Dairy Policy and Market Watch

Policy Watch

I have just returned from Chicago were a 50 plus group of who's who in the dairy industry gathered for a two-day brainstorming event. Sponsored by Cornell's Dairy Markets and Policy group and by invitation only, representatives from industry, cooperatives, government, and universities got together to look into the industry and policy crystal ball. Here is a condensed list of what these folks see as front-burner items and which every dairy farm family should be aware of and following.

Federal Milk Marketing Orders: The current pooling arrangements for Class I revenues is just not working and this is creating distortions and unhappiness in the dairy industry. Look for at least some of the industry to begin to get on board with the concept of a national pooling for all Class I revenues. All Class I revenues would be put into a great big pool of dollars and each milk producer would share equally on a hundredweight basis.

New Class 3 and Class 4 pricing rules: No one (save the USDA/Agricultural Marketing Service) is really ok with the newly adopted, but not yet implemented, pricing rules. Look for a court challenge just as soon as the USDA/AMS announces their implementation.

Federal Price Support Program: The current program offers no real support as witnessed by Class III prices that were in the mid eight-dollar range in 2000 and 2002. Many in the industry believe that the current (and expensive) Milk Income Loss Contract (MILC) program would not be needed if the support price program really provided support for the milk price. What to do about this is not clear. Increasing the support price level is most likely out of the question, although some will continue to argue this position. Broad U.S. trade liberalization desires will likely push us toward less support, not more. We may have to be satisfied that we have the program as it is and be ready to save it in the next round of agricultural legislation.

Trade Liberalization: The World Trade Organization and the current round of new trade talks will dwarf any real concerns or challenges that the dairy industry might present. Trade is a conundrum for the U.S. dairy industry. On the one hand, we do not wish to see a single import item enter this country, yet our industry realizes that we must become players in the international trade field, and to do so, we need lower barriers not higher.

Market Watch

In this section of the column, I will provide a short-term outlook for milk component prices, market prices, the MILC payment, and a representative milk check. These forecasts are generated by my staring into my personal crystal ball. However, truth in advertising forces me to tell you that I use information from many varied sources to arrive at my guesses for the future.

Here is the Class III price outlook from those active in the Chicago Mercantile Exchange Futures and Options market.

Table 1. Futures Class III Prices: Quarterly Average Settle Prices as of 01/07/2003.

This market is betting that a combination of weak, if not declining milk production, along with a rebirth in general economic activity, will work down the large supply of butter and cheese and provide a solid third quarter price. If you use the futures markets to hedge the Class III part of your milk check, now is a good time to get some price protection in the summer and autumn months.

Table 2. Forecast National Agricultural Statistics Service (NASS) average dairy product prices and the Class III price.

Figure 3. Forecast Average Market Pay Prices for Butterfat, Protein, Other Solids, and Nonfat Solids.

My analysis suggests that the commercial markets will be weaker than that implied by the current futures contract settlement prices. Note, that I foresee a substantially lower average Class III price for the April to June period than that anticipated by the futures market ($9.93 Class III vs. $11.48). Clearly one of us is wrong. I am betting that the market is over-estimating both the growth in commercial demand and the decline in milk production. If I am correct, then those prices on the Chicago Mercantile Exchange (CME) contracts for April through June look very good, and at least some of your milk should be priced on the CME at this time. Putting together the Class III price plus the producer price differential, the gross milk check price looks to be $11.07 for January through March and $10.89 for April through June. The MILC payment will add another $1.35 and $1.55 to the first 24,000 hundredweight in each period.