Transfer of Funds

There is a recent National Bureau of Economic Research (NBER) paper:MODELING PROCESSOR MARKET POWER AND THE INCIDENCE OF AGRICULTURAL POLICY:A NON-PARAMETRIC APPROACH by Rachael E. Goodhue and Carlo Russo. The document is: Working Paper 16706

The paper is concerned with wheat, however, there are some interesting parallels to dairy. The authors state, "the wheat milling industry is relatively concentrated, while there are a very large number of wheat-producing farms. Consequently, individual farmers have relatively little ability to negotiate effectively.
These factors are reflected in the organization of farmgate grain markets;
generally prices are set by buyers and farmers choose whether or not to accept the take-it-orleave-it offer." Sounds like dairy.

The authors conclude:

"This analysis demonstrates that market power might redistribute the benefits of government intervention. It provides empirical evidence that U.S. wheat millers were able to increase their marketing margins on average by approximately 10 percent when farmers received payments through a marketing loan program. This expected increase in margins was computed controlling for the realizations of a broad set of supply, demand and processor marginal costs shifters in those years. In turn, these findings suggest that millers are extracting a rent from the deficiency payment/marketing loan gain policy. Thus, the analysis suggests that the general assumption that competitive models may be a good approximation for imperfectly competitive agricultural markets does not necessarily hold, particularly if distribution, as well as efficiency, is a concern."

If you substitute milk for wheat and throw in the MILC payment, there should have been no surprise 2009 was Dean Foods most profitable year.

Banks

In spite of dairy farm prices looking up, banks will continue to put brakes on expansion. Not only U.S. banks, but also, New Zealand banks.

http://www.stuff.co.nz/business/farming/4531024/Banks-keep-tight-rein-on-rural-lending

Export commodity prices are sparkling but the outlook for the rural economy this year is "muddly", with banks keeping a stranglehold on farm lending and cashflows still tight, say sector specialists.

Global food prices lifted by 25 per cent last year and in Fonterra's first global online auction for the new year average dairy prices jumped 7 per cent.

But it will be 2012 before there is a rebalancing of overheated pre-recession land asset values and income, they say.

ANZ National Bank chief economist Cameron Bagrie says farm balance sheets look "a bit shoddy" despite "remarkably" high commodity prices, generating stronger incomes in the sector.

"Things will come together in 2012 but 2011 is going to be a bit of a muddly year."

Farmers will continue to concentrate on reducing debt this year. The outlook for 2011 is better than for last year but the sector is "in a halfway house", Mr Bagrie says. Next year farmers will have repaired their balance sheets and commodity prices are expected to still be strong, he says.

Market experts expect only a slight improvement in farm sale activity.

PGG Wrightson, the country's biggest rural real estate company, predicts more energy in the $10 million-plus farm market with farmers and other investors with cash teaming up to buy farms that would be operated like corporates, with shareholders and contracted management.

PGGW real estate manager Stuart Cooper says inquiry at this top end of the market increased last month. There were only five sales of big farms nationally last year compared with 60 in boom year 2008, he said.

Bank of New Zealand chief economist Tony Alexander says an indication of new economic life in the sector is a strong increase in tractor registrations last month.

More people, including syndicates, with capital and only some debt would enter the market this year, he believes.

But Waikato accountant Nigel McWilliam, a dairy specialist with Diprose Miller, says banks are responsible for the real estate market squeeze.

"Bank criteria for lending are making it so difficult to get deals across the line.

"We have farmers looking to borrow, and a number [of clients] looking to sell, and the banks are very involved with sale and purchase agreements, walking the property with the purchaser and then pouring cold water on the deal."

This is a far step from pre-recession days when banks were lending freely, including against land value appreciation, Mr McWilliam says.

ASB rural economist James Shortall says dairy and meat returns are generally strong but farmers' cost structures are still high because of increases in inputs like fertiliser.