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0909 PD: Can supply management fix a demand drought?

Walt Cooley Editor Published on 05 June 2009

Dismal mailbox prices for milk and a historically low milk-to-feed price ratio hang over producers this June Dairy Month. Rallies and demonstrations against low milk prices have already rained on the usual celebratory parades and breakfasts that accompany Dairy Month.

All this is on top of dairy families’ stress from a U.S. economic depression that clouds life off the dairy too.

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Sweating under the pressure of it all, may we not forget that our current economic stress might be unique beyond just low milk prices and high feed prices? Consider the following two points as I compare the industry’s current situation to a drought.

First, what makes a drought so discouraging is that those who suffer from it can do little to change what began it – a lack of precipitation. Most would argue current milk price depression began as a result of evaporated world demand for milk that started last year. Our current excess cattle population was reared to feed anticipated world demand. When the data finally catches up, I think we will see that when the economic conditions that grew these new markets started to fade, international consumers cut back. Where did they reduce costs? They did without what they had only begun to discover in their diets – milk and dairy products. Thus, we suffer from what we can do little to change.

Next, the way to survive a drought is to better manage and conserve the resource a drought eliminates – water. Since 1895, nearly all of the West has been under drought 15 percent of the time, according to the Palmer Drought Index. To thrive when the environment is volatile, western settlers learned to better manage what water they did receive. We must do a better job of capturing demand when it’s available. More on that later.

Our industry is learning to pioneer a new frontier – the global dairy marketplace. It’s a landscape that is more prone to occasional droughts of dairy demand. We are learning that many of the mechanisms we have used to prosper to this point aren’t as effective when droughts of demand occur.

For example, during the most recent CWT buyout, I know of a producer who sold a large herd, paid off some pressing debts and began buying bred heifers to milk as soon as they calved. This, as you know, comes with a forfeiture of 10 percent of the value of the total bid which was to be paid next year. It was meant to be a penalty to deter bidders from milking for at least a year. Yet when it’s over, this producer will be milking a smaller herd, but still milking in less than a year. The numbers penciled out just right for the producer. Is the producer to blame? No, the system is. It’s not entirely useless, but it needs to be refined to prepare for more frequent demand droughts.

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CWT was more potent when the heifer supply was constrained by natural selection. Sexed semen has removed the constraint. So producers should be upset at A.I. studs? Right? Maybe not. Sexed semen was a benefit when the U.S. dairy herd needed to grow quickly to take advantage of high global prices in 2007 and 2008. Do we have any mechanism to address replacement supply?

Despite the challenges of migrating into a global dairy marketplace, it’s worth a vigorous attempt to establish ourselves as a permanent resident. Just like western settlers in the 1800s, those who are willing to venture into unknown territory may have to go it alone at first.

These pioneering producers have been using forward contracts for milk and feed. If you don’t believe it, find one of the few producers who is buying cattle others can’t afford to milk and ask where the cash flow is coming from. More producers will learn about how margin management using forward contracts is like storing demand. It’s like carrying water with you, just in case it doesn’t rain.

I’m concerned that discussions about supply management are an attempt to hunker down in our established settlement and cut off pioneering new frontier because it’s too dangerous. Even the authors of the much-talked-about Growth Management Plan admit GMP can’t “provide complete protection from an unanticipated event” like a steep decline in global demand.

World dairy demand will return. The drought will end. Any plans made now must not shelter U.S. milk production from the world marketplace. To supply international markets, individual producers must be more ready for occasional demand droughts. Producers must learn to carry more of their own water rather than expect it to always be available. PD

Walt Cooley Editor

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