Commentary: What happened to supply and demand?

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

Instead of 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 x-axis y-axis charts. 

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.

This week, Class III milk futures prices have been skyrocketing due to the prospect of tightened supplies due to the drought ― a classic case of supply and demand at work.

In Wednesday’s Dairy Herd Network newsletter, 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.”

The comments from Conlee and other readers are really quite good. Read the comments here.

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.

Also. see “Dairy could be ‘most in danger’ from Farm Bill impasse.”





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Tom Van Nortwick    
California  |  August, 17, 2012 at 12:10 PM

The part you leave out of the equation is that the supply plan is voluntary and isn't in affect today, combined with the fact that if it were in place it would fall woefully short of what producers have needed to get and stay profitable. Sure 4 dollars would be better than no dollars, but it isn't in place and won't be becasue the status quo will not allow it. Producers are instead loosing up to 50 million dollars per day to the processors and manufactureres who will again enjoy a year of record profits. 2012 will not be quite the record profit year for processors and manufactureres as was 2009, but it will be close. Just stay tuned and watch the nubmers. 2012 has already proven to be a record year of loss for producers. You talk about supply management as if it is already a controled situation. Far from that is true in the dairy industry. The only thing that is controled in the dairy industry is that dairy producers continue to loose millions having no control over input costs and no power to recoup increased costs from the market place. It is the market place that is controled and producers are the loosers every time. You should not try and portray that the Dairy Security Act within the 2012 Farm Bill would change a thing. It is a vailed attempt to get taxpayers and producers to pay for margin insurance in order to lessen the impact on dairy producers caused by a manipulated market price that again is robbing the whole rest of the industry of more than 50 million dollars per day. It is from the market place producers should be profitably compensated. That will only happen when they, and a new management team, using business minded tactics properly control the supply of milk in concert with profitable demand.

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