How Milk is Priced?

http://www.3news.co.nz/Fonterra-rejects-calls-for-inquiry-into-milk-prices/tabid/421/articleID/203714/Default.aspx

Fonterra, oddly enough, is claiming they have nothing to do with milk - it is the "market." Sound familiar?

Fonterra is rejecting calls for an inquiry into how milk prices are set.
The company says prices are set as part of a normal commercial process and that New Zealanders have to get used to being part of the global market.

(complete story at link)

Here in the USA:

http://www.fsa.usda.gov/FSA/webapp?area=about&subject=landing&topic=dia

The purpose of the Dairy Industry Advisory Committee is to review the issues of farm milk price volatility and dairy farmer profitability and provide a report with recommendations to the secretary on how USDA can best address these issues to meet the dairy industry’s needs in the near and long term. The report also will provide feedback on the effectiveness of recent actions taken by USDA affecting the dairy industry. USDA’s Dairy Industry Advisory Committee brings the concerned public into a productive, information-gathering process to assist in developing recommendations for the development of national dairy industry and trade policies.

Aside from providing a cure for insomniacs, what was accomplished?

Pay no attention to the guy behind the curtain.

What is Real, What is Normal?

Graphs Courtesy of Robert Shiller
(click on images to enlarge)

Robert Shiller is a world renowned economist from Yale University. He is particularly known for his work on the housing bubble.

In a June 2009 Project Syndicate editorial, Shiller concludes, "The sobering truth is that the current world economic crisis was substantially caused by the collapse of speculative bubbles in real estate (and stock) markets."

Every dairy farmer should understand, the world economic crisis brought about a crash in dairy farm milk price.

Essentially, what the above graphs are really showing is greed and concentrated power.

Now everybody wants to know when things will return to normal? The above graphs indicate some problem in defining normal. For dairy, what has passed for market economics is really "slash and burn" economics. There is no way what has been considered normal can continue.

This leaves us to contemplate how farm milk should be priced. Furthermore, we need to contemplate whose voices should be heard in the discussion on the future of farm milk pricing.

The political establishment takes great pains to point out the importance Of the 2012 Farm Bill. In fact, to go to Washington DC cost a minimum of $500 for most people. Few dairy farmers have the spare, multiple,$500.

Unless things change dramatically, the voice of the dairy farmer will not be a real part of the discussion for the upcoming 2012 Farm Bill.

Margins

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With dairy farmers not able to pay their bills, the price of the above government contract is obscene.

With the price of the additional butterfat figured in , the per hundredweight "value" is pushing $80.

Recession & All Milk Price

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We have had two recessions in the past ten years as indicated officially, by the National Bureau of Economic Research (NBER).

The first was the dot.com bubble. This seemed to have no effect on farm milk price. The most recent recession time period, seems to be very much a factor in farm milk price.

In spite of all the talk about supply/demand, this most recent recession was about finance. Credit tightened and the buyers of milk were able to "extract" their needs from dairy farmers.

Officially, according to NBER we are out of the recession. However, there are many who talk about a double dip recession. That is, a second following on the heels of the first.

The possibility of a double dip is a genuine cause for concern.

Although, officially we are out of the recession, to most people we may as well still be in recession. We are likely to have a "jobless" recovery. That will keep them down on the farm.

Legal Plunder

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It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder.

Frederic Bastiat

The expression "All roads lead to Rome",comes down to the fact the elite of Rome plundered the rural areas and the roads conveyed wealth from the countryside to Rome.

In June, 2010 New York dairy farmers were paid a total of $177,505,300. According to USDA "Costs and Returns" the total costs were $261,960,900. There will be those who argue the "costs" numbers are not accurate because milk can be made cheaper - think slavery.

All of the arguments for the elimination of parity were bogus. Yes, the government bought a lot of product, but there was no "need test" at all. As noted in an earlier blog, elimination of parity actually increased milk production, while the profit from milk production went to "Rome."

There was absolutely no public benefit from elimination of parity. The Consumer Price Index (CPI) for dairy went right along with the CPI for all items - a .99 correlation.

Rural NY looks like a war zone. NY has been the third largest dairy state. Dairy is the most important economic factor in rural NY. The plundering of dairy farmers has left the rural areas decapitalized - to wit, plundered.

The same can be said of other states, I have just taken NY as an example.

May Exports of Milk Powders

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The U.S. International Trade Commission (USITC) updated its trade database this week to include figures from May 2010.

Looking at the data is interesting because, everyone was told milk prices crashed because the export market for dairy dried up. Of particular concern was the crash of the milk powder market - nonfat dry milk (NFDM) and skim milk powder (SMP).

Total exports of dairy products are very high this year. The May 2010 dairy powder exports are 87% of May 2008. But, the "all milk" price is just 82% of May 2008.

The financial world is still very shaky. Credit is still a worry. So, my guess those with the power to put a little aside for a rainy day, are doing just that. Supply and demand alone, leave quite a few questions unanswered.

Dairy Politics

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In 1939 the Supreme Court in the Rock Royal case affirmed dairy farmers should get cost of production. The actual words of the Court bear repeating:

By Section 2, 7 U.S.C.A. § 602, it is declared to be the policy of Congress, through the exercise of the powers conferred upon the Secretary of Agriculture, 'to establish and maintain such orderly marketing conditions for agricultural commodities in interstate commerce as will establish prices to farmers at a level that will give agricultural commodities a purchasing power with respect to articles that farmers buy, equivalent to the purchasing power of agricultural commodities in the base period.

In other words "parity."

Then in 1981, Ronald Reagan signed a bill eliminating parity. The hue and cry from all experts was that without the end of parity, dairy farmers would continue to overproduce. Processors and co-ops dumping dairy products did not have to prove anything. The government stood ready to buy dairy products, which met standards.

The only basis for the claim would have been linear projection of recent milk production. So, projecting out the data available in 1981 indicates production would have been 160 billion pounds in 2009.

Trim a fruit tree and you get more, not less, fruit. Dairy farmers took the only option left and produced more - 29 billion pounds more in 2009.

Beware of the scams conjured up by people in high places. Critical thing should not be optional for dairy farmers,there is a high price to pay for being a follower.

Orderly Marketing

A major point of the federal milk market orders is the idea of "orderly marketing", which has come to be interpreted as meaning the milk is on the shelves.

This was not always so. In a famous 1939 case, known as "Rock Royal Creamery", the Supreme court opinion states:

By Section 1, 7 U.S.C.A. § 601, it is declared that 'the disruption of the orderly exchange of commodities in interstate commerce impairs the purchasing power of farmers' thus destroying the value of agricultural assets to the detriment of the national public interest. This interference is declared to 'burden and obstruct the normal channels of interstate commerce.' By Section 2, 7 U.S.C.A. § 602, it is declared to be the policy of Congress, through the exercise of the powers conferred upon the Secretary of Agriculture, 'to establish and maintain such orderly marketing conditions for agricultural commodities in interstate commerce as will establish prices to farmers at a level that will give agricultural commodities a purchasing power with respect to articles that farmers buy, equivalent to the purchasing power of agricultural commodities in the base period.

Has the destruction of dairy farm assets been a "detriment of the national public interest"? Milk is still on the shelves but, is that all that is important?