September 16, 2016

Unintended Consequences

 |  By: Dairy Talk

As a dairy farmer, you are likely all too familiar with Murphy’s Law: When anything can go wrong, it will.

A corollary to that is Merton’s Law: Anytime you mess with policy, unintended consequences will always rear their ugly heads. That point was driven home in spades this summer.

Case in point #1. With milk markets in the doldrums and dairy budgets bleeding red all spring, farm organizations couldn’t help themselves and pleaded with USDA for help. The National Milk Producers Federation (NMPF) asked USDA for $100 to $150 million in dairy product purchases to soak up milk surpluses brought on by increasing production and weak export sales.

The American Farm Bureau Federation, a bit out of  character, also asked for $50 million in product purchases. And sixty U.S. Congressmen and women and the National Farmers Union asked for assistance but did not specify an amount. 

Being that 2016 is an election year, USDA responded with almost unprecedented speed that it would purchase $20 million of cheese and donate it to food shelves.

At current prices, that $20 million will purchase less than 10 million pounds of cheese, or less than 1% of cheese currently held in inventory. In fact, it represents less than the amount of increased cheese made this summer from increased milk supplies.

The market responded exactly the way everyone thought it wouldn’t: Cheese prices fell. Purchases of $100 to $150 million might have made a dent in inventories; purchases of $20 million only slowed the rate of inventory growth.

Case in point #2. Everyone in the dairy industry of any age remembers the whole herd buyout program of the 1980s. The government accepted bids from farmers to buy-out their entire herds in order to reduce milk production and increase prices.

The publicity over the program was so bad that farmers knew USDA would never re-visit the program, no matter how bad prices got.

But milk prices once again tanked in the early 2000s, dropping from $15/cwt in 2001 to $12/cwt in 2002. So NMPF recreated the buy-out program, this time on its own terms and funded by dairy farmers.

There’s still some debate whether the program actually worked. U.S. cow numbers were at 9.087 million head in July 2003 when the program started, and fell 100,000 head by the following March. Milk prices responded, averaging $16/cwt in 2004 and $15/cwt in 2005. But by February 2006, cow numbers had rebounded to the same level as at the start of the program. And by then, milk prices again averaged less than $13.

The program went on for another four years, eventually culling 500,000 cows. Consumers also took notice. In 2011, a  class action suit was brought against NMPF, CWT, Dairy Farmers of America, Land O’Lakes, Dairylea and AgriMark claiming they all conspired to raise milk prices. Earlier this month, a settlement of $52 million was reached.

The point of all of this is not to Monday-morning quarterback these decisions. But we should be smart enough to know by now that any time we mess with markets, the law of intended consequences is going to bite us.