With the increasing volatility of dairy markets in recent years, and the increasingly difficult dairy industry, many proposals to restructure dairy policy have been introduced recently. Many of the proposals, most notably NMPF’s Foundation for the Future program, seek to maintain a profitable margin for all dairy producers throughout the country. While it is generally accepted that some reform is needed to update the dated dairy policy/pricing system, many aspects of the NMPF proposal have no place in the free market.

Producers already have the tools necessary to protect their margin through futures and options. They do not need government intervention to achieve a stable market.

The supply management portion or “Dairy Market Stabilization Program” would, in effect, cap production in times of low margins in an attempt to reduce supply and maintain a profitable price level to producers.

The program would likely artificially raise prices; however, it could be damaging to an efficient producer who may have expanded in the months prior to the DMSP kicking in, only to be penalized for increasing production.

If the objective is to maintain the profitability of every single U.S. dairy producer, efficient or not, then yes, the DMSP would likely achieve that goal. The increased prices domestically would also result in higher U.S. prices relative to the world market.

In today’s global economy, the dairy industry has benefitted greatly from the export market. Any policies put forward should help enhance the export market, not hinder it. While some government subsidies and policies are in fact necessary, any subsidy creates inefficiency in the marketplace.

Often when the government puts policies in place they are much easier to initiate than amend or eliminate. Times like these call for less government intervention, not more of it. Instead of convoluted programs and complex pricing systems, we should promote a simplified alternative to the status quo.

One pertinent example of government intervention was the mohair subsidy, explained in the following paragraphs from The Concise Encyclopedia of Economics .

“One special interest that has gained at the expense of consumers and taxpayers is wool and mohair producers.

During World War II, military planners discovered that U.S. wool producers could supply only half the wool the military wanted. Partly for this reason, and partly to give added income to wool growers, Congress passed the National Wool Act in 1954.

Mohair, produced by Angora goats, had no military use but was included as an offshoot of the wool industry. Although wool was removed from the military’s list of strategic materials in 1960, the program survived and continued to grow.

Under the Wool Act, growers were given subsidy checks to supplement what they received in the market for their wool. In 1990, the wool subsidy rate was 127 percent, so a farmer who got $1,000 for selling wool in the market also got a $1,270 check from the government.

The subsidy rate for mohair was a much larger 387 percent. The subsidies were paid for by tariffs on imported wool.

Thus, consumers were paying more for imported wool, which also drove up the market price paid for domestic wool, a close substitute. The economy operated less efficiently because less wool was imported, even though the imported wool would have cost less to produce and to buy.

The subsidy program, together with the higher price caused by the wool tariff, meant that domestic land, labor and capital resources were applied to the production of wool and mohair instead of to more valuable goods.

Nevertheless, political support for the program was strong, and Congress continued it. Thousands of very small checks were sent to small growers in every state. Almost half of the 1990 payments were less than $100.

Many of those receiving them were willing to write letters and to vote for those who support the program. Nearly half of the money, though, went to the 1 percent of the growers who were the largest producers.

The largest checks, nearly 300 of them, averaged $98,000 and accounted for 27 percent of the program’s 1990 cost. Recipients of these large checks could be counted on to contribute to organizing costs and to give campaign donations to members of congressional committees critical to the subsidy program.

By contrast, because American taxpayers paid only a few dollars per family (Wool Act subsidies were $104 million in 1990), most taxpayers were unaware of the program and of how their elected representatives voted on it.

Even though taxpayers were numerous and the Wool Act cost them a lot as a group, each taxpayer lost so little that none had an incentive to become organized or knowledgeable on the topic. Thus, the Wool Act, which harmed the interests of the great majority of voters, survived until 1996, the last year of a three-year phaseout of the program mandated by Congress in 1994.

But organized interests are resilient. A subsidy program that effectively set minimum prices for both wool and mohair was part of the 2002 Farm Act and seems likely to persist for years to come.”

While this example is not the norm for subsidies in general, it does provide a glaring picture of the inefficiencies and difficulties government intervention can produce. The idea of protecting a margin is not a new concept – margins have always been the basis of profitability for any business.

Producers can, in fact, reduce risk and protect margins with futures and options. Whether or not they choose to do so should be up to the producer.

I would like to see the dairy industry come together to promote policies that would be beneficial to the industry as a whole. For example, we could as an industry work to eliminate ethanol subsidies.

One recent study by the University of Missouri found that ethanol subsidies add, on average, 18 cents per bushel, or 13 percent, to the price of corn.

Calculating the average dairy margin using FFTF’s own feed cost formula and using August 2011 prices of $6.62 and $5.75 (less 13 percent) for corn, $12.90 for soybeans and $191 per ton of alfalfa, eliminating the ethanol subsidy alone would increase margins by $1.02.

Not an insignificant amount, and this could be used as a point to persuade politicians toward ending the subsidies. We should also work to promote exports.

The Dairy Price Support Program encourages production of nonfat dry milk because the government is a guaranteed buyer even though it is not a major export demand product. Dairy products purchased by the government sitting in storage benefits no one; it only prolongs periods of oversupply.

It is good to see the dairy industry coming together to promote comprehensive policy reform. I hope that whichever policies are approved do not make attempts to manipulate the market but benefit all producers and provide the tools to capture a growing global marketplace. PD

References omitted due to space but are available upon request to editor@progressivedairy.com .

Jace Leal
Dairy Producer
Tulare, California