Milk crisis: US-made pragmatism
Frédéric Courleux, advisor of Momagri
The US market is not immune to the milk crisis that is currently hitting hard Europe. The USDA indi-cates that farmers’ incomes dropped by 35% during the past two years1, cheese private reserves are the highest since 19842 and US cheese exports declined by 20% in two years3.
In such context, US Secretary of Agriculture Tom Vilsack announced on August 23 the purchase of approximately 11 million pounds of cheese at a cost of $20 million. Intended for food banks, this transaction is made with the objective of raising milk prices4.
In addition to this interim measure to support the dairy sector, the USDA announced the extension of the deadline for registration in the Dairy Production Margin Protection Program (DPMPP or MPP) to December 16, 2016, instead of September 30.
The MPP, a counter-cyclical support with flexible protection level
The MPP is one of the new provisions of the 2014 Farm Bill. This program to protect dairy farmers’ margins is activated when the difference between milk prices and animal feed costs (bi-monthly average milk margin) falls below a certain threshold, thus providing livestock farmers with support in case of crisis.
Since July 1, 2014, this voluntary program allows each producer, for a $100 registration fee, to safe-guard a gross margin level on 25% and 90% of his historical production volume. The level of gross margin guarantee is left to farmers’ choice, from $4/Cwt to $8/Cwt, but farmers must pay an addi-tional amount each year to get better protection.
In 2015, 55% of farmers took part into this program, which closely ressembles an insurance system but whose management and funding falls under the USDA jurisdiction, and is thus labeled as an “insurance-like program”. Consequently, 24% of producers––42% of the production––had opted for the program’s basic coverage, and 31% of producers––27.5% of the production––signed on for a higher threshold than $4/Cwt, and most of them for $6 to $6.5/Cwt. In the end, 45% of farmers––31% of the production––did not purchase any coverage5.
Many are remaining skeptical as to the operations and terms of activation of the MPP program. The main criticism concerns the calculation of the gross margin, which suffered a cut in the final hours of negotiations of the recent Farm Bill. As recently stated by Randy Mooney, the chairman of the National Milk Producers Federation, “the [current] margins have activated the MPP at the highest coverage threshold, i.e. $8/Cwt, and only 264 farmers were able to receive payments [in 2015] and if Congress had not cut the calculation of feed allowance, over 8,500 farmers could have gained from the MPP.”6
Cheese purchases were made outside the framework of the latest Farm Bill
While the MPP system is subject to criticisms, the purchase measure decided by the USDA seems to be rather welcomed, even if the National Milk Producers Federation (NMPF) was expecting a cheese volume higher by 40,000 tons, or 90 milllion pounds7.
Yet one must note that the purchase of 5,000 tons of cheese was made outside the framework laid down by the provisions of the latest Farm Bill. In fact, the Dairy Product Donation Program (DPDP) calls for USDA purchases of dairy products for food aid earmarked toward deprived people. The system is activated in case of low level margins during two consecutive months et this intervention is limited to three months. Similarly to the MPP, the milk gross margin threshold is $4/Cwt during two consecutive months. Yet, in spite of declining milk prices, the average milk margin tended to recover to abount $7/Cwt in early summer as a result of lower corn prices.
The purchase of 5,000 tons of cheese was therefore made outside the DPDP framework through a disposition of the 1935 Farm Bill giving discretionary power to the Secretary of Agriculture to buy agricultural and agro-food products to support ailing sectors. In addition, as with the DPDP, these purchases are allocated to food banks and the needy9.
Higher price levels than in Europe and a recovery that seems under way
Yet, while there has been a strong decline in prices for the past two years, the recorded price levels seem to be substantially higher than in Europe. The reporded trend reversal based on the August 2016 data, which remains to be confirmed, also shows price setting variations.
The variation in milk price for the past two years––about 20% to the benefit of farmers––might be explained by the attractive currency parity and mostly because of the lower exposure of milk prices to powder and butter price fluctuations resuting from the US segmentation policy stimulated by the Federal Milk Marketing Orders.
In fact, the FMMOs are initiated by producers and organize the negotiation of milk prices paid to farmers. Price formulas are set in order to determine the share of the value of each dairy product that must be paid to farmers. As a result, all producers in a FMMO get the same basic price for their production each month; simultaneously, an equalization is made between processors so that they pay the same price level regardeless of their commercial opportunities . By doing so, price setting in the United States is more transparent, and directly takes into account all valuations and not only products with lower added value.
With MPP, DPDP et FMMO, the US farmers’ policy context carries a great number of acronyms! While the calculation formulas and/or activation thresholds might vary in the coming years to in-clude current situations, the fact remains that the United States has additional regulation tools to secure the sector. The swiftness in activating these tools and the ability to alter them are a testi-monial of the pragmatism and effectiveness of what could be called the “agricultural realpolitik”. This stands in contrast with a wavering Europe that “cobbles” makeshift solutions, when it does not opt to deny the very existence of crises.
Equipped with crisis management mechanisms and systems allowing for balanced price setting, the Americans are significantly better prepared to tackle the scourge of international circumstances, to the extent that collection volumes continue to increase at a time when they are declining every-where else as a result of the crisis. Without similar regulation mechanisms in Europe, the only way out has been a temporary reduction of volumes, which have indeed increased on this side of the Atlantic due to the elimination of quotas. Let us hope that the European Union finally seeks to de-velop effective regulation means enabling the better functioning of markets and sectors to prevent tensions and tugs of war––the last resorts of producers, who are made to withstand most of the exposure to intenational market volatility
5 According to Daniel-Mercier Gouin