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0909 PD: Do something! Anything!

Ben Yale Published on 05 June 2009

Buried in red ink and no good news, producers are crying, “Do something! Anything! Just do something!” The cry reminds me of a meeting with producers decades ago in similar bleak economic times.

The farmers sat in a circle on upended 5-gallon buckets in a machine shed. Heated discussions focused on one issue – price. It was too low. Different ideas were brought up, chewed on, shot down and brought up again in heated discussion. The buzzword that night was finding a “tool” or “tools” to help the farmer get out of desperate economic times. In the midst of endless discussion, one frustrated and desperate dairyman, cried, “I don’t care what you do, just do something! Anything!”

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The host then rose and pulled from a large red tool chest the biggest monkey wrench I ever saw. Swinging the heavy metal, he entered the circle and proclaimed, “Here’s your tool!”

“What can that wrench do for me?” The frustrated farmer asked.

“I am going to wallop you on the side of the head.”

“No you don’t! That’ll hurt!”

“You said just do something, anything. Any tool would do, just use one.”

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“Not that one!”

In today’s “just-do-something” moment, some are reaching into the dairy program tool chest for a tool. One tool now being swung around is supply management. Producer trade groups from California and the Northeast have been proposing one, a breed association has announced its own plan, at least one bill is now proposed for supply management in Congress, and Cornell has just announced a special conference to discuss the economic implications of such programs. And there will be more.

Fundamentally each of the programs share key common elements:

1. Government mandates cover all producers.

2. Government imposes limits on production, sometimes allowing growth, sometimes demanding every farm reduce production.

3. Government imposes high milk taxes on production for those who exceed the limits and pays money (collected from the taxpaying farms) to those who do not.

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4. Government bases these decisions made nationally, not at the farm.

So far, these bases go with a milk producer permit. Bases cannot be transferred between farms or persons. They can go up each year based upon prior year’s production but will not go down.

The proponents argue the underlying theory: If we can predict demand and if we can dictate supply through government-imposed taxes and subsidies, we can control the supply/demand changes, then we can guarantee higher prices perpetually. If we can accurately predict demand for milk, if we can dictate who can produce the exact supply, and if we can turn these ifs into is, there will be no more low prices.

The “we” in predicting demand and the “we” in controlling supply and the “we” in setting milk prices is not “we” as “we milk producers,” but “we the People,” the national government. That is the officials elected by 300 million Americans will be the “we” in predicting, controlling and setting what is a program that only 50,000 farmers depend upon. Individual market decisions made today by producers will be surrendered to a distant bureaucracy answering to another constituency. It is indeed a different “we,” and the results of the collective activity will certainly benefit those who set it, not those who will endure it.

Therein lies the primary reason these programs are swinging wrenches. Despite all of the wonderful work dairy farmers and their advocates will do, Congress will not pass the legislation the way producers want it. Neither will the administration enforce the bill as producers thought Congress passed it. Once in place, when it malfunctions, and it will, an Act of Congress will be required to end it.

Domestic dairy marketing and pricing involves thousands of moving parts. No one, including the USDA, has shown the ability to accurately predict what parts will move how fast and how far to predict supply and demand accurately enough for this program. Current models provide only approximations and let the market do the rest. In supply management the exacting markets will be replaced with approximating government.

If domestic marketing has thousands of moving parts, global markets have millions. There is simply no way to predict or manage world demand and supply. To make a supply program work, the U.S. dairy industry would have to abandon exporting. But long-term exports is where the future growth and value for dairy farms is. With less exporting, there will be need for fewer farms. West Coast dairymen will be particularly hit hard.

According to current proposals, each quarter producers will be permitted to market only the amount of milk they marketed that quarter the previous year plus or minus (yes, it can require reduction in milk) the allowable growth factor dictated by the government. If there is any production over the allowable limit, the entire milk production on the farm, not just what was excess, will be taxed for a year. These adjustments will be made nationally, not locally. If the nation needs to reduce, you do too, even if your local market is demanding more or even if it means you cannot afford to operate at that level.

Here is an example of how the program would work: For this example, assume a dairy with 200 cows with an annual herd average of 20,000 pounds per cow per year. Four million pounds produced is the maximum allowable milk marketings for the farm under the program. Also assume a milk price of $15 (not guaranteed by any program). In this assumed year, the milk would generate $600,000 or $1,050,000 for seven quarters (more on that later).

Assume now that the producer adds one cow to the herd. Without a supply management program, the herd would generate for the seven quarters $1,055,250. Under supply management, when the herd exceeds its “allowable milk marketings” for a quarter the Secretary of Agriculture will access it a fee of $2 to $3 per hundredweight on all of the milk marketed for one year. Use the middle or $2.50. The added production from this cow will not only take the farm over the allowable milk marketings for the first quarter, but for the next three quarters as well. Each of those quarters extends the assessment another quarter for three. As a result the assessment for adding one cow would be for seven quarters. Now instead of getting $1,055,250 on 201 cows’ milk, for seven quarters, the milk will generate only $879,375 for the same period. The addition of one cow results in $170,625 of reduced revenue as a result of this milk tax.

Adding a cow is not the only way this could be triggered. Changes in ration, weather, illness, milking crew or any number of things can result in the half-a-percent change in production the one cow in the example created.

The proposal does not call for reduced milk marketing after the initial amount for a farm is set, so producers can reduce production without penalty. Obviously the confiscatory tax on growth of milk production means there will be no additional milk. Milk production will stagnate as will the development of technology to improve milk production.

Supply management will thwart the market-driven movements of milk production closer to consumer markets to reduce carbon footprints and create sustainability even when it is one farm closing in one area and moving to another. The cost of moving milk to the markets, almost entirely born by producers, will remain high.

Heifer markets will stagnate. Additions to herds will not happen. If someone were to risk any acquisition to build or grow a herd, the milk tax on growth will discount heifer prices to reflect the reduced income. The purchase of replacement heifers in growing herds sets the value of all heifers, whether purchased or grown on the farm. Banks limit loans to the value of cattle as established in the auction and other markets. Depressed sale prices means herds nationwide, even those owned by compliant farms, will see reduced wealth. By putting a government tax on herd growth, the demand for these additional cattle will be reduced. Reduced demand for cattle means lower prices; lower cattle prices mean lower value held by farmers.

Sexed semen use and Canadian imports will provide even more heifers to a shrinking market for the animals. These, now cheaper, excess cattle will be exported overseas to areas that will grow their herds unimpeded as they meet the growing demand for milk products, which the U.S. dairy farmer will necessarily have to abandon under supply management.

This reduced volume will not hurt the big producers, but the small ones. Small- and medium-sized farms poised to grow to meet the needs of the next generation will face a tax substantial enough to end any hope for that family restructuring to remain a dairy producer in the future. A farmer wishing to retire will not be able to sell his base. Instead, whomever buys his herd will pay the lower price as indicated above, because those animals to the buyer will be extra marginal cattle and impose significant extra costs.

The dairy industry is in rapid change. Most of it comes from forces outside of dairy – changes in products, marketing channels, customer preferences and the economy in general. Removing the necessary flexibility to size and to locate dairies profitably in order to meet these changes will harm the dairy industry in general and farmers in particular, all of them.

No changes in policy can solve today’s dairy dilemma. Reaching out and taking hold of any idea for the future is not avoiding the problems for the future but can very much be the cause of even more serious ones.

As tough as times are now, dairy producers cannot accept just anything. Rationally consider the long-term consequences of what is proposed. Look carefully, otherwise that tool may be the swinging monkey wrench coming at your head. PD

Ben Yale Attorney at Yale Law Office

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