Over the past 20 years, covering the dairy industry for Dairy Herd Management, I have seen market volatility get much worse.
Some of it is due to the global marketplace; some of it is ridiculous government policy (such as the renewable fuel standard for corn-derived ethanol), and some of it is the weather.
The most extreme example I have seen of volatility is summed up here:
Average net income of California dairy farm clients of the Genske, Mulder & Co. accounting firm:
2009 Minus $1,618,846
2010 Plus $623,461
2011 Plus $1,504,909
And, it looks like the numbers will be down again in 2012.
What a roller coaster ride!
The “roller coaster” term is showing up in more and more articles pertaining to the current dairy situation. Here are two examples from this week:
Reading the second article ― about a dairy producer in Pennsylvania who isn’t sure what to do next ― things seem rather bleak. How can a business be expected to run if it faces continual uncertainty about input cost?
Frankly, the only solution I see on the horizon is the legislation now in front of Congress to create a “margin protection” program for dairy farmers. Similar to an insurance policy, it would provide basic protection when the margin between milk price and feed cost tightens to an uncomfortable level, and also give producers the chance to buy additional coverage if they want.
It would be a voluntary program. But, in order to receive insurance coverage, a producer would have to agree to the “market stabilization” portion of the program. He would then be encouraged to limit production increases in times of tight profit margins.
The legislation has been approved by the U.S. Senate and the House Agriculture Committee, but hasn’t reached the floor of the House yet because the House leadership is playing political games with the Farm Bill.
Regardless, it is most realistic opportunity to do something about the crazy volatility affecting dairy farmers across the U.S. (And, regarding the one sticking point of the legislation ― the market stabilization aspect ― it stands to reason that limiting production increases in times of tight margins would help to strengthen milk prices. That’s what the law of “supply and demand” is all about. The market stabilization aspect also gives taxpayers, who are footing the bill in the first place, some assurance that the total cost of the program won’t spin out of control.)
It’s a tough subject, but this time it looks like there are some possible solutions.