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Published December 07, 2010, 08:12 AM

Dairy needs ‘make allowance’

MESHOPEN, Pa. — There has been a lot of criticism — if not outright slander — leveled against the notion that dairy farmers need a farm milk price that reflects the average cost of producing milk, specifically the Federal Milk Market Improvement Act of 2009 — S1645.

By: Gerald Carlin,

MESHOPEN, Pa. — There has been a lot of criticism — if not outright slander — leveled against the notion that dairy farmers need a farm milk price that reflects the average cost of producing milk, specifically the Federal Milk Market Improvement Act of 2009 — S1645.

Some call it welfare. Others call it anticompetitive or un-American, or complain that it would guarantee a profit for dairy farmers and stifle innovation.

Still, others say it would raise dairy product prices so high that people wouldn’t buy them or that it would take food out of the mouths of the poor.

First of all, S1645 is no guarantee of profitability. It uses national average cost. Some producers have a higher cost and some have a lower cost. It would not stifle innovation. Farmers still want to be profitable. It is not welfare any more than minimum wage is welfare. Anticompetitive? Dairy already is a controlled industry.

Cost of production

To put cost of production into historical perspective, in 1980, the total economic cost of production was $12.64 per hundredweight, while the gross value of milk was $12.95 per hundredweight. In 1990, the total economic cost of production was $14.73 per hundredweight. while the gross value of milk was $13.70 per hundredweight. In 2000, the total economic cost of production was $18.02 per hundredweight. while the gross value of milk was $12.63 per hundredweight. In 2009, the total economic cost of production was $22.28 per hundredweight. while the gross value of milk was $12.81 per hundredweight.

Bruce Krupke, executive vice president of Northeast Dairy Foods Association Inc., says, “Anyone with basic economic understanding knows that if you operate a business, costs are not guaranteed . . ..”

It seems clear to me that no business is sustainable under these conditions. I have sat in federal order hearings in which processors have argued that make allowances must be high enough to cover manufacturing costs in the highest cost regions.

Perhaps this industry mentality causes Krupke to interpret S1645 as covering high cost producers.

Consumer prices

The second glaring misconception regards consumer prices. The standard industry scare tactic is that if farm prices go up, retail prices will soar and consumers won’t be able to afford milk. Of course, the industry will do this as an excuse generated by greed and after all, the competition and efficiency doctrines do not apply to them.

Patricia Stroup, testifying at a California dairy hearing last year on behalf of Nestle USA and its Dreyers Brand Ice Cream Holdings division, made the point that raising the minimum farm milk price in California by 50 cents per hundredweight would hurt ice cream sales when she well knew that the national average retail price of ice cream was just as high in 2009 as it was in 2008 and higher than 2007 in spite of much lower cost for whole milk.

Let’s look at average retail prices from Dairy Market News. In January 2008, after several months of record-high prices, whole milk was $3.87 per gallon; butter, $3.08 per pound; processed cheese, $3.99 per pound; natural cheese, $4.62 per pound; and ice cream $4.14 per half gallon.

Compare this with September 2009, after months of farm milk prices that were 40 percent to 50 percent lower than late 2007: whole milk, $2.98 per gallon; butter, $ 281 per pound; processed cheese, $3.82 per pound; natural cheese, $4.61 per pound; and ice cream, $4.24 per half gallon.

As you can see, the only real price signal is in fluid milk, which varies widely between markets. Manufactured retail milk product prices do not vary much regardless of farm milk prices.

I have no doubt that the “industry” actually can stifle and control retail sales by maintaining high retail prices. This, coupled with imports, maintains an “oversupply” and depresses farm milk prices.

All farmers are asking for is a “make allowance” similar to what processors already have. The main problem is that farmers have no money or power while processors have plenty of power and all the lobbying money that they need at the farmer’s expense.

Editor’s Note: Carlin is a Pennsylvania dairy farmer.

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