Guest Editorial
Modern times

by John Umhoefer

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

Necessity drives change, and the accelerating globalization of the U.S. dairy industry can no longer tolerate antiquated systems.

In 2007, world demand for dairy and volatile supply changed the U.S. dairy industry nearly overnight. The industry’s methods for discovering the price of dairy products, for determining a value for milk and for altering these models crossed from tolerable to harmful for business.

The consensus for change was palpable at the U.S. Dairy Forum in January. Diverse panelists from John Wilson, senior vice president, Dairy Farmers of America to Mike McCully, associate director, Kraft Foods found agreement on several issues. For example:

1) The weekly NASS survey of dairy product prices, lagging weeks behind the spot market for cheese, “are the Achilles heel” of milk price formulas, Wilson stated. Wilson and other Dairy Forum panelists agreed with McCully’s call for daily price reports from industry, channeled through NASS, to provide timely data.

2) Futures markets offer a less volatile alternative to cash markets for setting a milk price. Panelists also agreed that futures markets for milk components – butterfat, protein, other solids – may function better than product-based (e.g. cheese) futures.

3) Price discovery for nonfat dry milk and whey is far from transparent with multiple announced prices including imprecise “price range” surveys.

Kraft’s McCully noted that with clear, immediate information on product prices, federal milk market order price formulas are not needed. Manufacturing milk prices could be deregulated, and the enhanced value of bottled milk could be pooled in the form of price differentials.

Two industry committees are exploring changes to federal milk marketing orders. National Milk Producers Federation is looking at detailed solutions, Dave Fuhrmann, CEO of Foremost Farms stated at the U.S. Dairy Forum. “Federal order reform is not a unanimous idea among the cooperatives,” he said. Their committee is examining a reduction in the number of milk classes and alternatives to end product pricing formulas. “The value of whey really messed with our industry” in 2007, Fuhrmann said, adding that his own cooperative’s investment in value-added whey processing was penalized by a milk price formula that uses the dried whey price.

At International Dairy Foods Association, a similar committee has consensus on the need for fewer milk price classes and the need for simple, clear price discovery tools, said John Kaneb, chairman of HP Hood.

The need for swift changes to price discovery, to federal order price formulas and USDA responsiveness is clear. U.S. dairy markets now react quickly and directly to supply changes in the EU, reduced exports from Australia and demand spikes from the Far East. World demand for whey last year strained the utility of U.S. price discovery and milk price formulas to the breaking point.

And the globalization of the U.S. dairy industry is only beginning. Export volumes will rise and new partnerships and buyouts between U.S. and international dairy manufacturers will increase. The modernization of price discovery and federal milk marketing order has become imperative.

The dairy industry is challenged with implementing several reforms at once: a period of experimentation and revision to reach a clear, timely, and efficient pricing system. To facilitate new ideas, USDA should consider altering its decision-making model to allow for fast interim decisions that can be implemented while further bureaucratic steps plod on. For example, USDA could hold public hearings within 60 days after a proposed change to federal orders and issue an interim decision directly from the AMS Dairy Division within 60 days after the hearing.

Federal milk marketing orders are the clear impediment to new ideas such as daily reporting of cheese sales prices, or weekly reporting of milk prices or futures-based milk pricing. These tools have no place if classified prices and end product price formulas continue, and continue to defy change.

The globalization of the milk supply, of demand for milk, and of our very manufacturing companies is already influencing milk prices in the U.S. The modernization of U.S. milk pricing structures is vitally important to future investment and profit in dairy manufacturing.

CMN

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