Farming Magazine - December, 2009

COLUMNS

Opinion: Producer Pricing of Commodities

By Martin Harris Jr.

Maybe it’s the exception that proves the rule, but my conversation in late August (supposedly the dead month for politics, agricultural included) with Gene Paul, former president of the National Farmers Organization, was both enlightening and encouraging.

It came at a time when the usual cycle of down-turning milk, livestock and grain prices is producing an unusual set of responses from dairymen, cattlemen, planters and, particularly, large-scale growers, although the response from government has been about what you might expect if you have watched the industry’s struggles in recent decades.

If you look further back into American history—the turning point came when an urbanite majority was first proven by the Census of 1920, and one way it shows up is in the subsequent change of focus in the USDA Yearbooks, from farm prosperity to consumer concerns—you can see that it wasn’t always so. However, for the two farming generations since the Great Depression, it’s been a rare year indeed for the national ag stats to show a positive return-on-investment—nothing even remotely approaching the 10 percent or so accorded by law to regulated public utilities, and now roughly 90 percent of farm-household income is earned in off-farm jobs. Only the brief post-WWII period—when a similarly-intentioned parity-pricing law, coming out of the Depression-era governmental fear of consumer prices rising because of too many discouraged farmers quitting—enabled a few consecutive years of significant black ink on farm ledger sheets; that ended by the mid-’50s when government chose to end it. Thus, it wasn’t by historical accident that the National Farmers Organization was founded in 1955, with the promise to members of the same sort of aggressive producer pricing of commodities, which had first been successful with the then-innovative dairy farmer strikes of the ’30s.

However, the 25-year evolution of consumer-oriented food-price politics soon surfaced; while government had silently acquiesced to the producer holding actions of the late Depression, it reacted with negative vehemence when NFO, unique among contemporary co-ops and alliances, tried first a small holding action (livestock, for a month in early 1962), then a larger one (grains as well as meat animals, in later 1962), then an on-farm retention-of-grain strategy in 1964, soon followed by a similar one for livestock. Each of these had positive per-unit pricing results for member producers.

By 1966, the organization was successfully assembling and brokering larger-quantity livestock and grain sales for groups of members, and then in 1967, a milk holding action began. Within two weeks, the U.S. government struck back. The suit, filed on antitrust grounds, had the desired effect and the strike collapsed. In 1968, NFO tried again, starting with grain and later adding livestock. It worked.

By 1970, the potato crop was being held back, and contract poultry growers were refusing to start new chicks. Corporations ranging from Ralston-Purina to Allied Mills, who lost their cases but inflicted the desired chilling financial damage, sued NFO. By the early ’70s, NFO was into commodity lifts via re-loads, particularly and successfully for milk, assembling product into larger blocks, and moving it away from the usual buyers, with the desired result of increasing producer pay-prices. In retaliation, other farmer organizations like Mid-Am and AMPI promptly sued it. It took 20 years for NFO to win in court, but again, the costs were devastating. Further attempts at serious producer-price management, other than a continuing brokerage program, were discontinued.

I recite all this semi-ancient history because it serves as background to Paul’s present conclusion that the future of commodity-pricing by producers doesn’t lie in the traditional methods of strikes (holding actions) and diversions (reloads and lifts) using already-produced market-ready supplies but in a different direction entirely: managing the volume of the supplies to be produced. If the strikes of the Depression were Plan A, supply management is Plan B. Importantly, if attempts of Plan A produced legally-lethal government reaction (they did) and contemporary executions of Plan B by consortiums of large-scale agri-business producers have not produced comparably hostile and punitive governmental legal response in the present (they haven’t), then it makes sense for sole proprietors, through their organizations, to go to Plan B.

One beta test version of Plan B calls for a highly skilled and eminently judicious team of experts, primarily representing the triumvirate of ag power—producer organizations, the federal government and agri-business—to determine a “fair” pay price at the farmgate for food items. Actually, it’s a quadrumvirate; the silent power in all such situations being the dominant political voice of the urban consumer with his insistence on ever-cheaper food.

