Dairy Solution Requires Balance
July, 17 2009
US dairy farms will produce 190 billion lbs of milk this year exceeding current demand by 4%, market response to this national oversupply has taken the price of milk per cwt from last year's high of $23.50 to its present low of $10.50 the farmers' cost of production is $17.50 cwt.
In their struggle to survive deplorable economic conditions over the past 6 months, dairy farmers across the nation have converted a lifetime of accumulated equity into $4.5 billion worth of loans. Included in this struggle are businesses within our communities which represent the infrastructure of rural America and characterize Vermont.
Today's dairy crisis began with last year's decline of export markets accounting for nearly 11% of our production and then dwindling to the current market level of about 6%. A depressed world economy effectively caused the consumer base to shrink thereby reducing demand. Last year's robust export markets were largely the result of weather events which created food shortages in some regions of the world while other regions produced for the increased market demand, those markets tend to exist briefly and then disappear, thus the crisis.
In order to make sense of dairy markets you must first recognize the importance of balance between supply and demand, something the dairy industry has struggled with for many years and something our federal government would prefer the industry solve itself.
Price volatility in the dairy industry comes down to our lack of a management plan which would effectively place controls on the national milk supply and keep pace with demand. While focusing on long term stability in the dairy industry there is a recognizable need for short-term relief, which could be achieved through a Milk Diversion Program.
The Cooperatives Working Together (CWT) program which offers participation in a whole herd buyout could be enhanced to include the option of a Milk Diversion Program.
Participation in a Milk Diversion Program could offer dairymen the opportunity to decrease their annual production by 10-30% and pay them $7.00 cwt for milk they do not produce.
A contractual obligation of 12-15 months would provide an escape clause should class III milk reach a trigger price of $17.00 cwt for 3 consecutive months, participants would then have the choice of continuing or not. The importance of such a program is to provide short-term relief to the farmer while removing milk from the market, during its first quarter of operation the Milk Diversion Program of 1984 created significant market response.
In draft form the Dairy Price Stabilization Program developed by Holstein Association USA calls for a mandatory national program to include all states and requires every licensed US milk producer to establish a milk production base.
The program will be administered by the US Secretary of Agriculture with an advisory board to include 2 dairy producers from each of 6 regions of the country, 1 consumer representative, 1 representative of dairy product firms, 1 representative of a fluid milk bottler and a dairy economist advisor to the board.
The board will meet quarterly with the US Secretary of Agriculture to forecast the market for fluid milk and dairy products which include both the domestic market and exports for each quarter of the next 12 months.
The board will also determine needed change in US milk production to balance supply with market needs for each quarter of the next 12 months.
The stabilization program does not penalize a producer who stays within his base but it does collect a market access fee for those who produce beyond their base. Finally, the stabilization program allows for new growth within the industry.
The Vermont based group Dairy Farmers Working Together (DFWT) of which I am a member, endorse this 2 pronged approach toward stabilizing the industry. On Monday July 20, 2009, we will offer testimony before a national milk board in Chicago
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