December 12, 2018

New Farm Bill Kicks the Can Down the Road

 |  By: Dairy Talk

It’s pretty clear, at least to me, that the U.S. dairy industry has reached a tipping point. Large herds predominate. Small herds are hanging on for dear life, with more succumbing to the inevitable every week.

 

The new farm bill doesn’t really solve this conundrum. Nor can it. The 2019 farm bill merely kicks the can down the road to be dealt with another day. And that day of reckoning could be brutal. Does anyone remember the 1980s?

 

What the new farm bill creates, whether it’s intentional or not, is what economists call a “low-level equilibrium trap.” That’s a fancy way of saying the farm bill will likely provide just enough revenue to keep small farms in business but only by providing Dairy Margin Coverage (DMC) indemnities. Positive margins for smaller farms will be largely dependent on the government, not the market.

 

Large farms will keep growing, provided there is room to process their expansions. Small farms won’t expand, and if they do, only marginally. They just aren’t strong enough financially to make them competitive with the big guys. It’s extremely difficult to go from 200 cows to 1,000, and impossible to jump to 3,000 cows where the true economies of scale and leverage reside.

 

So the big guys will continue to grow, producing enough milk to keep prices at or near break-even for the average farm. The only way to dispose of this increased production is to discount domestic sales or move product into low-cost export markets. This is the very definition of the “low-cost equilibrium trap.”

 

Consumers, of course, will benefit. But the cost to government for the DMC indemnities could quickly balloon, perhaps even reaching the levels last seen in the 1980s. Back then, dairy farmers were seeing milk price increases every six months as the government tried to maintain parity at 80%. But the cost of all of that mushroomed to $2 billion. It was unsustainable then; it likely will be unsustainable in 2023.

 

You can’t fault current politicians for trying to make the 2019 farm bill work for dairy farmers. From Maine to California, dairy farmers and their communities are screaming for help. 2019 will mark the fifth consecutive year of economic pain, and the new farm bill is one way to provide some much needed relief.

 

But the fundamental reality remains. Dairy production in the United States is now being driven by commercial-sized dairies that are efficient, well run and continue to grow at every opportunity. The poultry industry went through this process 40 years ago. The hog industry went through it a decade ago. And the dairy industry is now in the throes of its own reformation.

 

Some in the industry would like to see a transition to supply management as a way out of this dilemma. But farmers would first have to convince consumers that doubling their milk, cheese and butter prices are in their own best interest. Then they would have to come to terms with the cost of quotas, tying up thousands of dollars per cow simply to have the right to market their milk. And as cow productivity continues to increase year after year, they’ll have to keep buying more and more quota simply to maintain their same herd size.

The reality is that commodity markets—where your milk is little different from your neighbors—are brutal beasts. Dairy farmers who are not in a position to compete in this hard reality should use the 2019 farm bill as their five-year window of opportunity. They can use it to differentiate into some kind of niche market or transition to some other career.

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