Guest Editorial
Opportunities? Maybe…

by John Jeter

John Jeter is president and CEO of Hilmar Cheese Co. He contributes this column exclusively for Cheese Market News®.

We are all aware of the very different and dynamic world dairy situation that has driven dairy prices to record levels. As we try to adjust our businesses to these new dynamics, almost all agree that the United States is in a great position to play a much bigger role in world dairy trade in the future, rather than sitting on the sidelines as we’ve done in the past. The United States has one of the largest incremental areas of arable land with potential to produce much of the world’s new dairy product needs in the years to come — at least the demand that will be met through global dairy trade. Additionally, we have some large, established milk production regions that may have growth potential as well. Conversely, the European Union (EU) is much more limited in their growth opportunity, and Oceania as a region has not met the production predictions of five to eight years ago. Many, including this author, believe that the United States has the potential to be the supplier of choice for incremental dairy products to the world — not to mention the amazing opportunity we have by being in the middle of one of the largest, most sophisticated and safe food systems in the world — the United States.

With this potential opportunity ahead of us, a critical question is “what is going to stop us from moving forward to take advantage of this?” An important corollary to this is “what has kept us on the global dairy sidelines in the past and do these same barriers still exist?” There may be a connection.

First, a quick look back …

When most U.S. dairy policy — and all agriculture policy for that matter — was designed in the 1930s, it was really in response to the Dust Bowl, the Great Depression and the fact that the majority of the U.S. population was involved in some way in production agriculture. Giving agriculture and dairy a stimulus and supports accomplished part of what the New Deal was all about. The problem is that U.S. agriculture policy, in particular dairy policy, has essentially remained the same with only minor changes since the 1930s. And, as we are all aware, the world and U.S. food markets have changed immeasurably.

U.S. dairy policy was designed to mitigate risk and protect farmers because no real valid cooperative movement existed during that time. However, once valid cooperatives were formed, policy did not change. In fact, these same risk-mitigating policies became even more deeply imbedded. The result was an industry that was risk adverse and not well suited for new opportunities or threats — be they in the United States from soy, bottled water or bellywashes for share of stomach; or overseas from less regulated, low cost producers; or the EU where dairy policy had a much less regulated price surface and had a component that recognized the importance of international markets. The cornerstones of U.S. dairy policy — regulated, classified, pooled prices and the support program — created an industry and leadership culture that largely focused on managing pool proceeds and margins while minimizing risk through use of government supports. Simply put, a significant amount of human and capital resources were spent on the wrong things over many years. The result, as one eminent dairy philosopher put it, “if you were good, you could win the 100 in 14 flat.” And that is not a compliment …

The system worked for a while when we in the United States just competed with each other. The problem is that we are now in a world where we have to compete with a whole new class of competitors. One set of competitors includes the non-dairy beverages and ingredients that have invested in new products and directions over a long period of time. The other set of competitors includes large, global dairy companies found in Oceania and the EU where they have a far different approach to dairy policy — an approach that required a devotion to the development of resources and competencies associated with global dairy trade. The results were competitors who have a deep understanding of where their products could and did fit into the sophisticated food systems throughout the world, and the resources and capabilities to get them to market. One might say that their long-term success depended on it. Success in our system in the United States depended on how to get the regulators to adjust make allowances and pooling requirements with a focus on products that were treated most beneficially relative to the classified price and supports.

The unintended outcome of this was that many dairymen and dairymen trade associations did not understand the long-term importance of investment in products, markets and customers and began to focus on the regulated price to enhance revenue at all costs.

The current whey factor built into the regulated price for milk going into cheese is a perfect example. All incremental revenue from a cheesemaker’s whey operation, after paying the manufacturer to make it, goes to the dairymen via the regulated price. But, actually, there is one more step — the revenue is pooled before it is paid out, which further blunts any economic signals. Using the regulated price to capture whey revenues via the classified price and then redistributing them in pools has gutted the cheese industry over the past two years. It was the ultimate in government intervention and has sped up consolidation of the industry to the detriment of many.

As is typical in today’s thought, the regulated price was viewed as a way of increasing revenue, which it is not. The regulated, classified price only divides revenue and re-allocates economic resources. It does not in any way create value; it just distributes it differently. And for that reason alone, it must be de-emphasized and diminished if we are to survive and thrive in this dynamic global dairy economy ahead.

If we continue to have a regulated price, it must be low and not intrusive. We need manufacturing milk prices created from surveyed, transparent, market transactions that incorporate the unique risk and market elements of those involved. Economic resources will then be allocated very efficiently as a result. The market will work and we, the U.S. dairy industry, will work in the global market and capture a very fair (earned) share of the opportunities ahead.

Critical to this issue is the current milk hearing in California. The original request for the hearing came from a group of cheesemakers asking the California Department of Food and Agriculture to eliminate the whey factor and step away from the regulation that has devastated the cheese industry and created chaos. Then the alternate proposals came from those focused on the classified price and pooling system as the answer/end all. In almost every case, the proposals are actually more regulation via new credits or price classes. These would add complexity and ultimately say that regulators can allocate resources better than the market. More price classes and credits in the pooling system are not the answer. We clearly need to reduce and simplify.

The U.S. dairy industry is at a critical juncture. Will we continue down the path we have been on or will we take some big steps toward charting a new course? Will we move closer to the marketplace allocating resources, or will we continue to think that regulators can do it better?

Opportunities? Maybe…

CMN

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