guest editorial/opinion
Perspective: Dairy Economics

Ken Bailey is associate professor of agricultural economics at Penn State and contributes this column exclusively for this week’s issue of Cheese Market News®.

Mandatory daily reporting: A possibility for the U.S. dairy industry?

The upcoming Farm Bill is a good time to consider alternatives to how we price milk. However, ideas to improve pricing and efficiency for the U.S. dairy industry via obvious comparisons to other industries often are met with polite retorts of “we are different,” “milk is perishable,” or “it’s more complex than that.” If all else fails, one can easily counter that such suggestions could lead to “disorderly marketing conditions.” That scares everyone who doesn’t know about milk pricing.

The problem is that we have markets that report daily and weekly dairy commodity prices, but it is very difficult to see how these prices result in prices that processors pay milk producers for their components. For example, the National Agricultural Statistics Service (NASS) survey of cheese, butter, nonfat dry milk (NDM) and dry whey introduces an unnecessary two-week lag in the pricing system. And USDA’s Agricultural Marketing Service (AMS) only reports NDM and dry whey prices once per week. The reality is we are heading toward a robust dairy market that demands daily reported prices for all dairy commodities. Futures contracts for Class III and IV milk, butter and dry whey trade every day. In addition, these futures markets must reconcile to announced federal order prices that are driven by the NASS surveys. Milk producers and processors rely on these markets. Wouldn’t it be better to have the market transmit daily transaction prices that are then used directly in federal order formulas? That way milk producers would know what their milk was worth every day and could better hedge their milk. There would be a more transparent link between the markets and the value of milk.

One idea would be to get rid of the NASS survey and require daily mandatory reporting of all dairy transactions (in terms of price, quantity, location and quality) for all finished dairy products. I also would suggest that milk buyers report each day what they pay for milk. Dairy farmers and cooperatives, processors, retailers, traders and speculators all would know what these dairy commodities and milk components were worth each day. There would no longer be any reconciliation to the NASS survey. By the end of the month everyone would know what the monthly average commodity prices would be and what the federal order class prices would be.

Mandatory daily reporting could apply to all transactions at the wholesale level that would involve a finished dairy product. That would include all fresh dairy products and manufactured dairy products such as cheese and butter. It also would involve other commodities such as bulk and condensed milk and dry proteins such as milk protein concentrate and whey proteins. Prices and sale quantities would be reported as well as location and quality grades (high heat vs. low heat, grade, weight, moisture level, etc.). Anonymity would be maintained during the aggregation process before the data is released by USDA.

At first glance this idea seems completely impractical. How could processors report each and every transaction daily to the U.S. government? Who wants to deal with the cheese police that would be asking for this information? The most obvious concern would be cost since it is the processors who would bear the reporting costs. Some would complain that such a reporting requirement would result in higher costs for staff, paper and typewriter ribbons.

But whatever the cost and effort required, processors also would benefit by receiving daily information from around the country about the value of milk and dairy products. The reality is that the livestock industry is way ahead of the U.S. dairy industry in terms of reporting. Beef and pork producers were concerned that consolidation in the meatpacking industry and greater use of contracts were resulting in less public market information and lower market prices. The result was the Livestock Mandatory Reporting Act of 1999 that requires mandatory daily reporting of all livestock prices for cattle, hogs, lambs and livestock products by meatpackers. The purpose of the legislation was threefold: 1) provide information that can be readily understood by market participants; 2) improve the price and supply reporting of USDA; and 3) encourage competition in the marketplace for livestock and livestock products.

Each and every day meat packers must report all livestock financial transactions electronically to USDA’s Agricultural Marketing Service (AMS) in Des Moines, Iowa. This information is then sent to a clearing house in Virginia where the numbers are crunched and made available back to AMS. AMS then reports the consolidated information daily to the marketplace. USDA’s AMS is doing a fantastic job of using the very latest technologies to meet the needs of the marketplace and should be congratulated on its efforts.

The U.S. dairy industry needs to take a more long-term view when it comes to milk pricing. First, price discovery today is hardly impressive. Cash cheese and butter prices reported by the Chicago Mercantile Exchange only represent a fraction of the transactions that actually occur in the marketplace. Spot prices for NDM reported each week by AMS are at a huge range that suggests there is not one price for powder.

And, there is credible talk that the federal order system may not be around forever. While it works today, there could be a day when farmers vote many or all of the orders out. If that were to occur, any replacement in terms of milk pricing would need good market information. Daily mandatory price reporting would provide timely information, improve price discovery, remove delays in price transmission and would greatly improve transparency in the pricing system. Milk producers and processors would be able to see the obvious connection between what occurred in the commodity markets and prices reported on milk checks.

At the end of the day it is the farmers who would benefit the most from mandatory daily reporting. In fact, I would argue that once they find out it is technically feasible, it is the milk producers who will clamor the most for such a change. The fact is there is great frustration and discouragement with the present pricing system among dairy farmers. Some of that frustration is understandable given the confusion in milk pricing and the lack of clear transparency. They see good prices reported each week by AMS, but can’t see how that translates into the milk check. Mandatory daily reporting would thus be a good starting point in making the present system more transparent and responsive to market conditions.

CMN

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