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1709 PD: Watch out for blind spots

Ben Yale Published on 19 November 2009

Everyone knows that the highest- paid position in pro football is the quarterback. But who gets the second highest pay on an NFL team? Forget about the flashy names of runners and receivers or even kickers and punters. Don’t think about the defense either. The second-highest-paid position is the left tackle.

The reason is this: His job is to protect the highest-paid position from his blindside. When a right-handed quarterback is stretched back to throw, his orientation blinds him to his left side, making him vulnerable to a defender coming from the left. These left tackles are a special breed. Big enough to fill a doorway bottom to top and side to side, fast enough to outrun most people, agile as a dancer and smart.

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These players are seldom named. But without them, the best play design and execution is vulnerable to loss. Without someone defending the blindside, the highest-paid player, the quarterback, and the team are at great risk.

In the dairy industry, we have a tendency to look at the obvious, sometimes more glamorous, aspects of our industry. There is constant talk of prices of NDM and cheese, cow numbers, supply and demand. But it is the unglamorous, sometimes forgotten or even unknown, factors that come out of the blue, the blindside, and wreak havoc on our prices and our livelihood.

You do not have to look at sports to understand the risk of being blindsided. You are driving down an interstate and seeking to move to the left. Nothing shows in the mirror and the lane looks clear, but as you move your Suburban to the left, HONK, a car tells you the place is taken. Where did that car come from? It came out of the blind spot.

Historic, non-dairy events blindside us. In the months immediately following September 11 attacks on Washington, D.C. and New York, milk prices tumbled almost $4 per hundredweight. Last year and half a world away, the melamine poisoning of milk in China ended milk sales. With the end of the Olympic economic boom, and the world economic crisis, the melamine scare reduced Chinese imports of dairy products to a near zero. Fewer imports, fewer U.S. exports, surplus milk, and lower prices all resulted.

Government actions blindside us. One of the best tools to protect producers from price volatility is the use of the futures and option markets to their advantage. The sudden, and unexpected, change in the support prices by USDA this summer chilled participation in the milk futures. In response, futures through August 2010 dropped an average of 30 cents from their positions before the announcement. Continued talk of new government program initiatives, market participants no longer allow themselves to be blindsided. As a consequence many are staying on the sidelines. After September Class III prices settled, open interest in Class III futures hit its lowest level in almost four years as players await the government to announce the new rules.

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Not all surprises are bad. As everyone talks about helping dairy prices with programs such as DEIP, increased support prices, more cheese purchases and increased cow slaughters, forgotten dry whey moved from 15.67 cents per pound to 29.25. With a multiplier of 5.86, this increase contributed almost 90 cents to the increase in Class III from $9.31 to $12.11. When Class III formulas were established late last century, the assumption was that adding other solids would generate an added value of about 25 to 50 cents to the price. But in 2007, the dry whey price reached as high as 60 cents in 2007, contributing over $3 to then- record-high prices. No one saw that coming.

What goes up can quickly go down. Early this year, the other solids component price was a negative number. Dry whey shows that our domestic dairy prices are still linked to the global market. In its most recent Dairy Outlook, USDA forecasts by the end of 2010, dairy producers will produce net of farm use, 185.5 billion pounds of milk. At the same time, exports will drop from 26.6 billion pounds in 2008 to 20.3 billion pounds in 2009. These 6.3 billion pounds are the production from 315,000 cows. Even then, the export market still represents, for 2009, on a skim milk basis, over 10 percent of the market for producer milk, down from the high of 14 percent in 2008.

Besides exports, dairy product imports are an important part of the domestic pricing. Over the years our markets have seen a fairly steady to rising level of dairy imports. Currently imports of milk products will increase by 200 million pounds to 4.1 billion pounds on a skim milk equivalent basis in 2010. Imports would be greater if we did not have tariff rate quotas (TRQs) to limit the volume of such products.

The 1996 Uruguay Round Agreement on Agriculture has long and lasting impacts on U.S. dairymen today. The Agreement removed bans and quotas on products and in its place instituted the TRQs. TRQs combine quotas and tariffs. The quota component combines with a specified tariff rate (such as a rate per kilogram of product or liter of milk) to provide import protection. Generally, imports of products that come from specified countries within specified quantities during a period of time are subject to a lower, or even no, tariff rate. Imports above the quota’s quantitative threshold face a much higher (usually prohibitive) tariff.

TRQs for the U.S. can be found in the Harmonized Tariff Schedule of the U.S., HTSUS. These tables, ever changing, are available at http://www.usitc.gov/publications/docs/tata/hts/bychapter/0910C04.pdf, the International Trade Commission’s website. The most important part of the HTSUS are the notes. There are general notes regarding overall trade policy and there are notes specific to particular industries. These notes identify the special quotas and tariffs given to individual countries for imports. These notes show that under WTO agreements about 3.3 billion pounds of milk equivalent can be imported into the U.S. bilateral trade agreements (agreements between the U.S. and individual countries), and provide another 1.7 billion pounds of milk equivalent.

According to the Congressional Research Service, when all of these take effect over 5 billion pounds of milk equivalent can be imported without tariffs. The U.S. general tariff of 35 percent beyond those favorable TRQs establishes is not that much of a barrier to foreign products if domestic prices get too high relative to world prices. The real import in the blind spot is Mexico. Under NAFTA, Mexico can basically export dairy products into the U.S. duty-free. That is not happening now, but circumstances in our neighbor to the south could change rapidly for the better and with that a growing dairy industry challenging our domestic production and processing in the Southwest.

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Whether export or import, there are many ways in which the dairy industry can be blindsided. U.S. and global trade are greatly affected by the growth and stability of world markets. Just look at what the growth in China did for sales. Weather disasters, war, threats of war, terrorism, civil disturbances, and other kinds of hostility from man or nature can bring trade with a country to a halt overnight. The U.S. is not alone in the dairy industry. Overall global supplies and prices, changes in currency exchange rates, and other governments’ changes in support of agriculture can all result in changes in U.S. dairy prices. All of these illustrate just how vulnerable dairy pricing is to events domestically and internationally. These surprises can bring higher or lower prices. This uncertainty shows up in government estimates of future milk production and prices.

Each month different offices of the USDA combine to provide the World Agricultural Supply and Demand Estimates. As part of these reports predicting production, consumption and prices through the next year, USDA also reports the reliability of its reports in a 28-year record of the differences between that month’s projection and the final estimates. In September 2009, USDA said that changes between the projections for the month of September and the final estimate have averaged 2.1 billion pounds (1.3 percent), ranging from negative 7.2 to positive 6.8 billion pounds. The September projection has been below the estimate 16 times and above 10 times. Some months it has been more accurate. This wide range between projection and reality is the result of being blindsided by events not expected and not part of the economic models. The difference in the range represents a difference in the production of 700,000 cows!

Some people are today arguing that producers be limited to production based upon these projections. Some producers would be blindsided. Today some people are arguing for some kind of central control of the dairy industry. With different details, fundamentally they claim that a committee of producers can keep production and demand in line and prices high. With elaborate charts and plans, it looks like a winning plan.

It would be except for being blindsided. In this playing field which we call dairying and marketing, we need to be ever aware that things can come suddenly out of our blind side and turn the greatest designed play into a loss of yards or even points. We cannot protect against these events happening by making plans that ignore the probability of being blindsided. But we can, and should, take the precautions and steps to reduce or even avoid the losses associated with them. We need a left tackle. PD

Ben Yale
Attorney at Yale Law Office

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