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1508 PD: Round and round, up and down we go

Ben Yale Published on 16 October 2008

Too low milk prices once again are rolling into local dairy farms.

High feed and fuel input costs make the low milk prices unwelcome, even hostile. Try as we may, these pesky economic forces invade us time and time again, always when we want them the least.

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Though clearly unwelcome, they surprise no one. In response to a year and a half of good prices, American dairy farmers produced more milk. Like a ball on a tilting board, raise one end up higher than the other and the ball will roll down. But knowing it is coming does nothing to reduce the pain and the anguish. Dairy farmers respond by avoiding buying what they can, defer what can wait and reduce the use of the rest; easy to say, difficult to do, painful to endure.

But these cycles bring something else predictable – a cry for a fix. The underlying assumption to this need for new policies is that the downturn is in itself a bad thing and removing the down cycle will be a good thing. The word cycle explains what is truly happening.

Put a small light near the rim of a bicycle and in the dark watch as the bicycle moves. Although in one respect, the wheel is going round and round, the light appears like a wave going down and forward and then going up, but still forward. The round and round of the wheel seen as up and down in the light moves the bike. The going down is just as important as going up to move the bike. Painful as it is, so is the downward pricing of milk just as important to the dairy industry as the upward pricing. It has the effect of cleaning out the excess milk in the system and bringing the system in balance with demand. Though low milk prices are bad because you cannot pay your bills, it is the low prices that bring us high milk prices. Together they move the industry further ahead.

Economists tell us there is too much milk for too little demand. That means low prices. Then, the cause is that they have produced the extra milk. After all it is their new farms, their herd additions, their new ration, and their additional milk that has caused the problem. Get rid of their milk, then the problem is solved, no more downturns, or so the logic goes. Let’s be honest, no dairyman today has survived without increasing his milk per cow and the number of cows on his dairy. When it comes to additional milk, almost every dairyman makes it.

The situation we are in is not the result of their actions, but our (as in us and theirs) problem. Like spokes on a wheel, every producer is linked to every other producer and we share the same cycle. Everyone uses the same animals, competes for the same feed, makes the same products and markets them in the same national, now international, market. But more than anything else, everyone of us is tied into a national scheme of pricing and pooling.

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National (not because it covers the country or the USDA controls all of it) but because the combined patchwork of pricing and pooling in the federal and state milk marketing orders impact not only their own marketing areas, but the rest of the country. These programs have been a partial fix for the down cycles of milk prices, and been successful at that. Primarily, they insulate individual producers from being the sole person on the bottom of the wheel when it turns by distributing the surplus milk and cheap prices among the entire market. In addition to and in conjunction with this process, producers have developed and maintained elaborate private cooperative marketing and pooling programs. From individual co-ops in one area to larger regional cooperatives to marketing agencies in common, super pools and other cooperative programs, all work to insulate individual producers and cooperatives from the downside risks of the marketplace.

No matter where located, every producer has benefitted from all of these programs. The response to that benefit has been growth, by everyone. The price for socialized sharing of risk is socialized sharing of wealth. While protecting producers from having less than their neighbor, these pools and pricing programs have also created an environment that both encourages growth but insulates individual producers from the true price of that growth. Without true pain, there is no true response to low market value, and more milk continues to be produced. As a result we have a bigger wheel, higher climbs, longer dips.

Besides protecting existing producers and encouraging (at least not discouraging) milk production, the pooling and pricing is open to all quality milk in the market. Thus by creating a protection against low prices, we raise prices and remove new entry and expansion barriers to those who wish to take advantage of the prices and markets we have created. There is no other industry in which someone can start from a green field and build a product-producing operation where his competitors have to immediately, and without question, share their best markets, pricing structure and income. And if it is milk the market does not need? All of the farms shoulder the cost.

The long life of these pooling and pricing systems is that the programs were effective at capturing the value lost by the inefficiency of the dairy industry. There were gaps in the wheel such as very small farms, comingled routes, plants and producers not located in the most efficient areas, wide swings in supply and countering those wide swings in the opposite direction of demand. Rather than let the wheel collapse or get stuck, the programs completed the circle and producers gained.

For example, the concept of two-tiered pricing (plants pay based on use and producers receive a uniform price) was a patch to avoid the disorderly marketing of milk by everyone fighting for the same, higher markets. The result was a more efficient movement of the milk for the benefit of products. Today, those gaps no longer exist or exist to a lesser degree. Nonetheless, the gaps of the past are still filled by government regulation, industry practice, and cooperative payment plans. The result is an inflated and misshapen wheel. The extra value attracts even more milk, the wheel turns faster and with more bumps.

The point of all of this comes down to several simple points: We cannot avoid the cycles of high followed by low prices. They are part of the natural flow. To move forward we have to move with the wheel and its ups and downs. Efforts to fix the system in the past are contributing to some of the problems today. Rather than add another patch to the wheel, we need to clean the wheel of all patches and see what, if anything, needs added. PD

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Ben Yale
Attorney at Yale Law Office

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