Panel raises specter of high cost of dairy margin payments

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, Feb. 26, 2014 - The dairy panel at USDA's annual Outlook Forum focused almost entirely on the bullish market prospect for dairy farmers and vigorous exports of U.S. dairy products. Yet one speaker offered a long-term caveat about potential “unintended consequences” arising from the milk margin protection program authorized by the 2014 farm bill.

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USDA sees record milk prices in the first quarter of 2014 and continued profits thereafter as export demand stays strong and U.S. production expands only modestly. Exports set a record in 2013 for the fourth out of the past five years, supporting higher milk prices that continue in early 2014, Uthra Raghunathan, dairy programs agricultural economist in the USDA's Agricultural Marketing Service (AMS), said in a presentation at the forum.

Last year's average milk price was $20.01 per hundredweight, the second highest ever and only 13 cents less than the record in 2011. USDA is estimating an average price of $20.30 per hundredweight in January and projects an average between $20.85 - $21.55 for the full year. “I expect another dollar in February on top of the January record,” said Peter Vitaliano, VP for economic policy and market research at the National Milk Producers Federation (NMPF).

A healthy run-up in profit is needed to help recover the equity that dairy lost during the past few years, said Dave Bellows, director of risk management at AgriVision Farm Management in Hartley, Texas. While his outlook for continued strong prices does not challenge USDA's projections, he expressed concern that production might someday exceed demand and trigger significant payments to farmers under the farm bill's margin protection program.

“I'm afraid we are setting ourselves up to be a wonderful global exporter but with massive unintended consequences,” Bellows said. The program gives producers “the opportunity to take advantage of all the ‘ups' when margins are good, but when margins are poor I don't get that signal” to cut production, he said. “Down the road it could be a hugely expensive program at the expense of taxpayers if there is an oversupply. It would be tough to get that signal back to the producer.”

Yet such concerns appear far in the future. The margin of milk prices over dairy feed costs approached $11 per hundredweight late last year and is “expected to stay above $8 for all of 2014,” USDA Chief Economist Joe Glauber said Thursday. He attributes much of the strength to exports, which “are expected to grow further over the next 10 years.” Glauber described it as “another picture of where trade is very important to an industry where, very frankly, we didn't think about trade 20 years ago. Now there are categories where the U.S. is very competitive in these markets and we anticipate this will grow over time as well.”

USDA's Agricultural Projections to 2023 report sees nominal farm milk prices mostly steady through 2016 but then rising gradually over the rest of decade. Real prices are projected to drop as production efficiency improves with technological improvements and consolidation.

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