On December 14, 1799, George Washington died. Two days earlier he spent five hours riding around his Mt. Vernon farm in a winter storm. After being exposed to the extended cold and wetness, he contracted what is believed by many to be acute epiglottis. This piece of anatomy in the upper throat, when inflamed, can swell.
Even by today’s standards it can be life-threatening, but generally antibiotics are sufficient for full recovery. Untreated, the epiglottis swells, suffocating the victim.
He did not go untreated. Top physicians came and did what they did in those circumstances – bled him. Under this medical theory, certain arteries are slit and the patient bleeds.
The theory was that with the removal of this lifeblood, poisons causing the disease are removed. Reportedly over half of his blood was let during the operation. Bleeding did not work. At the age of 67, the President suffocated.
Arcane and bizarre as the treatment seemed, the truly sick were treated, ones who probably would have died in any event. It was not practiced on healthy people.
Though in deep distress months earlier, lately the dairy industry has been healthy. March 2011 stands as a case in point. Never before had producers grossed as much for their milk as they did that month.
The all-milk price of $20.40 per hundredweight (cwt) on a record 16.97 billion pounds resulted in $3.46 billion dollars in gross producer income. April 2011 followed with the eighth-highest gross for one month. At the time of writing this article, May’s numbers are not in, but they too should be in that high level.
The high milk prices rank eighth and 10th of the ten highest all-milk prices, and growing milk production responds to an ever-growing demand abroad for American dairy products. A weak dollar, growing economies elsewhere and the high quality of American dairy products mean dollars in the milk check.
Export demand for milk powder pushed Class IV prices to the top 10 of that pricing series. Demand worldwide for dry whey prices added over a dollar to the Class III.
Higher Class IV prices have driven the Class I to near-record levels as well. Without the demand from exports, the weak domestic economy would be producing significantly weaker dairy products.
The future for these export sales and the income that comes with it provide dairy farmers with the necessary sales to offset historically higher feed costs. Without this export demand, domestic-only milk income would be less able to cover these costs.
USDA reported a milk feed ratio of 2.14 for March, or a milk price less feed costs of about $10. This is a government computation of a national average. Obviously, different farmers in different regions would experience different feed costs, but all regions showed positive gross margins.
In the midst of this dairy vitality, a threat looms. Based upon published and discussed elements of the Foundation for the Future, had that program been in effect, producers nationwide would be compelled to forfeit over $380 million dollars of those months’ income. The amount is about $1.20 per cwt average from either not being paid for dumped milk or government taxes approximating $1.20 per cwt.
Under the terms of FFTF, producers must forfeit either in value or reduced production the entire value of production added over the same month in 2010 plus another 4 percent for March and 2 percent for April. That means 6 percent of March’s producer check and 4 percent of April’s, one to two days of production.
There was no ill patient needing healing in March and April. Those months’ class and producer prices responded to a robust demand for dairy products. Record-high prices only come with record-high demand.
When these prices occur in conjunction with record production, the market signals a demand for more milk. For dairy farmers that means not only higher milk prices, but higher volumes. The higher gross fills the milk check with needed dollars.
The proposal calls for the reduction in milk marketed during times of highest demand, actually shorting the market. In that situation, someone wanting milk will not be able to get it. Because of the structure of pricing, infrastructure and industry practices, the domestic market will not be shorted. Domestic markets will not respond with higher prices.
Rather, the first markets to go will be the higher-priced export markets. The 6 percent reduction in milk represents about half of U.S. exports on a solids basis. But telling a customer you will not sell her all the milk she demands does not mean she will buy any of the milk you offer. The proposal eliminates the current milk price driver producers need to cover feed costs.
Producers need these higher prices now to overcome the higher feed costs incurred now. Theoretical recovery over 10 years in some model of that lost income will do no good for the here and now. The penalizing dollar-plus assessments on gross income with unstopped rising feed costs will pinch producers.
Instead of profitable months, badly needed after the bath of the previous several years, the program will bleed too much and be the cause of their demise, not a benefit.
Producers could lose from more than just reduced gross milk income. Profitability on the farm during times of small margins comes from efficiency. That means everything must operate at its full capacity to return enough value to ensure farm profits. Rapid reductions in milk supply mean that inefficiencies will come.
Producers under contract to deliver specific volumes of milk individually or cooperatively to plants will be forced to buy milk at higher prices to replace the milk they had to give up on their farms. The producers will bear that cost.
Producers who individually or collectively own and operate their own plants will be forced to buy milk, rather than using the milk they had to dump, to keep plants at profitable capacity and maintain their market share.
Disruption in marketing milk will bring yet another cost to producers. As the month plays out, producers will realize they need to cut more and more milk to get down below the penalty stage. The last days of the month could find empty milk trucks as producers dump milk rather than pay hauling and checkoff fees for valueless milk. Then the first day of the month, trucks are full again.
During a period when the government demands (subject to penalty) a rapid reduction in milk production, heifers will depreciate rapidly in value, reducing yet another source of income to producers.
If there is a treatment, there should be an illness that needs cured.
It is necessary to understand the formulas driving this proposal. The formula averages prices on the CME for corn and soybean. The daily closing prices for nearby futures are averaged.
For hay, USDA’s monthly report will be used. All prices are national. Corn price per bushel is multiplied by 1.192, soybean meal per ton is multiplied by 0.00817 and hay price per ton by .0152. The resulting feed cost is subtracted from the preliminary all-milk price announced by USDA for the same month.
When this difference is less than $6 for two months or $4 for one month, reduced milk production will be required for the second following month. The reductions will continue until the formula results in margins in excess of $6 for two months, in which case the second month following that period, the required reductions will end.
Under this formula, December had a margin less than $4 and January less than $6. As a consequence, the law would have required the secretary to announce on January 31 compulsory 4 percent reductions in milk marketed for March and 2 percent for April.
Because production was up about 2 percent, the reductions from production would have been 6 percent and 4 percent, respectively. The formula also would penalize production through at least August of this year.
While producers can choose in advance to use the quarter prior to the announcement to set their base, analysis shows that except for producers in a major growth stage, that option would not be used.
So what illness in December are we treating in March and April? What does draining profits from dairy producers to the tune of $300 million in March and April have anything to do with high corn prices in December?
Or, how does the production in March and April 2010 have any bearing on the margin in December and January or the amount of milk that needs to be reduced in 2011?
December and January milk prices were historically on the higher end. Producers have only received higher prices in two dozen months and only two years averaged higher than the price of December. Like March and April, higher December and January production was met with equally higher demand.
The problem with December was higher feed prices. Supply and demand for corn, not milk, narrowed the formula. To cover these costs, producers have to be even more efficient. The proposed solution makes them less profitable, less efficient and less able to be sustainable.
Using a treatment that was unrelated to the problem was, itself, sometimes the cause of death. Bleeding to death denied patients the opportunity to heal naturally.
Removing profits from the life of a dairy producer today because a theoretical model said margin one or two months earlier was too low, can and will do the same thing. The use of bloodletting survived a long time, even though many patients died anyway. PD
Illustration by Mercedes Opheim.