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Guest Columns

Perspective:
Industry Issues

Letting markets do the job of moving milk

Connie Tipton

Connie Tipton is president and CEO of the International Dairy Foods Association. She contributes this column exclusively for Cheese Market News®.

Finding solutions always supposes there’s agreement on the problem. Ah — it appears therein lies the rub!
Let’s briefly remind ourselves why federal and state regulation of milk prices began in the 1930s. The dairy marketplace was very different 80 years ago.

• There were huge seasonal swings in farm milk production due to widespread reliance on pasture and the inability to harvest and store sufficient forages for the long winter, using mostly horse power. (By the way, much of that stored feed was needed for those same horses).

• Dairy producers were reluctant to invest in farm improvements that were necessary to become Grade A; while more Grade A milk was needed in the late fall and winter when milk production fell, that same Grade A milk had trouble finding a processing home during the flush spring production and through the summer.

• In the 1930s, farm milk and dairy products rarely crossed more than one or two state lines to serve consumers, because the country just did not have an adequate refrigerated supply chain and transportation network. Even if it that network had been in place, only a relatively small percentage of households had adequate refrigeration. It was a time when making sure every local area of the country had a ready supply of milk was important.

• Finally, dairy farm operations were much smaller then, output per cow was much lower and dairy producers marketed much less milk. At the same time, however, milk processors and dairy product manufacturers were growing larger at a faster pace, often putting dairy producers in a disadvantageous position in negotiating a price for their milk.

OK, we know why the government stepped into this space 80 years ago, but why is it still here regulating milk prices in today’s marketplace?

Seasonality of farm milk production is no longer an issue in the United States, and 99 percent of our farm milk production is Grade A. The vast majority of dairy producers, representing more than 84 percent of all farm milk, work through cooperatives to market their milk, and those cooperatives are often larger than their processor customers. Also, our refrigerated supply chain safely delivers fresh milk and dairy products anytime, anywhere, even overseas.

These positive changes came largely from new technologies and innovation, major improvements in infrastructure and a focus on delivering what consumers want when they want it. Federal orders may have helped manage the problems in the dairy marketplace of 80 years ago, but price regulations did not solve those problems; technological change, capital investments and a focus on the consumer are mostly responsible for the changes since then.

Even though the dairy marketplace today is not anything like it was in the 1930s, many in the U.S. dairy industry cling to the false assumption that they still need farm milk price regulations. In today’s global environment, other countries have recognized much more quickly the value and benefits of free-market competition. Just look around: There are no government-enforced milk prices in New Zealand or the European Union, the two leading dairy exporters, nor in any other major dairy exporting country except the United States.

But we’re making a little progress. Here in the United States, we finally recognized that the dairy price support program, designed when our markets were strictly domestic, was outdated and not serving the interests of the major dairy exporter our country has become. We did not tinker with the existing program; we got rid of it.

So, what makes sense for U.S. milk production and pricing in 2015 and beyond?

Thanks to the 2014 Farm Bill, our dairy farmers now have a safety net in place, the Margin Protection Program for Dairy (MPP-Dairy). For $100 a year, farmers can sign up and get catastrophic coverage when the margins between milk prices and feed are squeezed, and they can invest in greater coverage on their own.

The industry also enjoys tremendous opportunity through growth in demand for dairy in emerging markets.

Fortunately, our entire supply chain has the production capacity, backed by infrastructure, technology and innovation, to support continued market growth.

But regulated prices are hurting products in our domestic markets. Fluid milk, cultured products and ice creams, known as Class I and Class II products under the federal milk marketing order system, are being priced by formulas based on prices paid for products in export demand. The formulas are forcing higher retail prices for the Class I and II domestic products, driving consumers to non-dairy products that cost less.

It is time to change this outdated milk pricing system to allow current markets to work efficiently with milk moving to its highest value use instead of moving according to complicated formulas.

It is time for the industry to agree that we have a problem and to come together to talk about phasing out the federal regulated pricing and pooling provisions under our federal milk marketing order system. The facts about market changes and future opportunities for the U.S. dairy industry clearly point to letting markets do the job of moving milk.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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