BERRYVILLE, Va.–Times are tough in America’s Dairyland. Farm milk prices have dropped to a 20-year low, and Congress is considering a $500 million relief package to shore up beleaguered dairy farmers.
Ironically, at the same time this bill is pending, one of the most important innovations to the long-term health of the dairy industry is being severely encumbered by officials in Washington.
Last year, Congress directed the Department of Agriculture to establish a temporary pilot program to allow “forward contracting” between milk processors and dairy farmers.
Under such an arrangement, otherwise prohibited by law, dairy farmers could lock in long-term, profit-making prices.
Processors are willing to offer these price guarantees because their customers–grocery stores–want stable prices for dairy products. Customers shy away from the dairy case when prices fluctuate. Instead of milk, they buy bottled water and calcium-enriched fruit juice and shy away from yogurt, cheese, sour cream and cream cheese.
With forward contracts, everybody wins. Consumers are happy and healthy, grocery stores generate more business for the dairy case, an important profit center for them.
Processors can be more efficient in everything from scheduling job shifts to shipping out, because they know their costs and the quantities of milk they’ll be handling. Most important, dairy farmers can lock in not only stable prices but profits as well.
Tell all that to Congress and the Department of Agriculture. The first thing Congress did when authorizing forward contracts was to exempt so- called Class I milk–the beverage milk consumers buy at the store.
This restriction eliminates more than 30 percent of the U.S. milk supply from the potential benefits of forward contracting. And as a rule of thumb, this exemption denies opportunity proportionately more to dairy farmers the further east they are located.
Those farmers generally see a larger percentage of the milk they produce go directly to the consumer as beverage milk, rather than to manufactured dairy products.
But even the farmers whose milk goes into cheese and other dairy foods may not benefit. The Agriculture Department has proposed rules so restrictive that these contracts may never fully get off the ground.
The Agriculture Department has proposed that the first contract a farmer or farmers’ cooperative enters with a milk processor be limited to six months.
Yet the nation’s largest dairy cooperative, Dairy Farmers of America, told a Senate committee that “production of milk increases in the spring and declines in the late summer and fall. Consumer demand for milk is just the opposite. The need for milk is heaviest in the fall and lightest in the late spring and early summer.”
These 6-month contracts are unlikely to span both the peaks and the valleys of the milk market and would not provide the opportunity to spread dairy prices in a way that assures the farmer of a profit for the full year.
Under the proposal, subsequent contracts could be longer, overcoming this problem. But placing such a restrictive requirement on the initial contract into which a farmer enters is much like leading someone a room full of riches but not providing the key that unlocks the door.
The Agriculture Department is also proposing farmers and cooperatives should have the right to revoke contracts. This provision is patterned after consumer laws that protect elderly widows from being duped by preying telephone solicitors or unscrupulous door-to-door salesmen.
Sure, farmers may enjoy the benefit of locking in a price and then shopping around for a better deal over the next three days, but in such a case one of two things will happen.
Either processors will collude to not offer more lucrative contracts, or worse, they will not offer contracts at all. The Agriculture Department may be seeking to protect farmers, but this misguided restriction will only protect them from a chance at prosperity.
The proposed rules and Congress’ exemption of Class I milk are a threat to the viability of forward contracting for dairymen. It’s instructive to review the Commodity Futures Trading
Commission’s experience with such rules. A couple of years ago the commission considered allowing off-exchange trade options between farmers and grain handlers.
Like forward contracts, these option contracts were explicitly prohibited. The commission sought to open up these options to farmers as a means to hedge against low grain prices, yet the commission proposed a rule so restrictive that no trade options were ever developed or offered to farmers.
About a year later, the commission went back to the drawing board on the trade options rule. But in the meantime, grain farmers continued to suffer through a bearish market without this potentially important price leverage opportunity. It would be a grievous error to repeat that mistake.
The government is now assessing whether to modify its proposed rule. It should reconsider its restrictive rules for milk, and Congress should reconsider its decision to exempt nearly one-third of the milk market from this important risk management tool.
DAVE JUDAY, an adjunct fellow with the Hudson Institute’s Center for Global Food Issues, was former Vice President Dan Quayle’s chief agricultural adviser. His views are not necessarily those of Bridge News, whose ventures include the Internet site www.bridge.com.
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