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Milking supply and demand

Also on CropChoice this week:

By Joaquin Contente
President, California Farmers Union

(April 19, 2002 -- CropChoice guest commentary) -- The law of supply and demand dictates that when supplies are abundant prices generally become depressed. The opposite occurs when demand outstrips supply. These very basic principles still prevail, even in the fast-paced, global economy of the 21st century.

The dairy industry in the United States is no different than any other industry; it is not immune from the law of supply and demand. For many years the prices that producers received were influenced by governmental policies such as parity, which was based on a historical index or a target support price minimum. As we have moved away from governmental intervention producers have experienced more of the volatility of the market because of the lack of any coordinated effort by the industry to balance the law of supply and demand.

Perhaps by examining how other industries respond to supply and demand we can learn a very valuable lesson and apply those principles to the dairy industry. At the end of the year 2000, General Motors announced it would produce 14.5 percent fewer vehicles in the next three months than it did in the first quarter of that year. Ford and Chrysler followed suit by announcing similar cut backs in production.

Another example of the effect supply and demand plays on prices is the Oil Cartel of the Middle East. Even though that area of the world produces a large amount of the oil for the engine of industry, without exercising balancing supply to demand they become victims of oversupply, thus depressing prices. The oil producers in that region have been able to monitor the demand in the marketplace and supply to the market, thereby reducing the periods of depressed prices and stabilizing the marketplace.

In a better example of maintaining the marketplace balancing supply to demand would be the Canadian milk pricing system. Nowhere in the world is there more stability in the marketplace for milk and milk products than in Canada. More than 30 years ago, dairy producers formed their own marketing agency that sets milk prices at the farm gate. The key element of the Canadian milk pricing system is its calibration of milk supply to demand. Producers in Canada enjoy a stable and constant price compared to most regions of the world. Surprisingly to those unfamiliar with the system is that the Canadian consumer also benefits by enjoying lower prices than consumers in the United States. During the past six years, independently conducted price comparisons show the average cost of dairy products in Canada has been between 5 and 30 percent lower than a similar sample in the United States.

Every two months, the producer-marketing agency assesses the market, communicates to the dairy producers what the demand is and adjustments are made accordingly. By not having any sizable excesses there is less confusion and burden to the market. All segments of the industry are able to plan what the price of milk will be and budget what they’ll sell to stores ahead of the production.

By contrast, the U.S. system is very confusing and overly complex. The country is a net importer of dairy products; U.S. dairy farmers cannot produce enough to meet the demand. At the same time, prices for milk paid to dairy farmers are below the cost of production. Dairy producers in the past have relied on the government programs to provide a safety net. As the government is moving away from these support programs, we have experienced greater volatility. The reason: less discipline in the market and greater incentive for farmers to overproduce. No program will be successful without a mechanism to manage supply, including imports.

Imports are a huge problem that cannot be ignored. The House and Senate Conferees' committees are considering a National Dairy Target Revenue Program that was unveiled on April 10. This program sets a target of $14.79. Deficiency payments would be made to producers for any month in which the actual All-Milk price is below the Target Price. The payment is made at the rate of 25 percent of the amount by which the Target Price exceeds the All-Milk price and is paid on a producer's actual marketing (but not greater than base marketings) for a payment month.

What makes this program very appealing is the introduction of language that addresses excess production of previous history, simply put, "supply management". Here is the opportunity to usher in the missing element of domestic milk pricing in the United States. While it is true that this proposed program fails to address the problem of milk imports, this would be the first time that supply management would play a role in stabilizing this very volatile and unsustainable industry.

Eighty thousand dairy producers across this country will benefit from the program. The largest benefactors would be the hundreds of millions of American consumers paying less for their dairy products because the new dairy program balanced supply and demand, and thus removed any incentive to gouge them.

Congressional leaders are struggling with many concepts of how to benefit all parties involved. They must try to provide the policies to encourage the best quality and safest food supply and also the best value to the public. Our leaders should consider the tremendous consolidation that has occurred throughout the marketing chain, and ameliorate the negative effects it has had on producers and consumers by balancing the supply and demand in the dairy market.

The devastation of the American dairy farmer continues today at a rapid and unprecedented pace. More than 42,000 dairy families have had to leave the farms over the last decade. The industry now is at a point that it is actually unsustainable. Over 50,000 cows disappear from our nation's herds every year. The disorderly transition from small herds to mega-dairies has put a huge burden on the environment, creating issues for all of us in the industry.

Now is the time to encourage our nation's elected leadership to put political motives aside and step up to the plate and do what is right for the many that have no voice or influence as compared to the powerful special interests.

I do believe that our elected congressional leadership wants to do what is in the best interest of their people back home. But it is up to us to support the needed change by communicating to our Senators and Representatives on issues that affect our daily lives.