Wednesday, July 21, 2010

Keeping a dairy policy open mind

After sitting in on the National Milk Producers Association board's approval of the Foundation for the Future program last month, it's been interesting to read the different reactions to the plan from throughout the industry.

One of the most thought-provoking (to me at least) write-ups was penned by Jim Dickrell, editor of Dairy Today, and published on his AgWeb blog. At first, the title of his post — National Milk's Plan a Bit Schizophrenic — irked me. My initial responses to negative reviews of the Foundation plan have been negative themselves, and a bit cynical: "Do you have a better idea? What we have now certainly isn't working."

Then, when I finally got around to reading Jim's piece and digesting it for awhile, I had to agree with him on at least one point, that being supply management.

If you recall, supply management wasn't part of the original Foundation for the Future plan. We were told last November at the NMPF annual meeting, when the Foundation plan was first unveiled, that price volatility was here to stay — it was an unavoidable part of operating in a world market — and that we just needed to learn how to manage around volatility, thus the reason for the Dairy Producer Margin Protection Program, and change the way we price milk so that supply and demand signals work better (which is what the Federal Milk Marketing Order reform is trying to do).

The Dairy Market Stabilization Program was added later. I'm inclined to believe now that some revisions need to be made if this component of the program is to be included in the final plan.

Jim made one very good point about the market stabilization program:

"The problem comes in when the Dairy Price Stabilization part of the program tries to solve [milk price-feed cost margin] problems by cutting supply. In two out of three cases, it could actually make the problem worse. Why? If you cut supply, you raise milk prices. But if the problem is not over-supply but feed prices, you simply raise milk and cheese and butter prices and reduce demand, which in turn reduces prices which means you have to cut supply even further. The same thing happens when demand is the problem. By cutting supply, you raise prices and kill even more demand."

Maybe National Milk needs to design a different trigger for initiating market stabilization, so that we're only cutting production when over-supply is truly the problem. Or maybe it needs to scrap the market stabilization program altogether. 

For me, only one thing is certain about Foundation for the Future: it will be interesting to see how this plays out. I do hope that the margin protection and marketing order reform parts of the plan become a reality, but I'm not sure yet about the market stabilization program. I will keep an open mind, though, when reading future reactions to the plan.

What do you think?

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