guest editorial/opinion
Perspective: Industry Issues

Connie Tipton is president and CEO of the International Dairy Foods Association. She contributes this column exclusively for Cheese Market News®.

Opportunity is knocking — Will we answer?

There are more signs than ever that we’re in a perfect moment to build a better safety net for dairy producers. Why should you — and all processors and producers — care, and what should we be doing? Why focus on a “safety net” rather than pricing issues — such as the Federal Milk Marketing Orders — that are creating problems in our industry right now?

Because all of these interests and issues are tied together, and tied to the industry’s health. The more I look at the state of our dairy policies and the great opportunities before us, the more I believe that building a better safety net is key. It can make everything work more effectively for producers and processors.

Consider this: How many of our battles over pricing issues really have to do, in the end, with a perceived concept of protecting and enhancing farm revenue? I would answer “all of them.” So a better safety net that supports our producers and that doesn’t interfere with markets will go a long way toward alleviating all of our other issues — from battles over classified pricing to the unintended consequences of the Milk Income Loss Contract (MILC) and Dairy Price Support programs.

And the signs are clear that we’ll be in trouble without change. Markets for corn and other crops are driving feed costs up. Energy policies that encourage more use of biofuels may put more upward pressure on feed costs. At the same time, energy costs continue to put pressure on farms and plants. The good news is that international demand looks great: Markets are driving prices for nonfat dry milk and other dairy ingredients to levels we’ve never seen before. All these factors are reflected in Class III futures prices at levels higher than we’ve seen in decades.

How will our current safety net perform in these times? If under the new Farm Bill, Congress just continues the current programs — MILC payments and the Dairy Price Support Program — neither will be effective in helping farms with their higher costs. Neither will help farmers with the on-farm challenges that must be addressed to ensure a stable supply and encourage market growth.

Here’s why: Current prices are predicted to average well above the levels required to trigger MILC payments. So dairy producers will have high milk prices, but with feed and energy costs up substantially, their margins will still be squeezed.

At the same time, the markets that are driving up nonfat dry milk and other ingredient prices will leave the Dairy Price Support Program without a purpose. Markets are working to use up our surplus production, so a government program ready to buy surplus at low prices is irrelevant. Keeping it in place is an illusion of security that doesn’t help farmers, and discourages investment in production capacity to meet the demands of growing markets.

And when there’s no real support and farmers’ margins are squeezed, there’s continued pressure to look to classified pricing and other failed ideas of the past — where processors have to pick up the tab. So the battles likely will continue unless we work on a better safety net.

Consider that right now USDA is examining a variety of proposed changes under federal orders that are hugely contentious, and that implementation of the make allowance decision is tied up in a lawsuit over input costs.

All of this feels more like Chinese water torture than a process that hopes to yield good business decisions for the U.S. dairy industry. Current government programs look to prices — minimum support price, MILC price triggers and classified pricing... and we’re seeing limited benefits and a big downside.

More and more companies and farmers are sick of it and want to make matters better. Can we find a better safety net? I believe we can.

I don’t think it’s a stretch to say that this current environment presents some real opportunities — despite the gripes about prices, and the gripes about organics and consumer demands for sustainability. As the joke goes about the room full of manure, I’m the optimist who sees the pony in there somewhere! And, in fact, our strengths far outweigh our weaknesses.

At the Dairy Forum in January, I spoke about ideas for a safety net that will promote healthy and sustainable farms, and will at the same time get away from looking to government programs to influence prices. These ideas include replacing current ineffective programs with a safety net that provides a combination of green payments to farms to promote good farm and environmental practices as well as revenue insurance that provides help when it’s needed, whether because of low milk prices, rising costs or some disaster.

Key to our proposed programs is the fact that support is not driven by current market prices or production volumes. In other words, these programs don’t end up messing with the marketplace, and they are more accessible to all farmers. Dairy farms can depend on support not only when prices are down, but also when prices are up and input costs are up. And some of this support, based on sustainability improvements on the farm, would give farms an incentive to invest in technology and good farm practices. Consumers and customers like these kind of investments (certainly much more than they like government subsidy programs) and might well buy more dairy products as a result.

As I said, timing is good, because we’re working on a Farm Bill where positive change can be made. But, more importantly, because the U.S. dairy industry needs to better position itself for the global opportunities before us. We can be a world leader, but we badly need to bring our domestic policies in line with today’s global marketplace to take that leadership role — and we need to act now.

Better policies — and fewer battles — are possible, but everyone must get involved. It will require the engagement of the entire industry to make sure our elected officials seize this opportunity and reform dairy programs in the 2007 Farm Bill.

CMN

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