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What a long fall off the dairy cliff would have been like

PD Editor Walt Cooley Published on 01 January 2013

Most said falling off the dairy cliff wouldn’t happen because it never had before. For a short time, Congress let it happen. But what did it mean for your milk check and rising milk prices? Experts say very little.

Congress would have had to delay enacting a new farm bill for much longer for the effects of parity pricing milk to have been painful.

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“I remember being in ag policy class and having this question: Why do we always have a farm bill?” dairy market analyst and Daily Dairy Report publisher Mary Ledman says.

“The answer to that is that we have this horrendous, cost-prohibitive 1949 legislation on the books that would come into effect. That is the hammer that causes the Senate and the House to come together, and rural and urban interests to come together. If the hammer never comes down, what forces Washington to do anything?”

Two weeks before the beginning of 2013, Ledman laid out in her weekly newsletter how that 1949 law would have impacted milk pricing .

She wrote: “If nothing is done, laws and policies governing agriculture revert to the Agricultural Act of 1949. According to the Act: '[T]he price of whole milk, butterfat, and the products of such commodities, respectively, shall be supported at such level not in excess of 90 per centum or less than 75 per centum of the parity price therefore as the Secretary determines necessary in order to assure an adequate supply' … What exactly is parity? Parity refers to the 1910-14 'golden era' of agriculture when commodity prices were particularly high. USDA’s monthly Agricultural Prices report includes a table with parity prices.”

On Dec. 31, the USDA announced that parity price for milk would have been $39 per cwt.

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Ledman went on to further explain:

“For the Secretary of Agriculture to support milk prices at not less than 75 percent of parity, the Secretary would need to almost quadruple the current dairy product support prices. If dairy product support prices were increased fourfold, there would be a significant premium to sell product to the government. But this doesn’t mean farm-level milk prices would top $30 or that a gallon of milk would cost $6 because Federal Order milk prices are calculated from the National Dairy Products Sales Report (NDPSR) prices and California milk prices are priced off CME spot prices – not government support prices.”

Dave Fuhrmann, president and CEO of Foremost Farms USA, a Midwestern dairy co-op, says many misunderstood how the parity price would factor into farm-level milk checks.

“I think most producers assumed they were not going to get $30 cwt milk,” Fuhrmann says. “They knew that is not a practical long-term solution.”

Fuhrmann explained why milk prices didn’t increase overnight after the short lapse in policy.

“It is our understanding that you cannot take product made in December and offer it to the Commodity Credit Corporation (CCC) on Jan. 2 or 3. So the earliest that product would have been offered is mid-January,” Fuhrmann says. “That would have to be reported through the National Dairy Products Sales Report and published at the end of the month. You would have seen small incremental increases in the January milk price.”

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Ledman believed the most likely dairy products to have been sold to the government would have been those that are easiest to store long-term – butter, then NFDM and finally cheese.

The government’s detailed product specifications and delay in payment have historically made it the market of last resort. However, Ledman says parity pricing would have provided a premium to sell to this market of last resort for the first time ever.

“You would have had to paint the scenario that it is March and we still don’t have a Farm Bill to move the needle a lot,” Ledman says.

The real effects of parity pricing depend on its duration. A snowball effect would eventually kick in.

Basic economics suggest that over time, as higher volumes and value of product were sold to the government, and when these prices were reported monthly, they would increasingly impact the federal order class prices and thus farm-gate prices paid to dairy farmers.

Then as farmers got paid more and more for their milk, they would eventually begin producing more.

“We were not going to do anything to short our current customers just to shift product to the CCC,” Fuhrmann says. “However, if there had been any surplus of milk available, we would have certainly considered making 40-pound blocks of cheese and offering it to the CCC.”

The other wild card would have been how quickly milk prices would rise at the CME. Those prices for cheese would have more quickly factored into federal order formulas.

“Another key thing that could have played out for some companies is spot sales, rather than long-term commitments, for cheese,” Fuhrmann says. “If you had spot sales, you could say to a customer, ‘Look, I’ve got an option here. I can sell this cheese to the CCC for $4 a pound. If you want to buy a spot load, that’s what I’m going to expect you to pay.’ The spot market could have been significantly influenced. And, therefore, the snowball could have started rolling pretty quick.”

All agree that while rising farm-gate prices would have been welcome at first, the consumer backlash from higher dairy product prices would likely have had a long-term deleterious effect.

“One thing that we tried to communicate to our farms is the impact this would have had on the demand side of the equation,” says Karen Cartier, senior vice president of legislative affairs for Dairylea. “That was our biggest concern from the get-go. While this may have seemed like something that was good in the short-term, it certainly would have had a lasting impact on domestic and international demand.”

Fuhrmann and Cartier both say their co-ops' milk checks will continue to go out on schedule.

“Absolutely nothing will change with milk checks going out. The normal course of business will continue.” Fuhrmann says.

As Ledman concluded in her newsletter, “While some may toast to $39 milk, the party is likely to be short and the hangover long.” PD

Click here to read Cooley's related article, "The dairy cliff that wasn't."

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Walt Cooley
Editor
Progressive Dairyman magazine

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