How would your plan change, if at all, the way milk is priced? The Rational Milk Pricing plan would change how milk is priced by first using a 60-month moving average to price 90 percent of a dairy’s production base. It creates a price discovery system that will involve all the buyers or processors competing for the milk in all areas of the country for the milk that is produced over the 90-percent production base. The bidding system will be component-based to determine the true value of milk’s components, which is important as milk is fractioned into many different products.

Does your plan suggest changes to the Federal Milk Marketing Order? If so, how?
The Rational Milk Pricing plan does change the FMMO by creating new orders to include unregulated areas of the country. Each market order would price milk independent of the other orders based on the unique supply/demand situations and product usages for that area. This will allow the producers and processors in each area of the country to adapt over time to the market signals and production cost unique to their area.

Does your plan change the inclusion of CME cheese pricing in milk pricing formulas? Why or why not?
The Rational Milk Pricing plan does not use CME cheese pricing in milk pricing formulas. The end product pricing system and formulas are a backward pricing system that is at the root of the milk price volatility experienced at the farm. The system is a problem because it prices all milk products based on a very small amount, in effect the marginal milk. The current system also provides at least the opportunity for price manipulation.

Under your plan, would there be any changes to processor make allowances? Why or why not?
The Rational Milk Pricing plan eliminates make allowances. Make allowances have encouraged milk products to be manufactured whether the marketplace wanted them or not. This has been a hindrance to product innovation and likely caused imports to be higher and exports lower. By paying processors to produce products that are not needed but are part of the pricing formulas, they have contributed to the low prices at the farm, while processors are insulated from the price risk.

How would your plan change, if at all, government support programs for milk and dairy products?
The Rational Milk Pricing plan would eliminate support programs that purchase milk products that are not currently needed by the market because they have interfered with the market signals. Any short-term price improvement is lost when unneeded milk products are purchased and stored because it just extends the period of low prices. Production is eventually overcorrected down because current production must be less than current consumption before the product inventories will be reduced.

Why will processors go along with your plan?
The Rational Milk Pricing plan adds price stability for the processors as well the producers. This will allow processors to enter into long-term contracts with the businesses they sell there products to. The moving average price is just an average of the prices they have already paid the last 60 months. They will also experience minimal fluctuation in inventory values on a month-to-month basis as is possible now.

Why is your plan the best plan for ALL dairy producers regardless of where they operate in the U.S.?
The Rational Milk Pricing plan is the best plan for all producers regardless of location because of the stability it provides to the pricing system. All dairymen will know their price 12 months in advance for 90 percent of their production base. The price will be stable enough to allow proper short- and long-term production and financial decisions. The stability of the 90 percent base price will allow them to cash flow well enough that they can respond properly if the market sends a signal for less production. Producers will be able to react properly to the uniqueness of the market in their area.

Why is your plan the best for ALL dairy producers regardless of operation size?
The Rational Milk Pricing plan is the best plan for all producers regardless of size because it does not discriminate on based on size. All dairymen will have a stable enough price to allow them to make proper decisions for their operation including what size is most efficient for them to be based on their market and the cost of production for them in their area. The stability of the pricing and the price trend will send more accurate signals if expansion is warranted. The current system may have sent too strong a signal for short periods to expand.

How would your plan manage U.S. dairy exports?
The Rational Milk Pricing plan makes no attempt to manage exports directly. But by allowing each area of the country to adapt to its own market (domestic or foreign) then we should be able to take advantage of export opportunities. Export opportunities will be maximized by efficient production that can compete on the world market. By not subsidizing milk products that are not wanted by the market or world, market processors are more likely to adapt to what the market does want. The plan does not subsidize production in any way to cause problems with WTO agreements.

Does your plan limit foreign dairy imports? Why or Why not?
The Rational Milk Pricing plan makes no attempt to limit foreign dairy imports directly. But by stabilizing the price it can limit the periods when the prices were too high and may have opened the doors to imports or even stimulated production overseas that eventually came back to haunt us by over supplying the world market.

What do you think producers will like most about your plan?
The Rational Milk Pricing plan provides guaranteed price stability 12 months in advance on their 90 percent production base. No other plan comes close to providing this market based price stability. Monthly cash flows will be able to be projected accurately and will allow much better financial decisions to be made. With the current system it is impossible to make accurate cash flow projections even just 12 months out let alone five years or more.

What is the least well-known benefit of your plan?
The least known benefit of the Rational Milk Pricing plan is that it will provide price stability all the way to the consumer and likely lead to improved consumption by keeping the door closed to product substitutions and reductions in usage caused by short periods of high prices. I believe that much of the expansion in retail versus farm price can be blamed on the extreme volatility.

What obstacles do you foresee for implementation of your plan? How can they be overcome?
The only thing that can be looked at as an obstacle to implementation would be setting up the bidding system in each Federal Order. But this would be a simple task for the Federal Orders compared to the massive amount of information they currently track. The Federal Order system already has the price history documented for the 90 percent of base price and cannot be manipulated.

Why (or why not) is margin insurance for producers a good idea?
Margin insurance is a program that is a reaction to a pricing system that is broken and needs to be replaced. The concept of insurance is for protection for that once in a lifetime catastrophe that you hope never happens. If the price is low because the market is telling us that we need less milk then margin insurance will just interfere with the market signals as the support programs do now.

Why (or why not) is supply management needed in the U.S. dairy industry?
Ultimately supply and demand must be in balance. No industry can continue to produce more product than is needed and expect to be paid for it. The Rational Milk Pricing plan will work very well to send the proper signals for more or less milk (market based supply management) by pricing the marginal milk (milk that may or may not be needed) separately with a bidding system that creates a connection between the producer and the processor.

Why (or why not) should pay price be directly linked to average cost of production?
Pay price should not be linked to any attempt to a calculated average cost of production for the entire country. It would become very much politicized. The actual cost to produce milk has a great many variables that can vary tremendously between farms even in the same region let alone different regions. It would create another disconnect in the marketplace between supply and demand possibly leading to excess production in some areas while causing loss of farms in other areas. PD