What happened to supply and demand?

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When I took my first economics class in college, I was disappointed.

Instead getting to talk about interesting things, like why some people have a knack for making money and others have a knack for losing it, I was confronted with an endless array of theories and graphs.

One of the things I did take from the class was the concept of supply and demand — basically, the idea that prices will rise when supplies are limited.

However, that concept seems to be lost on many of the people I deal with.

Here in mid-August, Class III milk futures prices are skyrocketing due to the prospect of tightened supplies due to the drought — a classic case of supply and demand at work.

In the Aug. 14 edition of our daily newsletter, Dairy Herd Network, we ran an article on how Canadian consumers are flocking to the United States to buy milk because milk is cheaper here. Some of our readers — in the reader comment section — wondered aloud if this means U.S. milk is under-priced. A Canadian by the name of “Conlee” chimed in, “If the American dairymen want to get paid more for their milk, then they just need to cut production down. The market is flooded with milk and so it’s no wonder it’s worthless and so volatile. That’s why in Canada we have a supply management system. If you restrict the amount of milk being produced, then you guarantee a higher milk price. It’s simply supply and demand.”

For months, I have been an advocate of the legislation now in Congress (which has been approved by the U.S. Senate and the House Agriculture Committee) that would provide insurance to dairy producers to protect the margin between milk price and feed cost. Most everyone can agree with that. Yet, the legislation has become somewhat controversial because it contains an element of supply management. The supply management aspect would only kick in during tough economic times when the margin between milk price and feed cost is really tight. There is continuing dissent in the industry over this feature.

Despite the fact the U.S. Senate and House Ag Committee have given approval to the margin insurance concept — yes, with an element of supply management thrown in — I still hear from people who haven’t given up on alternative proposals.

I just don’t understand it. Supply management in the tempered form now before Congress would help support dairy prices when it’s needed the most — when margins are tight.

Let’s stick with the time-honored concepts that have served businesses for years, including supply and demand.

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Everson,Wa  |  September, 06, 2012 at 02:57 PM

The problem with margin protection (at the tax payer expense) is that it WILL destroy the industry. Going through the cycles of ups and down, we tighten the belt in the lean times, repair the old, etc. In the good times, you replace the old with new (or at least, better). Shoot for the margin, and it is guarenteed to remove the ability to have the tops for replenishment. Why? Because who's margin are you shooting for. When the USDA announces the "cost" of corn,soy, and alfalfa, and they say alfalfa is $120 but we are paying $200-$250 because of freight. Or that grains are this much per bushell, and basis and freight can be anywhere from $50-$90 per ton on top. Canadians coming down to buy milk can find it for $3 gallon at other places besides Edaleen (The featured store). That the writer is making it a "story" is because they haven't been paying attention. Earlier it was selling for $2.69. The Canadian system may be good for their farmers. But when Quota cost's as much or more than the physical farm, it does mean that in the future, the only way you can continue is to be born into the family, or purchased by a company with a lot of capital behind them. Goodbye "family farm" when your kids don't want the lifestyle. Hello robot milkers. High Fuel price on the farm isn't a big problem because it is a small part of the overall cost/use. But multiply it by all the suppliers/fuel surcharges and you get to some serious money as a percent of cost of production. In The current political climate, You have people on welfare who don't want it to change because their lives won't get any better having to work for the same amount. Do we want farmers to get into that same trap? It could with this farm bill.

Wisconsin  |  September, 06, 2012 at 03:11 PM

Well said Jerry! Well said!

TN  |  September, 06, 2012 at 03:05 PM

200 billion milk market and congress is willing to put up 50 million for insuring a milk price, corn price and soybean meal price, 2.5 cent cwt. (want even pay the broker) and that kicks in after a governing body can reduce a dairyman's milk price if they have grown their milk production. I can make my own decisions as to when to cut back I don't need someone with a political view and a lack of understands as to how economics works telling me. The problem is to much pooling adding a another layer of pooling is not the answer.

Wisconsin  |  September, 06, 2012 at 03:05 PM

"The supply management would only kick in during tough econmic times". How nicely vague. A former congressman of ours Dave Obey (7th congressional district Wisconsin) had something similar when he proposed that some tax cuts be allowed when "several econmic indicaters reach a certain level. Nice! However, what economic indicators were going to be referenced for these tax cuts and at what point were these indicators going to trigger the cuts? These were never addressed. So at what point and at who's disgression would the proposed supply managment aspect kick in?

Knoxville  |  September, 06, 2012 at 03:45 PM

I was also taught supply/demand economic theory when I was in school. However, that theory has little application in today's commodity market. Prices (especially for feed) are far more influenced by the greed/speculation economic theory than supply/demand theory.

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