Things are bad, financially speaking.  

The million-dollar question is: Will it get better and when? The futures market predicts an uptick in prices at the beginning of 2010. However, Bob Cropp, economist and professor emeritus at the University of Wisconsin-Madison, points out that history always seems to repeat itself. In other words, despite any rises that occur in the next year or two, prices will inevitably come back down again.

Some people are searching for long-term solutions to price volatility.

One dairyman compares it to dealing with a deadly snake. “When you see a deadly snake, you don’t form a task force committee or write memos on how to deal with the snake. You kill the snake.”

Here is a closer look at the Dairy Price Stabilization Program being supported by Holstein Association USA and why its proponents think it may be able to kill that proverbial “deadly snake.”

Q. Would this program replace MILC payments and the federal price-support program?

A. The program would complement, not replace, existing dairy programs, such as the Milk Income Loss Contract program and the federal dairy price-support program.

“If the program was successful in stabilizing prices, it could actually reduce the federal government cost for these two programs,” says Gordie Cook, a dairy producer from Hadley, Mass.

Q. How would the Dairy Price Stabilization Program work?

A. The program would be mandatory in all states. Upon implementation, each dairy producer would be assigned an initial production base. Base may be determined by the volume of milk produced from April 1, 2008 to March 31, 2009, or the 12-months prior to signing of the bill.

An advisory board would be appointed by the U.S. Secretary of Agriculture. The board would consist of the following: two dairy producers from each of the six regions of the U.S. (West, South, Southeast, Central, Midwest and Northeast), one consumer representative, one representative from a dairy manufacturing firm, one representative from a fluid milk processor, and one dairy economist.

The U.S. Secretary of Agriculture, in consultation with the appointed advisory board, would forecast the 12-month demand for domestic and export markets, including fluid milk and manufactured dairy products.

This forecast would be reviewed on a quarterly basis, and changes could be made to either increase or decrease production according to forecasted demand.

Depending upon whether the forecast predicts an increase or decrease in demand, compared to current production levels, a small or large market-access fee would be assigned. At this time, an allowable growth percentage would also be announced.

The market-access fee would be used to keep the supply of milk in line with the demand.

Any dairyman who maintains his assigned production base within the allowable growth rate would not be charged a market-access fee. Producers would not be penalized or lose base if they produce less than the assigned base.

If a dairyman exceeds the assigned base by the allowed growth percentage in one quarter, he would have to pay the market-access fee. The market access fee is charged per hundredweight on all milk produced. If at the end of the 12-month period, if the producer is not over by the allowable growth percentage, he or she will receive a rebate on the market-access fees paid.

Q. Can base be sold or transferred?

A. Base cannot be sold, as it has no monetary value. However, base can be transferred to someone who takes over an existing operation. Base can also be combined between two or more facilities into one larger facility, provided that each producer holding base remains a part of the combined operation.

A producer’s base ceases to exist if the dairy’s owner is no longer actively producing and marketing milk.

All transfers or combination of bases must be approved by the area Farm Service Agency office.

Q. What if I’m in the process of expanding or I want to expand later?

A. Any dairyman who can verify that he initiated plans for expansion during or after the base time period may request a base adjustment. If the program passes, and a dairy producer can verify that he initiated plans for expansion during the implementation of the dairy price stabilization program, he can request an adjustment.

Base-adjustment requests would be reviewed by the advisory board.

Q. What if I’m a new producer?

A. New dairy producers have to earn base. New dairy producers will be assessed the market access for the first 12 months of production. At the end of this time period, the milk marketed over the previous 12 months will be their base going forward.

The fact that new producers have to earn base has been a highly criticized part of this program. “In virtually any other industry, a new entry into an established market would have to compete directly with its competition for a piece of that market,” says Syp Vander Dussen, dairyman and president of the Milk Producers Council in Chino, Calif. “In our industry, anyone can get into the business as long as they can find a milk cooperative to pick up their milk. They are guaranteed an equal share of the market revenues from the start. But what if the new production is surplus milk that is sold to the government for $9 per hundredweight? Under the current system, that loss is spread out over all producers in the pool while the new producer receives the full blend price.” This is why the program requires new producers to earn base.

