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May 30, 2019

U. S. Dairy Policy, Re-imagined

 |  By: Dairy Talk

Dairy economists and policy wonks are just as confused about U.S. dairy policy and direction as farmers are. There is even little perceived agreement on what the goals of U.S. dairy policy are or should be.


That was abundantly clear when more than 100 of these folks met at a National Workshop on dairy policy in Grand Rapids, Mich., in May.


Andy Novakovic, a Cornell University professor and arguably the dean of dairy economists in the country, live polled participants on a couple of questions regarding industry structure (size, composition, ownership, distribution) and farm milk prices.


About 50% of those responding to the poll believe the U.S. does not have an explicit policy on farm structure, while 20% thought U.S. policy was to preserve a network of family farms, 18% thought it was to slow the rate of decline of family farms, and 13% thought it was to allow free markets to determine who produces milk and where they produce it.


On milk prices, 40% thought cooperatives are still needed to level the playing field on milk pricing, 40% thought risk management programs are paramount, and 15% thought we need programs to stabilize milk prices.


I would argue that U.S. dairy policy was set about 15 years ago when dairy co-ops and processors decided to compete in global markets. Recall the original Bain Report showed that U.S. dairy farmers could be competitive in global markets as long as other governments, notably in Europe, did not undercut those markets by subsidizing exports.


The problem with this approach, as we’ve learned over the past five years, is that being a low-cost producer can be extremely painful. Work by Chuck Nicholson, also a Cornell economist, shows that U.S. all-milk prices rise only 10¢/cwt for every 1% gain in market share. That’s OK for the lowest-cost U.S. dairy farmers because their cost of production still nets them a margin and they have greater milk sales. But for higher cost producers, low world prices are devastating.  


What the Bain Report (and a subsequent Bain Report 2.0) could not anticipate were Russian trade embargoes, Canada behaving badly, or trade wars precipitated by an impetuous President. We’re so far down this freeway, however, that I don’t think there is an off-ramp to circle back to the 20th Century. If we were to stop exporting, we would need to reduce milk production 15% and cull nearly 2 million cows.


What we need is Bain 3.0. This study should take an in-depth look at what is required to change U.S. standards of identity and Federal Order policy to allow premium, value-added U.S. products to compete globally. Right now, our four-class, Federal Order system forces dairy companies to compete with two hands tied behind their backs and one leg encased in concrete. Such change will not come easily because many (most) dairy cooperatives have billions of dollars tied up in brick, mortar and stainless steel that are dependent on make allowances to produce commodity products.

A brutal, honest assessment needs to be done now to determine how our decades-old dairy regulations are impeding our ability to become world-class competitors. It took the industry nearly a decade to figure out how to solve the “higher of” dilemma of Class I pricing. We can’t wait another 10 years, just hoping world prices will rise to $20 where even high-cost producers can make a buck or two.