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…..