From The MPC Newsletter
The Fact Tell the Story - It's About the Milk
Implementing fundamental policy changes in Congress is a difficult task, no matter what industry you’re talking about. When in comes to dairy policy changes, “difficult” is putting it lightly. Yet, as we stand here today, the U.S. dairy industry has in front of us an opportunity to make dramatic improvements to our Federal safety net policies with a strong national coalition of dairy organizations and cooperatives supporting the policy proposal being discussed. For regular readers of this newsletter, you know what I’m talking about: the dairy provisions included in the recently-approved U.S. Senate version of the 2012 Farm Bill, which closely follow a bill introduced last year called the “Dairy Security Act” (a.k.a. the “Peterson-Simpson Bill”).
Of course, a strong national coalition of support doesn’t mean that support has been unanimous. For starters, a unified processing sector (largely represented by the International Dairy Foods Association, or IDFA) has pulled out all the stops to try and torpedo the effort. This opposition from the processors has been entirely predictable. They are understandably very nervous about a policy change that would empower the U.S. dairy producers to collectively respond to negative on-the-farm margins by addressing the fundamental driver of those negative margins – an oversupply of raw milk in the country.
In order to combat this unified opposition by the well-funded lobbying machine of the nation’s processors, it is imperative that the producer community stand as unified as possible behind the pro-producer changes being proposed. While that unified support is being realized by many of the dairy groups and cooperatives around the country, there continues to be individual organizations that voice opposition to the legislation for one reason or another.
One particular argument being made against the dairy provisions in the Senate’s 2012 Farm Bill is a criticism of the way the bill would calculate a national milk-price-over-feed-cost margin. As we’ve discussed many times in this newsletter, the Senate Farm Bill sets up a two-pronged approach to a Federal dairy safety net. Those two separate-but-interrelated programs are the “Margin Protection Program” and the “Dairy Market Stabilization Program.” Both programs rely on a monthly calculation of a national milk-price-over-feed-cost margin to determine when they trigger in and out.
An argument that has continued to crop up is an attempt to paint the milk-price-over-feed-cost margin calculation in the bill as “unfair” to one region or another. Regional politics are unfortunately a classic barrier our industry faces when trying to implement fundamental change to our Federal safety net policies. But are those arguments based on the facts? Fortunately for California, we have the benefit of some very reliable data being generated by the California Department of Food and Agriculture (CDFA) as to how our feed costs and milk prices have compared to what is being calculated in the Senate’s 2012 Farm Bill.
For many years, CDFA has conducted a survey of hundreds of California dairy farms to determine the cost of producing milk in the State. The recent results of those surveys can be found on CDFA’s website at: http://cdfa.ca.gov/dairy/uploader/postings/copcostcomp/Default.aspx. At the same time, we also have the ability to go back in time and determine what the calculated feed costs would have been under the Senate Farm Bill language. The graph below provides a glimpse into that comparison:
As you can see, there is a pretty close correlation between the feed costs reported in CDFA’s survey and the feed cost calculated in the Senate Farm Bill. Are they identical? No. There are times when the estimated feed costs in California are higher than the feed costs calculated in the Senate Farm Bill. There are other times when the estimated feed costs are lower. But on balance, over the past 17 quarters shown in the chart above (which covers the past 4+ years since the Congressional energy policies started dramatically impacting our nation’s feed costs), the average feed cost calculated in the Senate Farm Bill has averaged $0.27 per cwt above the estimated feed costs in California. Notably, since 2010, the average feed cost calculated in the Senate Farm Bill has been $0.77 per cwt above the estimated feed costs in California. So what exactly is it about the feed cost calculation in the Senate Farm Bill that is so “unfair” to California?
Now let’s look at the other side of the equation. Included in the Senate Farm Bill’s milk-price-over-feed-cost margin is the “U.S. All-Milk Price,” announced each month by USDA. This is a national average price that includes premiums, but doesn’t include hauling/marketing costs. For comparison purposes, we can easily use a very similar calculation made by CDFA called the “Statewide Blend Price.” So how does California’s statewide blend price compare to the national average milk price?
The graph above shows a very different picture than the feed cost comparison in the first graph. As you can see, California’s milk price is chronically and significantly below the national average milk price. In fact, over the same 17 quarters we looked at earlier, California’s statewide blend price averaged $1.45 per cwt below the national average milk price.
So what can we draw from this and why is it important? One obvious conclusion we can draw is that when comparing the margins being calculated in the Senate Farm Bill vs. the margins being realized here in California, the differences between the two calculations is almost exclusively driven by California’s price of milk, not our feed costs. In fact, California dairy farmers have actually seen lower feed costs in recent years than those being calculated in the Senate Farm Bill. So what should we be doing about it? We should be exploring ways to generate more dairy farmer revenue from the milk we sell! We had a hearing at CDFA just last month looking at that specific issue, and efforts like that must continue. Bottom line: We absolutely need the policy changes in the Farm Bill to help us with national milk price volatility, but Congress isn’t going to fix California’s milk price with the Farm Bill. That’s up to us to fix ourselves.
Opportunity like this to make much-needed positive changes to our Federal policies are few and far between. We cannot afford to create some perceived inequity on the feed cost calculation in the Senate Farm Bill (despite clear evidence that it’s our milk price that is driving California’s competitive disadvantage with our fellow U.S. dairymen) and allow that policy fiction to stand in the way of much-needed fundamental change. Our nation’s processors and IDFA have been benefiting from a successful “divide-and-conquer” strategy for years, and the results have been a river of red ink for dairy farmers.
In the coming weeks, the House Agriculture Committee will be debating and voting on their version of the 2012 Farm Bill. The dairy provisions in that bill are expected to mirror the dairy provisions in the Senate Farm Bill. We need as many dairy families and dairy organizations as possible voicing their strong support for that package of reforms to their elected officials on that Committee. And in California, we need to continue exploring ways to close the gap between our milk price and the prices received around the country. Our future depends on what we do today.
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