The new role for the US Industry
First published in Dairy Innovation Magazine.
Since the mid 1970’s production of milk in the US has been
steadily rising. In the early 2000’s with world demand and prices creeping
upwards to match the higher prices achievable on domestic markets, the
Americans started to awaken to the idea of exports. Not exports supported by
subsidised market dumping programmes such as the Dairy Export Incentive
Programme, but exports on commercial terms. Groups such as the US Dairy Export
Council worked tirelessly to awaken US processors to the possibility of the
world market. Buoyed by the scarcity of government stocks and the strong demand
from developing markets returns were good and producers invested in expanded
production. Then in 2009, hit by the global economic downturn and food safety
scares in China the market stalled. At the same time input prices to farms
increased to record levels. Americas producers were hit hard and the most
progressive who had borrowed to expand to meet the ever increasing demand were
hit hardest.
Now demand has returned to the market. US dairy exports are
again increasing and topped 12% of production in 2010. There is, however, an
emerging recognition that America both in capacity and cost terms has become
the balancing supply in the world market. While the American industry is well
placed to take up the slack between world supply and rising demands, with the
role comes the reality that ‘marginal’ litres sold on the world market are now
the major influence in setting US milk prices. Exposure to world markets brings
with it ‘volatility’ and the threat of a repeat of the 2009 experience,
something which the famously complex federal support mechanisms (a combination
of end use pricing, intervention buying, and market hedging) originally created
to support recovery from the great depression, were woefully inadequate to
prevent.
All sides of the US industry acknowledge that reform is
necessary and that a different approach is needed. The dairy farmers lobby body
the National Milk Producers Federation (NMPF) is supporting a package of
reforms under the banner of ‘Foundation for the Future’. The basis of the
proposal is to replace ‘Price Support’ with ‘Margin Support’.
Under the plans they are asking the government to reform the
market support mechanisms to provide a guaranteed level of margin on 90% of a
base level of production (the highest milk sales in any of the past 3 years
from a farm) irrespective of farm size and production level. Producers will be
offered the chance through the same scheme to top up the margin protection to
higher levels on a voluntary basis by payment of additional premiums.
In addition, the plans would substantially reform the
Federal Milk Marketing Orders scheme which currently sets regional prices for
raw milk based on end use of the product. Insisting still that milk for the liquid
market is inherently different from milk for the manufacturing market, the
proposals suggests a liquid premium is collected on milk bound for the liquid
supplies and distributed by the government, as now, to all producers, something
that processors group, the International Dairy Foods Association (IDFA) argue should
be abolished over 5 years.
Finally, clearly worried by the spectre of ‘2009’, the proposals support the introduction of the
a Dairy Market Stabilisation Programme designed to kick in if farm margins fall
below an agreed trigger point, limiting payment to the farm to as little as 96%
of the average milk sales over the previous three months (or the equivalent
month in the previous year). This would have the immediate effect of depressing
production, with the diverted milk sales monies being passed to a farmer board
who would use it to incentivise removal of the surplus from the market.
This final measure is the most controversial part of the
plan with IDFA claiming that this would limit supplies and damage export
potential. Arguing that policies attempting to manage production such as those
in Canada and Europe have lead to higher consumer prices with little benefit to
producers, instead IDFA argue for greater education about the use of existing
risk management tools and for the introduction
of tax deferral schemes encouraging producers to save money from the good years rather than invest in increasing
production.
It seems the debate will rumble on exploring Americas new
role in world supply and it is unlikely that any legislative changes will be
introduced ahead of the 2012 Farm Bill.
Whatever the outcome, both sides agree that any changes will need to be
within the scope of WTO agreements and should not seek to impose a more
protectionist approach or adoption of the market/growth management approach
advocated by the USDA Dairy Industry Advisory Group (the equivalent to the
European High Level Dairy Group). This surely signals an acceptance of the opportunities
offered by globalisation by the industry. At the same time the rest of the
world will maybe need to view American supplies in a different way
also…..
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