Guest Columnist / Editorial

John Umhoefer is executive director of the Wisconsin Cheese Makers Association. He contributes this column monthly for Cheese Market News®.

Life after federal orders

The dairy industry had a chance to rail against costly and slow federal order hearings at a meeting of the U.S. House of Representative’s Agriculture subcommittee on livestock, dairy and poultry April 24.

Committee chairman Rep. Leonard Boswell found the industry united for change. But at the hearing, USDA rejected the idea of timetables and deadlines for federal order hearings and decisions.

All this hand-wringing over the deep flaws in federal milk marketing orders is needless: If the dairy industry would sweep away all federal orders this year, the industry would face one year where the U.S. all-milk price would drop 17 cents and a second year where the price drop would be a mere 5 cents. By year five, six, seven and eight dairy farmers would actually make more money without orders.

Who’s spreading this milk price heresy? None other than Scott Brown, program director at USDA’s Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri-Columbia. Brown joined other nationally-recognized economists and dairy leaders for a panel exploring life after federal orders at the Wisconsin Cheese Industry Conference April 19. (Editor’s note: See “Industry envisions the landscape without federal order system” on page 1 of the April 20, 2007, issue of Cheese Market News.)

Admittedly, asking an economic model to predict a deregulated dairy industry is difficult, but FAPRI is USDA’s own impartial, non-partisan partner. Under a “no federal orders” scenario, Brown and other experts reasoned that premiums paid for Class I milk would weaken, but remain at levels of $0.50 to $2.00 around the nation. He noted that given today’s strong dairy markets, this analysis found prices declining much less and showing positive gains faster than previous “deregulation” scenarios he ran in 1995 and 2003.

Ken Bailey, associate professor of dairy markets and policy at Penn State University, joined Brown at the Wisconsin Cheese Industry Conference and he’s ready for change.

“There is growing frustration with the current (federal order) system. The time for change is here,” Bailey told an audience of about 150 cheese industry representatives.

Bailey suggested replacing milk price formulas with free market pricing based on good information. Milk buyers, like the meat industry, could submit to daily (blind) reporting of dairy product sales. This national sales information would be shared instantly, creating a benchmark for pricing dairy products and milk.

Cal Covington with Southeast Milk Inc., Belleview, Fla., told the conference that federal orders have failed to adapt to the unique marketing conditions in the Southeast.

“Long-term, we could live without federal orders in our part of the world,” Covington said. “Federal orders are a tool, and if they cannot be modified, we would make it without them.”

An attendee at the conference commented that this group of like-minded leaders made strange bedfellows. So be it. Federal orders are inept in a myriad of ways. In the Southeast, fluid milk is king, making up 85 percent of order sales. Population is increasing, but milk production is declining. Southeastern processors are concerned, Covington said, with balancing milk supplies with no balancing plants within 750 miles, handling seasonal variation in production, paying to transport milk long distances and hosting distant milk on their order.

After regional meetings to discuss dissolving two southeastern orders, “We got the attention of USDA,” Covington told the audience. USDA quickly called a hearing for this month (May 21), and area milk producers will testify in favor of higher Class I differentials, lower diversion limits and increased transportation credits.

Brown’s FAPRI model for eliminating federal orders finds that fluid milk sales increase, milk production drops slightly, cheese prices rise 3 to 5 cents per pound and butter increases 10 to 18 cents per pound in an unregulated market compared to the status quo.

Interestingly, the model predicts that Florida’s all-milk price would decline by about $1.20 while Wisconsin quickly recovers. After one year with a 5-cent loss, Wisconsin dairy farmers would see a 7-cent increase in the state’s all-milk price year after year. California also gains higher milk prices without federal milk marketing orders, according to Brown.

Eliminating federal orders would sweep away price formulas that force the cheese industry to produce commodity products, Jon Davis, vice president of Davisco Foods, told the audience. Davis lamented the high price of commodity dry whey embedded in the Class III milk price formula. Today, higher-value whey products such as whey protein isolate will not generate the dollars necessary to cover the Class III milk price.

“All the nutrition science, all the branding and marketing, all our investment in value-added whey products has to stop, because the government is telling processors to pay producers the dry whey price,” Davis said.

Bob Wills, president of Cedar Grove Cheese in Plain, Wis., is no fan of federal orders and described to the audience a unique advantage of the free market.

“One benefit of the demise of the orders would be an improvement in cheese quality,” Wills said. Under the market order, he said, companies have no incentive to improve the quality or service of commodity cheese, especially Cheddar. Expenditures on quality that result in price premiums feed back through the NASS price survey and result in higher milk prices for Cheddar and all other dairy products. With fixed make allowances that do not distinguish quality, Wills said, the primary objective for cheesemakers is to lower prices by using the lowest cost ingredients and highest moisture to stretch the yields.

After orders, Wills said, “producers will be able to make great Cheddar cheeses” without the fear of lost margin.

It’s time to replace milk marketing orders with modern information/risk management tools and the free market.

CMN

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