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3 open minutes with Erick Coolidge and Andy Novakovic [EXTENDED VERSION]

PD Editor Walt Cooley Published on 21 April 2011

Progressive Dairyman Editor Walt Cooley discusses the Dairy Industry Advisory Committee report’s findings with committee leaders Erick Coolidge and Andy Novakovic. This online article contains more of the interview than what was printed in the May 2 issue of the magazine.

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Q. Tell me about the name of your farm. – Le-Ma-Re Farm. That’s a unique name.

A. COOLIDGE: My father desired to attach a prefix to any animals that we would register. He thought he would like to include the first names of our family as the base for the prefix. Lynn, my father, and Erick, myself, make up the “Le” in Le-Ma-Re Farms. “Ma” stands for Mary, my mother, and “Re” is for Reba, my sister.

Q. And you’re a fourth-generation dairy farmer, correct?

A. COOLIDGE: Yes. Our son, Derick, as of a year ago, is now the fifth generation on the 700-acre, 240-cow Le-Ma-Re Farms located in Coolidge Hollow, Pennsylvania.

Q. Why do you think you were appointed to this committee?

A. COOLIDGE: Pennsylvania Congressman Glenn “GT” Thompson called and indicated that he would like to ask me to consider the nomination to be a part of a committee that USDA Secretary Vilsack was about to appoint, and I immediately, very graciously, said to him, “Congressman, I am very flattered, but I have three or four people I’d like to recommend that would have a good shot at it.”

I got about to the third name, and he said, “Let me interrupt you, Erick. I did, however, call and ask if you would accept my recommendation to be nominated.” I told him that I was sure it would be a long shot. He said he respectfully understood, but we’d go with it anyway.

Q. What was your reaction when you were chosen as a vice chairman of the committee?

A. COOLIDGE: It’s difficult to put that into words other than to say I was extremely humbled. When I was asked, I indicated that it would be an esteemed pleasure and privilege and I’d do my best. I must offer that it has been an education for me and still is.

I certainly respect and admire Andy Novakovic, the committee’s chairman. Because of his demeanor and leadership capability everyone followed, including myself.

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Q. What subcommittee had the hardest task?

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A. NOVAKOVIC: Subcommittee A, that looked at existing programs, probably had the most frustrating task, because it turns out that there isn't a whole lot one can do to mobilize existing programs in times of unusual stress.

I think an argument could be made that there are things that could be done which could make a difference, but getting budget permission from the Office of Management and Budget is a high hurdle, and even under the most optimistic scenario, what USDA could do would soften a hard edge not make the problem vanish.

The other two subcommittees, B and C, were organized around the two charges – dairy farm profitability and milk price volatility, but in the end they both talked about much the same issues and solutions.I don't think either one had a harder job.

Q. Andy, early in the process you told the group to focus on root causes not symptoms. Which symptom do you think the dairy industry most usually confuses as a cause of volatility?

A. NOVAKOVIC: One of our members frequently reminded us to drill down to what she called root causes. Her point was that something like low international prices on powder might be a proximate cause, but a root cause might be insufficient free trade or price regulation that inhibits the flow of goods in response to demand. This is only an example, not an analysis.

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There is also the issue of cause versus effect. Does price volatility cause supply and demand imbalance or does market imbalance cause volatility? The flip side is if one wants to fix this, does one try to fix volatility so that market balance is easier to maintain, or, does one need to fix market imbalance in order to restore stability?

Countercyclical payments or margin insurance is more appealing if you believe the former. Growth management is more appealing if you believe the latter.

My own view is that the U.S. has become much more susceptible to fluctuations in world supply and demand since the enactment of the Uruguay Round agreement in 1996. We are a big boat but we are now on a big ocean.

2009 shows us that we can really get swamped with a strong demand-driven wave. 2007 and 2010 show us that we can get a strong tailwind when there are major supply shortages elsewhere.

I think we have to think hard about how much we can control U.S. conditions to offset fluctuations in world markets. Maybe we might think of these world market conditions as a “cause” in contrast to U.S. prices as the “symptom.”

Q. After hearing all of the testimony, what do you think are the symptoms of volatility and low profitability? What are the causes?

A. NOVAKOVIC: The first thing about which we all ought to be fairly clear is what do these words mean. At least for my own use, I have defined volatility as involving three basic characteristics of price (or potentially any other economic variable).

One is uncertainty – not being able to predict with much accuracy what is going to happen to price in the fairly near term – say the next six to 12 months. A second is instability, which is simply to say that price bounces around a lot and the bounces are pretty high.

The third is adequacy. This is the most subjective of the three descriptors but it gets at the notion that all this bouncing around results in price levels that are at least occasionally painful – and this applies to the buyers on the upside as well as the sellers on the downside.

The "inadequacy" of price of course also relates to the issue of low profitability. Again, profitability is a word that sounds simple enough, but in fact really deserves more discussion and thought than it gets. As you may have noticed in our report, we spent a fair amount of pages talking about what is profitability and how do you measure it (similarly for volatility).

I used the concepts of the Farm Financial Standards group as references for this discussion. One thing they are very clear about is the difference between concepts of solvency, liquidity, profitability and the like. Many farmers complain about the lack of profitability, not only short-term but also long-term.

It is not so clear that there is, or even could be, evidence of long-term inadequacy of profits for the industry as a whole. Often the evidence given for lack of profitability are actually cash flow measures, which relate to liquidity, not profitability.

When people invoke debt indicators, they are in the realm of debt repayment capacity or solvency, neither of which is a synonym for profitability. While all of this probably sounds a bit too esoteric or fussy in an accounting/economics sort of way, I do believe it is necessary to be clear about such matters when one is formulating policy.

