Vilsack Wants to ‘Restructure’ Dairy

By Jim Dickrell

Last week, Secretary of Agriculture Tom Vilsack was quoted by the Associated Press saying the U.S. dairy industry must restructure.

The exact AP quote: “I think really what will be next in line is a longer-term discussion about whether we need to make structural changes in the way the dairy industry is currently operated so we no longer have these stark contrasts between boom and bust.”

I have several calls into USDA to get clarification. Is the Secretary advocating a Canadian-style supply management program? Has he bought into the Holstein Association’s Dairy Price Stabilization Program ? Or, does he have something else in mind?

All of this comes on the heels of the Bain and Company report, which suggests the gap between the world’s ability to produce milk and its hunger for more dairy products will soon reappear. I gave you a sneak peak at that study in one our eUpdates from World Dairy Expo last week. By 2013, the world could again be facing a “latent demand gap” of 7 billion lb of milk.

Although the Europeans are currently dumping milk in Belgium farm fields, they will be unlikely to meet this need. Their quota system, which keeps a lid on production, isn’t set to expire until 2015.

New Zealand would have to add perhaps 600,000 cows to its 5.6 million head herd to fill a 7 billion lb. bulk tank. The North Island is already tapped out, and it’s questionable how much more South Island land could be converted.

The United States is really the only current player who could add 250,000 to 300,000 cows in reasonably short order. In the last 11 months, we’ve killed more than 225,000 cows through the Cooperative’s Working Together program. While many of those facilities will be permanently retired, more than a few could be re-modeled, re-equipped and re-energized. By 2013, anything is possible.

There’s little question U.S. dairy policy needs restructuring. For starters, serious thought must be given to whether the combination of the meaningless $9.90 dairy price support floor and the Milk Income Loss Contract program offer any type of real protection.

I’ve argued before that the price support level was allowed to fall to current levels when the average cost of production, at least in “surplus” milk areas, was closer to $12.
A comparable level now, with $15/cwt COP, would be a $12 support price. Giving up the MILC payment might be a good trade.

But care must be taken to ensure the $12 floor isn’t too high to make the U.S. uncompetitive globally. The $12 floor certainly would be competitive with most of Western Europe, but maybe not against emerging industries in former Soviet bloc countries. The Kiwis could certainly compete at $12, but see above. The Aussies could as well, if it ever rains there again.

Federal Orders (along with arcane dairy product standards of identity) also need reforming. Reducing the number of classes—perhaps to just two—makes sense. One class for fluid and the second for manufactured products would allow manufacturers to experiment with new products.

More risk management tools are also needed. Livestock Gross Margin Insurance needs to be simplified, and perhaps subsidized, to entice more producers to use it. More contracting between producers, co-ops and processors—at specific prices for specific volumes for specific periods of time—also needs to be explored.

Yes, the Secretary is right. The U.S. dairy industry does need to be restructured. The questions are: Where will we pour the footings and where will we place the doors?

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.