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.