Good times or bad, milk production seems to go only one direction in the United States — up, which it is doing for the third year in a row despite a tumble in market prices. Economist Scott Brown says if the industry is unable to cut output, the only solution to excess milk supplies will be larger domestic and export demand.
“The dairy industry needs to carefully consider the inability to turn the spigot off when milk returns suggest contraction is needed,” said Scott, of the University of Missouri, during a House Agriculture subcommittee hearing. “Most importantly, the only way out of low returns is for demand growth to catch up to excess milk supplies.”
The USDA’s all-milk price was an average $23.97 per 100 pounds in 2014, when the livestock industry was booming, compared to its forecast of $14.85 this year. The strong dollar has discouraged exports at the same time production is rising by a cumulative 3 percent in two years.
“Historical data on U.S. milk production highlights past difficulties in reducing milk supplies when producer returns are low,” said Brown. As an example, production rose despite record-high feed costs following the 2012 drought, he said, and have fallen only twice, in 2001 and 2009, since 2000. Dairy farmers apparently have high fixed costs that prompt them to continue or expand production rather than curtail it, he said.
“Times are tough on America’s dairy farms for the second year in a row,” said Randy Mooney, chairman of the National Milk Producers Federation and a dairy farmer in Missouri. Larger European milk production is displacing U.S. dairy on the world market, he said, and the new U.S. dairy subsidy program “remains a work in progress” that provides little support. “At the end of the day, dairy farmers just want consistent access to affordable risk-management tools.”
The 2014 farm law created the insurance-like Margin Protection Program, which is based on the difference between the farm-gate price of milk and the cost of livestock feed. Payments are triggered when the range between the prices narrows. Feed prices collapsed at the same time that milk prices slumped with the result that only a small amount of payments have been made.
MPP needs to be retooled, said Mooney, because a rapid recovery in milk prices seems unlikely. Premiums are too high during tight times for farmers to buy coverage beyond basic levels of protection, he said. Some 77 percent of the farmers enrolled in MPP this year opted for the lowest coverage level.
Brown said MPP was a major change in policy, toward risk management and away from traditional government programs that set a floor on prices. “More work is needed to help producers think through the risk-management aspect,” he said. While enrollment shifted to lower levels of protection, “producers might be better served to participate at higher levels.”
To read testimony or watch a video of the subcommittee hearing on conditions in the livestock sector, click here.