Q. How could any new producer ever afford to start dairying?

A. A new dairy producer would have to consider and budget for the market-access fee his or her first year.

“The idea is that this program would keep prices high enough, by keeping supply and demand in line, that the market-access fee would be worth paying to get into the business,” says Doug Maddox, dairy producer from Riverdale, Calif.

This program would provide for more stable prices, which would also make a new producer more bankable, he adds.

Q. How much would the market-access fee be?

A. Initially, the fee may be $2 or $3 per hundredweight on all milk marketed above the assigned base.

Depending upon the advisory committee’s forecast when the program is implemented, the market-access fee could be adjusted higher or lower.

Under the program, if a dairy producer is currently being assessed a market-access fee for the current 12-month period, the fee cannot be increased.

The market-access fee would generally be the same across the country, but there could be some regional differences. “If milk was short in one area, the market-access fee could change to reflect the needs of the area,” says Maddox.

Q. What would the money collected as a market-access fee be used for?

A. Money collected through market-access fees would be pooled and then distributed to the dairy producers who stayed at or within the allowable growth percentage of their assigned production base for the year.

Q. How much would a program like this cost?

A. An assessment of no more than 2 cents per hundredweight would be assessed to cover administrative costs of the program.

Milk cooperatives would submit this assessment directly to the national Farm Service Agency office.

Q. If we had this program in place, would it have prevented the current dairy crisis?

A. If this program had been in place, it would not have completely prevented the downturn in milk prices, says Cropp. “It does smooth-out the volatility in prices, but it doesn’t completely eliminate them.

“This downturn was a major shock because of exports. Nobody anticipated that drop,” he says.  Yet, he adds, the Dairy Price Stabilization Program “could have taken action against plummeting prices sooner. For example, the advisory board could have ratcheted up the market-access fee by the third quarter of 2008.”

The program could prevent another downturn.

To increase milk prices right now, we would have to significantly lower base, says Cropp. To get prices up, Cropp believes the industry will need to cut milk production by at least another 2 or 3 percent.

Q. How is the dairy price stabilization program any different than a quota system?

A. The Dairy Price Stabilization Program is not like the government-run quota system in Canada and Europe, says Vander Dussen. Quota is fixed and permanent. Quota can be transferred from producer to producer, but it requires a massive transfer of capital (more than $30,000 per cow in Canada) from the new or expanding producer to the retiring producer. This severely hampers the continuing producer from investing capital in production efficiencies. It also creates a barrier to entry.

The Dairy Price Stabilization Program creates a financial incentive for dairies to actually pay attention to how much milk they are producing, says Vander Dussen. While there is a base utilized under this program, it is earned and expanded with the market. It does not accrue value, because it cannot be sold. It does not accumulate value, because the price to earn it is modest and producers can choose when it makes sense for them to expand and therefore earn additional base.

Q. How long would it take to implement the Dairy Price Stabilization Program?

A. If the federal government can pass the American Recovery Act of 2009 in a few months, why not a program like this?, asks Maddox.

This program would not require the Farm Bill to be opened up.

If passed, the program would run for seven years with a review at five years.

Q. Why doesn’t this program address imports, exports or the way milk is priced?

A. The initial problem is oversupply, says Cook.

“We do have competition for milk protein casseinates and we do need to make sure they are assessed under the tariff system properly, which they currently are not. I am in full agreement this needs to be addressed,” he says.

Imports are not an easily answered question, adds Maddox. “We do not have 15 or 20 years to get this through legislation.”   An all-encompassing bill that would address everything that needs to be fixed would be challenging to pass.

When the milk supply is under control, then the founders feel all of the other issues that need addressing can be addressed.