No Consensus on Supply Management

by Jim Dickrell

Dairy Farmers of America (DFA) hosted a conference call last week for a few hundred of its closest industry friends, dairy lenders and media riff raff. As usual with these types of affairs, the Q&A portion of the call turned out to be far more revealing than the formal webinar.

During the Q&A, Rick Smith, DFA CEO, revealed that DFA recently surveyed 2,500 of its members to get a sense of where they want the U.S. industry to head. “More than 90% see opportunity in participating in the global market place,” says Smith.

There was also strong consensus that dairy policy needs to change. But that’s where things started to break down. “Seventy-one percent think we should be trying to do something to manage growth [in production] going forward, and that transcended east/west and large/small,” says Smith.

But exactly what that program should be remains cloudy. Slightly less than half supported the Holstein Association’s Dairy Price Stabilization Program http://www.holsteinusa.com/association/dpsp.html .

Supply management programs, with a mandatory base for each farm, does not have support in the Midwest and only marginal interest in the Northeast. Only California, which has felt the brunt of the 2009 feed cost/milk price debacle, has majority support for such a program.

Smith also says “CWT (www.cwt.coop) has probably run it course.” The reason: DFA producer leaders say they are tired of free riders, with only 70% of the milk contributing the 10¢ assessment fee to support the program for the entire industry.

So there’s the conundrum Smith and DFA leaders face: Their members overwhelmingly want to participate in the global market. Yet they want to somehow control milk supply without mandatory production bases. And they’re tired of funding CWT.

I tend to agree with the 90% who want to participate in the global market. There clearly is opportunity out there. But dairy co-ops—who have taken the easier road of selling to the government rather than producing what the market needs and wants—need to change.

Supply management programs have their own problems. The first is quota value. Although the Holstein Association claims its program won’t accrue value, it can’t help but not. It might not be in quota per se, but it will get bid into land, facilities and cows. While cash flow might be better under a quota system, balance sheets likely won’t be. Plus, you can kiss the international market good bye because prices here won’t be competitive globally and imports will be screaming to come in.

I agree that CWT has probably run its course. In the early months of 2009, it took until May to get the first round rolling. By then, the damage was done. And with milk prices at or below support ($7/cwt in North Dakota), it became the only game in town because lenders wouldn’t let producers sell out because cow values had crashed along with milk prices.

Expecting co-ops, even co-ops as large as DFA, to fix volatility in global dairy markets is wishful thinking at best, naivete at worst. The world economic crisis, led by irresponsible U.S. lending practices, caused dairy markets to collapse. Global economic recovery, now starting to send up green shoots, is what will make dairy prices come back.

As the industry continues to argue about what needs to be done, you have a few choices. You can slowly rebuild your liquidity. Or you can get serious about risk management. Or both. Waiting for industry agreement on the next best dairy policy is like waiting for Godot, who never shows.