Guest Editorial
Perspective:
Industry Issues

Much ado about price volatility

Connie Tipton

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

Why is it that when things go awry on milk prices no one ever thinks the pricing systems and other government programs already in place are the problem? Instead, we try to put a band-aid on top of broken programs. Right now, a number of ideas are being floated to deal with the current cycle of low milk prices. How about asking if the current pricing system is actually causing the problem?

Consider this: we have a system that guarantees all producers a blend price, which goes up and down depending on the amount of milk that is marketed for all dairy products and ingredients relative to the amount of milk being produced on the farms. Farmers can count on the blend price but ignore whether or not a market exists for their milk. And market signals are actually masked by the system itself.

The problem with how this works becomes clear with a recent example. In October 2008, the U.S. government started to buy nonfat dry milk under the milk price support program (another program that isn’t working very well to help dairy farmers), but the national all-milk price paid to farmers didn’t drop until five months later in March, when they received their February milk checks. During that five-month lag time, milk production grew on a year-over-year basis, but it shouldn’t have because there wasn’t a home for that new milk. Keeping supply and demand out of the decision-making process, as is the case under the federal milk marketing order system, is one of the root causes of price volatility for the dairy industry.

Some are advocating that we put in place a new government bureaucracy to dictate how much milk each farm can produce so we don’t have the problem of oversupply. But I have a different idea, one that puts the farmer in the driver’s seat instead of a government bureaucrat who tells you how much milk you can produce. Let farmers negotiate quantities to produce and sell with their co-op or processors who then can pair that volume to a profitable buyer. That way we can continue to develop new markets, grow our dairy industry overall and avoid the risk of pricing ourselves out of global markets that are sure to bounce back.

This scenario illustrates how business is conducted throughout our economy. What’s so different about dairy? We have a managed price system that provides equitable prices to farmers, but it does nothing to move milk to its highest value use. And clearly it is not helping farmers maintain prices at any particular level; it just makes prices “fair” to all.

Imagine what would happen if farms and cooperatives contracted with customers who either can process that milk for markets they have developed for dairy products and ingredients, or can process and sell it to their own customers directly. And what if they could enter into long-term contracts that provide reliability of price and quantity to the farmer or cooperative as well as to the customer? Instead of a guaranteed blend price, producers would have, in essence, a guaranteed buyer at a known price that is negotiated freely.

Add the feature of making these contracts over a long term, say two to five years, so supply and price are both known quantities. Sure, there will be ups and downs in the market, but the idea here is to even out the price over time — for both sides of the buying equation. Under such a scenario, if the farmer wants to produce more than the buyer wants, he either finds multiple buyers or adjusts production. If you want a market-oriented supply management program that works, this is it.

A crazy idea?

It is my belief that the dairy industry must come together to revise the complicated pricing structure that exists under the federal milk marketing order system. With the right changes in place, dairy farmers, cooperatives, processors, manufacturers and marketers would be able to plan their business operations and stop being victims of a convoluted system that does nothing to provide the “orderly marketing” it was designed to achieve.

Now is the time to buckle down and fix this 70-year-old, outdated federal milk marketing order system once and for all. Everyone from farm to table would be better off.

CMN

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