Consider, for example, the Dairy Price Stabilization Program recently outlined by the Holstein Association. It proposes to limit milk supplies overall by assigning a production quota to each producer, so that the industry in total will “fulfill the market needs for each quarter of the next 12 months allowing for a producer raw milk price that is positive over operating costs as determined by the board.” Involved in the supply-management process will be the USDA, a dozen producer representatives, a consumer rep, a solid dairy product rep, a liquid dairy product rep and a dairy economist.

Notice that “positive” isn’t defined and could be at break-even levels; this was specifically advocated by the USDA in 1981, when it put into print this official finding: “Real increases in asset values are no less a return to farming than current income.” Translation: if your land is going up, you’re not entitled to a profit on crop production. Read it for yourself in Agricultural Food Policy Review, AFPR-4, page 45. An observer even slightly conversant with the history of the USDA’s post-WWII negativity to commodity-production profits would reasonably expect that, with the USDA seated at the Holstein Association conference table, the same position will prevail.

The historical record shows that, since its inception in 1937, the Federal Milk Marketing Order, in its various forms over time, has not been implemented to insure parity-level “positive” returns to milk producers but rather to provide just enough commodity pricing to prevent producer-quits, which might turn a chronic marginal product oversupply and the ensuing below-cost-of-production pay prices into a real product shortage and higher consumer prices. In fact, the USDA’s own language describing FMMO objectives puts “reasonable consumer price” first, “producer price stability” second and “pricing to ensure adequate supply” third. Producer commodity profit isn’t mentioned. Read it for yourself in a nicely written summary published by Farm Bureau in May 2009 under the title of AFBF Milk Pricing Policy Development.

In contrast, producers of electricity have negotiated much better with governmental regulators than producers of milk. Central Vermont Public Service, typical of regulated public utilities, was guaranteed a Return on Equity in 2008 of 10.7 percent and in 2009 of 9.8 percent; meaning that, if corporate property increases in value, the RoE, which is a return on net worth, must likewise increase. In sharp policy contrast, if dairy farm property increases in value, it’s fine under USDA logic for the farmgate milk price to decrease.

Because the historical record shows so little governmental enthusiasm for actual profit at the farmgate commodity price level, I’d guess that it bodes poorly for the prospect of the Holstein Association’s quota plan, as a supply-management device, actually improving pay prices into true profitability. Therefore, if you call it Plan B, beta version 1.0, you’ll need a version 2.0. That version may be taking shape in the Cooperatives Working Together (CWT) programs of the National Milk Producers Federation, one of which aims at herd reduction and the other that aims at supply export. Herd reduction, if successful, would have to reduce domestic milk quantities faster than on-going gains in per-cow production levels have been increasing them. Increased exports would likewise bring supply down to disappearance levels with price-enhancing results. Recent industry trends have been just opposite: milk supplies have been increasing far faster than consumption. In the mid-October issue of Hoard’s Dairyman is a report of increased milk production, 2002-2009, of 5 billion pounds in 2009, 25 billion since 2002.

However, it’s worth noting, historically, that the original supply-reduction-via-holding program of the NFO in 1967 triggered a federal lawsuit. Here’s the UPI press release from March 29: “The federal government has filed an anti-trust suit against the National Farmers Organization in an effort to break the milk withholding action.” So, 22 years later, the federal government reacted similarly against domestic-supply-reducing grain exports, declaring an embargo in violation of existing export permits, because, as described in a later study by the Heritage Foundation, the feds wanted in 1979 to “protect U.S. consumers and farmers from the market effects of unexpected Soviet purchases of grain such as those which drove up U.S. bread prices in 1972. In that year, so much grain was sold to the Soviet Union by separate grain companies that grain shortages developed on the U.S. market, driving up domestic prices for grain products.”

Would the feds similarly torpedo present-day efforts at supply management by producers, should they prove effective? Maybe so, simply because the arithmetic of the urban/consumer vote (98 percent of the total) is so dominant, and the consumer expectation for ever-lower-real-cost food is so evident. Maybe not: with large-scale producers like Tyson and Smithfield openly publicizing the supply-management (read: reduction) plans that they are now orchestrating in their respective industries, it might be hard for the feds to justify a repeat of their attacks of the ’60s and ’70s on sole proprietors and their small organizations for taking the same supply-management actions they’re not willing to challenge at the agri-business level.

The author is an architect and former farmer.