clear. It is his duty to implement the provisions of law that pertain to the U.S. Department of Agriculture. On the other hand, establishing a genuine support price and corresponding purchase prices for dairy commodities equivalent to $38 or thereabouts for the next 12 months would be like some kind of bad heroin trip for the dairy sector. Farmers might revel in euphoria at first but the after-effect on markets is almost too absurd to imagine.
“There are a few caveats to keep in mind. The Secretary can announce a $38 support price for milk, but until USDA announces the purchase prices for dairy commodities and releases the formal invitations for offers at those purchase prices, nothing happens to markets, other than perhaps rampant speculation. It is USDA’s purchases of butter, cheese, and nonfat dry milk at specific prices that moves market prices, not a simple declaration by the Secretary about the support price for milk. USDA could take a while to get all that machinery in motion, while Congress presumably came to its senses and retroactively stopped it all.
“Another caveat involves the action that would be taken by marketers. In the past, USDA was often described as buying products as if it walked into a store and loaded up its grocery cart. In fact, USDA issues offers to purchase very specifically defined products, in specific containers, manufactured in inspected plants that conform to various government procurement rules. If no manufacturer cares to sell to the USDA, then there is no sale and no corresponding price effect. This actually happened in the 1980s and at times in the 1990s...”
Back to my original point... The $38 milk scare-tactic doesn’t amount to much if manufacturers don’t actually make and sell the products the government would offer to buy at the underlying prices that together would make the $38 support price stick after January 1.
As Novakovic points out, if a new or extended Farm Bill is not passed after the elections and before Jan. 1, USDA could take its good sweet time implementing the underlying rules for reverting back to supporting the milk price at 75% of parity.
All the talk out of Washington is that House and Senate leadership will bring the Farm Bill to closure after the elections, and that another option for dairy policy will be debated and considered on the House floor. Namely, the Goodlatte/Scott amendment provides margin protection insurance opportunities without the devastating effects of the NMPF plan to manage U.S. market supplies using supply management penalties in the face of global competitors that do not have such restrictions.
From what I’ve seen and heard over the past year and a half, farmers seem simply unmotivated to hound Congress to pass this farm bill. Dairy farmers-in particular-don’t see it representing their real concerns about true reform of the pricing system for greater market competition.
Thus, I believe the silence on Farm Bill dairy policy among dairy farmers at this moment reflects an inner satisfaction of stoically letting the $38 milk scare-tactic stand as a way to make their elected representatives (in Washington and in their cooperatives) squirm a little. Let the squirming begin.
Dairy market rally stokes the fire
The CME spot cheese advanced almost a nickel every day during the first three days of this week with over a dozen loads traded Monday and Tuesday. At midweek, bids continued to rise even though no sellers came forward with product to sell. The CME pegged 40-lb Cheddar blocks at $2.0825/lb and barrels at $2.04/lb on Wed., Sept. 26. Butter also advanced eight cents to $1.94/lb.
Class III milk futures hit $21 for November contracts Wednesday, and the 2013 average softened a bit from $18.88 last midweek to $18.82 this midweek on the CME future market.
Nonfat dry milk (NFDM) on the CME spot cash market was pegged a penny lower again this week at $1.68/lb., but this is still about 30 cents per pound higher than the most recent California weighted average of $1.32/lb for week ending Sept. 21.
In the futures pits, Class III milk contracts advanced well over $20/cwt for the nearby months, and the 2013 months averaged ever-closer to $19 as of Wed., Sept. 19. Class IV future contracts continue to lag Class III by a couple bucks, but they are on the rise.
Editor's note: This "Market Moos" column first appeared in the September 28, 2012 print edition of Farmshine.