For example, I'm not sure the U.S. government can or should do anything to subsidize or try to guarantee profitability, but it is much more feasible to think about how to help with cyclical liquidity, cash flow management and solvency problems.

Also inherent in a discussion of symptoms or evidence of high volatility and low profitability is some standard of tolerance. We had quite a few discussions about whether we were trying to fix 2006 (a "normal" low period in the emergent dairy cycle) or 2009 (an extraordinary period).

As you might imagine, we did not agree about this and ultimately did not seek a definitive statement about it. This is one of the reasons that we had such a strong split about growth management.

One of the ways in which I tried to get the group to think about their own "tolerance" was to ask them to consider periods of time in which they felt volatility was too high versus other times when it was OK. Similarly for profitability – by whatever measure they felt appropriate.

My idea was to say that if one could identify 2000 to 2006 as acceptable, then one could identify objective measures of the boundaries of volatility and profitability and use those as goals or goal posts for policy, for example.

I didn't get much traction with that idea either, but I still think it is a way for anyone to approach the general question without getting bogged down by specific statistics or financial measures.

In terms of symptoms and testimony, it is clear that no one will argue that 2009 crossed a line in terms of profitability or that 2007-2009 defined an extreme on volatility. For most, those events are sufficient to say that we need a safety net that is stronger or has smaller holes.

I think it is clear that our committee wouldn't have been appointed if 2009 hadn't happened or looked more like the last two downturns (2006 and 2002-2004).

Personally, I don't think we are able yet to put a measure on when volatility is too high, but I also think that actually the problem that bedevils producers isn't really volatility so much as it is inadequacy.

I think a lot of farmers will tolerate, even embrace, a fairly high level of instability (they like the highs and know that the lows force them to get better) but when the lows are so deep that the farm can't cash flow or has nasty problems of insolvency, debt repayment and jeopardizes their ability to get operating loans, then it is a problem that goes beyond the normal bounds of good management.

Similarly, I think the more useful way to think about profitability is to focus on liquidity and solvency, not profitability per se.

As you noticed, the committee talked about such things and decided that milk returns over feed costs was probably the best measure and compromise between something meaningful and something quick. Our agreement on this was actually quite broad.

There were a few folks who wanted us to push harder on ensuring profitability, as in the real cost of production is $20-25-30 per hundredweight sort of thinking, but most of us couldn't go there.

Q. Before the committee began its work, Erick. You received two interesting letters. Tell me about them.

A. COOLIDGE: I received two similar letters after I was appointed to this committee. They asked me to do two things – to work collectively and cooperatively to resolve extreme volatility and at the same time not forget the little farmer. I tell you, that was not the case at all.

I mean, we had Jim Goodman with 38 cows who is an organic producer and we had Tim den Dulk with investment in 60,000-some cows. Clearly there could have been a division, but there was not.

Q. Take me and other listeners behind the scenes. What was the tone, the attitude of the participants, the number of comments, etc.?

A. COOLIDGE: When we gathered, each meeting was the same – no personal agendas, clearly accepting the charge and the task that Secretary Vilsack had placed before us – to look at volatility and profitability as two key points. Andy created a third leg for discussion purposes, and that was sustainability.

Everyone came with their unique and very important ability to express their experience, their knowledge, their professional background, and I’m not going to deny that there were conversations that were very strong, but that’s what a committee does when it comes together to create an outcome that is going to serve an entire industry.

Q. What did you learn about the interests of other dairy industry stakeholders from listening to their comments on the committee?

A. COOLIDGE: Without question, I benefitted from hearing firsthand from producers in different regions of this nation. For example, about milk-deficit regions, I’m not an authority on this topic by any means, but in matters like this I tried to capture in the debate or in the discussion an appreciation of a host of needs to be taken into consideration.

Q. Growth management – why was it one of the most controversial topics?

A. COOLIDGE: Everyone asks that question. I’m glad to be able to speak to that. The supply management or growth management is controversial just even from its wording.

In essence, you are saying to producers you’re going to tell them what to do, but what if we have a young man or a young woman who wants to be actively engaged in dairy production? Should we tell them how much to produce and whether it’s a good time to enter the business?

I’m not so much in favor of saying that to anyone, but who owns the responsibility of producing a product when there may not be enough demand for that growth to take place? Who owns that? I think we do as producers.

This country was built with choice and entrepreneurialism and the attitude of: “Heck, dang the torpedoes, we’re going to do what we’re going to do.” It’s very important that we don’t lose that kind of outlook and attitude about our industry.

I know why I voted in favor of supply management. It was because we all need to stay constantly aware and own the decisions we make.

Q. How would you grade the committee's work to identify causes not just symptoms?

A. NOVAKOVIC: I'd give us a B. We worked hard on this. I think we did as much as we could given our time frame and expertise. I do believe that it would be very useful for a group of technical experts to spend more time noodling on specifics.

This would not be a group to make a decision, but rather to flesh out specifics that policy makers could think about and react to.

Bob Wills, our only dissenting vote on the report, dissented primarily because he thought we should have done more to get to root causes. Other folks were equally keen on thinking hard about root causes but felt that the report was a fair reflection of the diverse views of members and that we had covered the ground adequately.

Q. What do you hope will come from this report?

A. COOLIDGE: I hope the legislators who will craft the 2012 Farm Bill find merit in this work, to include it, to use it as a guide in decision-making.

Q. Who did you meet through the committee that you’ll most likely stay in touch with throughout the next upcoming years, and why would you pick that individual?

A. COOLIDGE: Before I leave this good old earth, I hope to have a chance to visit these individuals one at a time. The one person I think everyone will agree was most interesting and was just a pleasure is Ricky Williams, a producer from Georgia.

He probably captured the interest of all of us. I still smile as I think of him and his Southern dialect. PD

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