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From The MPC Newsletter
Friday, September 9, 201
1

From 'Eastern DairyBusiness' and 'Western DairyBusiness': Commentary by Dairyman Doug Maddox
By Rob Vandenheuvel, General Manager

This week, a column written by well-known dairyman and Past-President of the Holstein Association, Doug Maddox, was published on the website of Eastern DairyBusiness and Western DairyBusiness.  The column, which delves into the industry debate over federal dairy policy reform, will be published in the hard-copies of these magazines in October, but thanks to their website, is available for readers now.  Many thanks to Doug Maddox and DairyBusiness Communications for this outstanding perspective on the decisions facing the industry over much-needed updates to our federal safety net policies.

Status quo or survivability?  Support for Peterson proposal is your choice
Dairyís three-year cycle points to another downturn in 2012. A policy discussion draft, based on the primary components of Foundation for the Future, is the best way to insulate dairy producers against it.
(http://dairybusiness.com/articles/2011-09-06/maddox--status-quo-or-survivability)
By Doug Maddox

As I reflect on the last 12 years, 2000 Ė 2011, one thing stands out. Volatility, with boom-to-bust years, does not favor the dairy producer. Dairymen have problems agreeing on anything. But, I think we all agree status quo is not a good option. Therefore, it puzzles me that so many well-intentioned people are fighting the dairy policy reform draft for discussion put forth by U.S. Rep. Collin Peterson (D-Minn.).

First, I want to tell you that Iím supporting Petersonís plan, and here is why. The 3-year cycle (2000, 2003, 2006 and especially 2009) has drained U.S. dairy producersí equity. Most people agree another 2009, continuing the 3-year cycle in 2012, would be devastating.

Naysayer positions

So, why the naysayers? I think they fall into three categories:

  1. Those who want no supply management, in hopes the global market will absorb all of our production.

  2. Those who think the Peterson draft does not go far enough. They want a program guaranteeing dairy producers a cost of production, plus a profit.

  3. Those who donít trust the National Milk Producers Federation. They believe anything NMPF supports will favor the processor sector of the organization.

Letís take a good honest evaluation of the national dairy situation. First, assuming the status quo is not an option and another bust cycle would devastate dairy producers, then our No. 1 priority should be to prevent the next cycle from occurring, or at least mitigate it to the survival point.

If so, what are our options?

The only realistic game in town is Petersonís draft. Is it perfect? No. Is it better than status quo? You bet. Would I like to have my production costs covered, plus a return on investment, plus a profit? Of course, I would. Will I support those proposals if they get any support? Yes, I will. Should we try to improve all of the proposals to be more producer-friendly? Yes, that is our responsibility. However, letís not kill the only game in town. 

Peterson bill our only hope

Chances are the Peterson bill is our only hope of dairy reform this year. Next year, and the 2012 Farm Bill, could be another story. However, 2012 is a presidential election year. Traditionally, not much gets done in election years. Remember the 3-year cycle, and 2012. I hope all dairy producers will consider supporting Petersonís bill. It might be our only hope.

However, I think people are looking at Petersonís draft Ė based on the primary components of NMPFís Foundation for the Future program Ė incorrectly. We should be comparing this proposal to what we have now, not to what is on our wish list. Letís compare the proposal to todayís programs, and maybe suggest some improvement.

Everyone can have input

First, personally, I would suggest the Federal Milk Marketing Order reform piece be addressed administratively, instead of in this bill. I think it will go through an extensive hearing process anyway. So, we might as well start that way, so everyone can have input. Having it as part of this bill only makes it harder for dairy producers to understand. In fact, in my opinion, it will not in itself protect the dairy producer.

The Dairy Market Stabilization Program (DMSP, or market management) and the Dairy Producer Margin Protection Program (DPMPP) are key to dairy producers as a safety net. Without some form of supply management, we cannot address a long-term supply-demand imbalance, at least in a reasonable time. However, we have supply management now: 2009 caused a 4% drop in California milk production (-0.4% nationally) to help balance supply-demand. But, do we have to go through that economic pain to balance supply-demand.

DMSP is unique; it kicks in when margins are compressed, and disappears when either feed costs drop and/or milk prices rise. The criticism is that it is not proactive enough and should activate sooner, to eliminate as much volatility and producer loss as possible. I agree with this assessment. I would like to see it activate when producers start to lose money. It should activate closer to the break-even point. However, it should be noted that we have no proactive supply management now, no protection whatsoever.

Global market concerns

The other criticism of any supply management is we should be prepared to produce for the global market. I also agree with that, and the trigger philosophy in the DMSP takes care of that need. If there is a profitable demand for milk, and demand and supply are in balance, we will not need to activate the DMSP.

However, one thing is certain: Producers donít want to take all the risks in supplying the global demands. At a Rabobank meeting recently, the talk was all about supplying this market. They also warned to be prepared for more volatility in the world market. As producers, I can guarantee we will produce the milk if the price is profitable, but should we be required to produce at an unprofitable price?

That leaves the margin protection program. Personally, I like insurance, and I like this part of FFTF as is. It sure beats the Milk Income Loss Contract program, a welfare program, and the Dairy Product Price Support Program, which is completely outdated. DPMPP is similar to other crop insurance programs, so it is not new to USDA. It does not guarantee a profit, but does provide a safety net to mitigate the losses.  It is far more cost-effective than other risk management schemes available.

Currently, national feed costs are about $13.00/cwt. If you buy up on the supplemental margin insurance to a $6/cwt. margin for 15.5Ę/cwt. on 90% of your milk, your safety net would be $17.80/cwt. on 90% of your milk. Obviously, that does not correlate exactly to Californiaís milk price, but here are the other options at this current time.

While it is not perfect, it definitely is better than status quo and cheaper than risk management on the Chicago Mercantile Exchange. Everyone recommends dairy producers use risk management to mitigate the losses of a volatile dairy industry. My vote for risk management is DMSP and DPMPP. Hopefully, we will not need margin protection with a proactive DMSP. Our goal should be that the insurance is not needed, and is only there for use in a catastrophic situation.

Now is the time for every dairy producer to step up and be counted. It appears to me the choice is status quo or survivability.

Doug Maddox, a Riverdale, Calif., dairyman, is past president of Holstein Association USA.

 

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