Much Ado About Nothing

American dairy production is going through some rough times. As illustrated by the chart on this page, the milk price vs. food price ratio is nearing historical lows. As a response, the industry is pushing in favour of a new safety net that it will certainly obtain once all the psychodrama that is shaking American politics is finally over. Nonetheless, this new safety net could very well be much ado about nothing.

The price of milk in the USA is highly volatile and is fluctuating around what it has been trending at over the past few years. In a context where the cost of input has considerably risen since 2006, farmers are left to deal with dropping margins. However, the direct payment program (Milk Income Loss Contract Program) only applies when the price is low, not when the margin is low. Without support from the State - or very little - farmers have few options left. Many are digging into the old and planning for their exit while those who choose to remain are doing their best to benefit from technological investments and economies of scale.

Regardless, US dairy farmers are impatiently waiting for a new dairy policy to come to their rescue. And a new safety net to protect them in the event of a margin drop is more and more likely. Would this really change anything? Highly doubtful!

Milk Price/Food Price Ratio in the US



First, farmers who will want to subscribe will undoubtedly have to pay a premium to enjoy this type of coverage, just like an insurance policy! But how high would the premium be? And what kind of protection would be provided? The ball is now in the actuaries' court and they're skating on thin ice. If protection is insufficient, farmers will not subscribe. If it is too generous compared with the premium to be paid, the cost to the US Treasury will be restrictive. The target needs to be just right. However, with public finances being what they are in the US, chances are that the State's precarious financial situation will overshadow that of dairy producers. The people who are examining the State's increased support for dairy farmers also have the annoying habit of including food aid for the underprivileged in their statistics.

Furthermore, note that any kind of eventual security net will have a ceiling. Currently, the MILC has a ceiling of about 130 cows. In 2013, 63% of US dairy production came from farms with more than 500 cows, the effect of the program and its respective ceiling on the development of the American dairy landscape remains minimal. Is this the desired effect? Note that in the dairy sector too much support for the industry is to be avoided, which would ultimately result in a surplus that would send prices into a freefall. It's always disconcerting to realize how those involved in the US farming industry perceive the tools used in making agricultural policy. Reaching a target income of some sort, for example with production cost, is simply not part of their language.

Where can US dairy production find deliverance? In fact, most of it is beyond the US borders, since a growing proportion of American dairy production is exported. This proportion will continue to increase as world demand rises. Another option for deliverance: technology and economies of scale. Oh that's right, you should also expect a new attempt to control supply in the event of a surplus. One more patch! May those who believe in this nth attempt raise their hands.
 
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