| Alan Levitt |
Uncertainty is generally bad for business. The temporary, 90-day price support increase that went into effect Aug. 1 provided an instant jolt to cheese and powder prices. But it also served to cloud an outlook that was already muddied by a variety of newly implemented or proposed market intervention programs.
Buyers of cheese and powder are approaching inventory management carefully this fall. They don’t want to acquire too much before the price support reverts back to its previous level on Nov. 1. This could be very unfortunate for cheese, since October is typically one of the strongest months of the year for cheese sales.
At this writing before Labor Day, it’s unknown whether price supports will in fact revert back or potentially even increase. An amendment that passed in the Senate prior to summer recess could increase supports on blocks, barrels and nonfat dry milk even further. We won’t know the fate of that measure until Congress returns this month. (See “Price Support Roulette,” page 6.)
The uncertainty is playing out heavily in the nonfat dry milk market. The higher price support sabotages the competitiveness of U.S. exporters, who now must depend more fully on Dairy Export Incentive Program (DEIP) subsidies to secure sales. However, during August, the DEIP bonuses were given only for shipments through the end of October.
Meanwhile, as the Cooperatives Working Together (CWT) program pays some farmers to sell their cows, the Milk Income Loss Contract program pays other farmers to hang on a little longer.
This mishmash of programs is to be expected in a year of historically low profitability. Against this backdrop, the industry is doing a lot of meeting and talking: the National Milk Producers Federation formed a Strategic Planning Task Force, USDA put together a Dairy Industry Advisory Committee and Congress established a Dairy Farmer Caucus.
As several ideas are kicked around, the dairy markets will remain unsettled. Ironically, all these programs and proposals contribute to the volatility because of the uncertainty they engender. Class III futures for the fourth quarter continue to fluctuate (see chart).
Intervention also masks the fact that milk supplies are turning, albeit very slowly. By fourth quarter, supplies could be quite a bit tighter than they are today…unless current and wished-for twists dictate otherwise.
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