Milk Producers Council
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From The MPC Newsletter
November 20,
2009

The Dairy Price Stabilization Program: Bringing it Back to Basics
By Rob Vandenheuvel, General Manager

Since the Spring of 2007, Milk Producers Council has been publicly advocating for a program that would give dairies an incentive to manage their growth in milk production.  The program has been called several things – Refundable Assessment, Growth Management Plan, and Dairy Price Stabilization Program – but the concept remained the same. 

The basic idea is that given the system of pooling we have in the U.S. where producers are paid the same for the last gallon of milk produced as the first, dairies have an inherent incentive to produce as much as possible, regardless of the market demand for dairy products.  This reality means that anytime we have balance in supply and demand (which results in a profitable price), every dairy across the U.S. has the incentive to produce as much milk as possible to “chase” that profit.  And given how quickly our industry can ramp up milk production, the response to profitable prices is an immediate and rapid increase in production.  Since we have no effective tool to get supply back in line with demand, we go through month after month of devastating losses, which eventually result in the necessary production decreases that get our milk supply back in line with demand.  This drives the milk price back up and starts the whole process over again.  That’s the “boom” and “bust” you’ve been feeling over the last ten years, getting progressively worse with each “bust.”

That’s where the Dairy Price Stabilization Program comes in.  It’s a tool that our industry can use to maintain a better supply/demand balance.  While MPC has spent considerable time and effort presenting the program to groups around the country and writing articles in our newsletter, my worry is that some of our readers still don’t fully understand the basic concept of the program.  So in an effort to bring everyone up to speed, I’d like to bring the discussion back to basics and explain the fundamental structure of the program.

First, the program would be governed by a producer board of directors, with the U.S. Secretary of Agriculture having the final say.  The Secretary and Board would announce two numbers prior to each quarter:

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An “allowable year-over-year growth” in milk production that any dairy can take advantage of without consequence.  (Cornell University has analyzed the program and determined that under normal circumstances, the program should allow production growth of 1-3 percent without paying any fee.)

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A “market access fee” that must be paid by any dairy that wishes to exceed the “allowable growth.”  (Cornell University has said that under normal circumstances, the program would work best with a market access fee of $0.50-$1.00 per hundredweight, assessed on all that facility’s milk for the first year of an expansion.)  All the market access fees collected would be distributed to the dairies that did not exceed their “allowable growth.”

And that’s it.  The rest is up to each individual dairy.  Under this program, every dairy across the U.S. would ask the same question: Do I want to expand my share of the market, and pay a market access fee during the first year of my new expanded production?  Or do I want to continue with my current share of the market, and collect my portion of the market access fees that are collected?  It’s that simple.

This is the point where folks start to ask more questions, and MPC has spent the last two and a half years answering those questions.  We’ve posted a number of frequently asked questions on a website started by the groups that have supported the program (www.stabledairies.com).  For those of you that want to explore the program further, I’d encourage you to go to that website.  But for the rest of you, the program is really that simple.  It’s about providing incentives, not government mandates.  It maintains the individual choice by each dairyman, but allows our industry to grow in a more rational manner.  And it gives our industry a tool to respond to sudden drops in market demand without putting our producer sector through another 2009, with equity losses to the tune of $1 billion per month for much of the year.

 

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