U.S. Dairy Policy and the Dairy Sector in the U.S. West. Joseph V. Balagtas Purdue University

Transcription

1 U.S. Dairy Policy and the Dairy Sector in the U.S. West Joseph V. Balagtas Purdue University

2 Recent Market Conditions Historically high milk prices since 2006 Drought in Australia/NZ Continued strong global demand for manufactured dairy products But also high feed prices Ethanol

3 25 U.S. All Milk Price, $/cwt, 1/2000-1/ Jan-2000 July-2000 Jan-2001 July-2001 Jan-2002 July-2002 Jan-2003 July-2003 Jan-2004 July-2004 Jan-2005 July-2005 Jan-2006 July-2006 Jan-2007 July-2007 Jan-2008 July-2008 Jan-2009 July-2009 Jan-2010 July-2010 Jan-2011 July-2011 Jan-2012 July-2012 Jan-2013

4 25 All Milk Price and Feed Costs, $/cwt, 1/ / Feed Costs All Milk 0 Jan-2005 May-2005 Sept-2005 Jan-2006 May-2006 Sept-2006 Jan-2007 May-2007 Sept-2007 Jan-2008 May-2008 Sept-2008 Jan-2009 May-2009 Sept-2009 Jan-2010 May-2010 Sept-2010 Jan-2011 May-2011 Sept-2011 Jan-2012 May-2012 Sept-2012

5 All Milk Price Feed Costs, $/cwt Jan-2005 May-2005 Sept-2005 Jan-2006 May-2006 Sept-2006 Jan-2007 May-2007 Sept-2007 Jan-2008 May-2008 Sept-2008 Jan-2009 May-2009 Sept-2009 Jan-2010 May-2010 Sept-2010 Jan-2011 May-2011 Sept-2011 Jan-2012 May-2012 Sept-2012

6 Prolonged Periods of Tight Margins for Dairy Farms Financial stress for many farms across the country Increased farm exits Increased debt/loss of equity for remaining farms Some increased cow slaughter, but mostly consolidation Some reduced yields, but total production continues to grow CA, NM dairy have been more responsive to price signals than the rest of the U.S.

7 Total Milk Production (% of 2000 production), U.S CA

8 Performance of Status Quo Policies Dairy Price Support Mostly inactive for the last decade (high milk and product prices) unresponsive to feed prices Milk Income Loss Contract Payments Pre-2008, deficiency payment unresponsive to feed prices Post-2008, payment formula adjusted to make payments more responsive to feed prices

9 Income over Feed Costs with and without MILC payments ($/cwt) All milk price - feed costs All milk price - feed costs + MILC Jan-2005 May-2005 Sept-2005 Jan-2006 May-2006 Sept-2006 Jan-2007 May-2007 Sept-2007 Jan-2008 May-2008 Sept-2008 Jan-2009 May-2009 Sept-2009 Jan-2010 May-2010 Sept-2010 Jan-2011 May-2011 Sept-2011 Jan-2012 May-2012 Sept-2012

10 Performance of Status Quo Policies Milk marketing orders not getting a lot of attention in the U.S. dairy policy debate. But keep in mind that the farm price of milk is not a market price, but a regulated price. Also largely ignored: Livestock Gross Margin for Dairy Evidence that it could be a powerful tool for managing price risk, but adoption has been slow (3% in 2010).

11 2013 Dairy Policy Proposals Dairy Security Act Eliminate MILC and Dairy Price Support Introduce Dairy Producer Margin Protection Subsidized margin insurance that pays when a national average margin falls below a specified level ($4.00/cwt with opportunity to pay for protection at higher margins) Introduce Dairy Market Stabilization Limits production to a % of historical base in months when margins are tight 100% tax on any milk marketed over quota

12 Economic Effects of the Dairy Producer Margin Protection Program Similar to current MILC payments, but designed to be more responsive to feed costs. Shields producers from market conditions that indicate reduced production, and so induces greater production exacerbating market conditions that triggered payments Costs born by taxpayers, and any producers that don t receive payments Gov expenditures for MILC approached $1 billion/year

13 Economic Effects of the Dairy Market Stabilization Program Restricts production/growth for individual farms when margins are tight Similarities to supply management systems in Canada, EU.a first for U.S. dairy policy Reduced production (for some farms): limits supply response of margin protection, taxpayer costs of DPMP Higher prices of milk, dairy products Reduced consumption of milk and dairy Reduced exports

14 Economic Effects of the Dairy Market Stabilization Program The DMSP transfers income from restricted producers to producers not facing binding quota. From low-cost farms to high-cost farms From good risk managers to bad risk managers From growing farms to shrinking farms From Western farms to Northeast/Midwest farms From U.S farms to N.Z./Aus farms

15 Economic Effects of the Dairy Market Stabilization Program But there remains uncertainty about how the supply management program would play out in practice. Who will sign up? How will producers respond to on again-off again quota? Market stabilization implies that the quota will have a counter cyclical effect on margins. Hard to imagine how this might be the case.

16 2013 Dairy Policy Proposals Current debate seems to be about if/how to implement the supply management program. Rep. Goodlatte-Scott Amendment DSA minus the supply management Sen. Gillibrand proposal: DSA with small-farm (anti-western) bias higher margin guarantee up to 4 mil. lbs (200 cows) Smaller farms exempted from supply management