Guest editorial/opinion:
Use market fundamentals — not milk prices — to guide business decisions

Connie Tipton, president and CEO, International Dairy Foods Association, is a guest columnist for this week’s issue of Cheese Market News®.

It’s time to look to market fundamentals — and not just milk prices — to guide business decisions in the dairy industry. To be sure, milk prices are an important indication of market conditions, but other factors, such as consumer demand and supply, play an equally important role.

Unfortunately, our industry has established a tradition of relying on government programs for short-term milk price gains rather than looking at market-oriented programs that can provide longer-range profitability. This is a short-sighted and dangerous path to follow, because it creates unreasonable expectations about what government policies can do and ignores market realities. Let me illustrate my point.

Three weeks ago, the National Milk Producers Federation (NMPF) petitioned the U.S. Secretary of Agriculture to ask for an emergency federal order hearing to consider a proposal to change the Class I and II price formulas. The petition argues that the expected updates to make allowances used in Class III and IV price formulas should not be reflected in the Class I and II price formulas. But adopting both the updated make allowances and the NMPF proposal would increase the difference between the lower Class III and IV minimum milk prices and the higher Class I and II minimum milk prices.

In the petition, NMPF is careful not to call this an increase in the differentials, but, in reality, that’s exactly what would happen if USDA adopted the proposal. Fluid milk bottlers and Class II milk buyers would be required to pay higher differentials than they do now for farm milk, widening the gap between these prices and the prices that those making manufactured products, such as cheese, would pay.

This raises two key questions about the motivation for the petition: 1) Is a greater differential necessary to get an adequate supply of milk? and 2) Will a greater differential for Class I and II uses lead the dairy industry to increased long-term profitability? The answer to both of these questions is a decided “no.”

A look at a few market fundamentals will support that answer.

According to data published by USDA’s National Agricultural Statistics Service, farm milk production increased by more than 60 billion pounds between 1975 and 2005; that’s an increase of 50 percent. The most recent forecast by USDA’s Economic Research Service anticipates that milk production in 2006 will increase to 182 billion pounds, 5 billion pounds above the record level of 177 billion pounds set last year.

At the same time that farm milk production was growing by more than 60 billion pounds, virtually none of this increase was needed for fluid use, according to data from USDA’s Economic Research Service. Between 1975 and 2005, for example, total fluid sales increased a mere 0.015 percent, with an increase of only 8 million pounds to 53,240 million pounds in 2005. The growing farm milk supply is clearly adequate to meet fluid needs, but demand for fluid milk products is stagnant.

Changing the Class I and II price formulas so that price differences are greater is not the way to increase the sales of milk and milk products. The International Dairy Foods Association has long advocated for changes in government policies and regulations that would allow the industry to improve sales and profitability by focusing on the changing demands of the marketplace and finding ways to meet those needs. Instead of looking to the government to increase the price for farm milk used in fluid milk products in the short-term, the dairy industry should work to move policies out of the way of the markets and employ our entrepreneurial spirit to build demand for milk and dairy products over the long term.

When we look to the future of dairy markets, we see that growing global demand, coupled with prices that allow the United States to be competitive in commercial markets, is already becoming a reality. The U.S. dairy industry has just begun to enjoy the benefits of export opportunities at commercial prices. This is a real change from only a few short years ago when our commercial prospects were limited, with only subsidized exports and large government purchases of surplus products available to clear the U.S. market.

The growing export of U.S. skim milk powder in recent years is one example of how the industry can meet global demand without relying on export subsidies. In 2004, total exports of powder more than doubled from 2003 to reach 511 million pounds, and nearly 80 percent of these exports occurred without subsidies. In 2005, there were no subsidized exports (and no purchases under the milk price support program either), and yet total U.S. exports of powder increased to 612 million pounds, representing more than 40 percent of all the powder produced in the country last year. Exports during the first eight months of 2006 are nearly on pace with 2005, sending 447 million pounds of skim milk compared to 461 million pounds last year, again with no export subsidies.

Additional opportunities for increased sales and profits certainly exist today. But the future of the U.S. dairy industry’s growth and viability lies in being able to meet the demands of the changing marketplace, both at home and abroad. Looking to the U.S. government to step in at every turn to “guarantee” higher milk prices keeps our industry from being truly competitive. If we want to succeed in the global marketplace, we need to stay sharp, focused and in touch with our customers; otherwise, we will not be able to compete effectively against other food products or substitutes for dairy ingredients.

Every segment of the U.S. dairy industry — producers, processors and manufacturers — can compete effectively and successfully as long we stay focused on market fundamentals. In fact, that’s the only way we can win.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.