Letter to the Editor

Which Plan Makes the Most Sense to You?
by Tom Van Nortwick
10/19/2012

Dear Dairy Producers,
 
We have some questions that every dairy producer and dairy family needs to answer. What would $3.20 per cwt mean to your operation this month? This would represent a pay price of $19.20 per cwt instead of the very recent pay price for many producers, which was around $16. What would $6.40 more per cwt mean to your operation today? Which, by the way, represents a pay price of $22.60 per cwt. Finally, what would $9.60 more per cwt mean to your operation this month? That would put the price of milk today at or near $27.60 per cwt, which, by the way, is almost exactly what the USDA says it is costing dairy producers to produce a single hundredweight of milk in September 2012.
 
Right now, this very day, dairy producers in America are producing milk at a cost that is 40 to 60% above the price they are being paid for their milk. These numbers tell us, The National Dairy Producers Organization, Inc., that milk production versus profitable demand is still as much as 3 or 4% out of balance for Class III and Class IV production. Based on our calculations, which show that for every 1% too much milk there is in the U.S. marketplace at any given time, dairy producers who produce that milk are paid a price for their milk that is 20% lower than it would be if the total production milk on the farm, plus imports, were balanced, or better yet if supply was 1% below actual demand at any given time.
 
We have continually replicated that if the national production of milk is 2% out of balance, you, the dairy producers, are paid about 40% less for your milk. If the national production of milk is 3% out of balance, you dairy producers are paid about 60% less than what you could or should be paid for your milk. These numbers, while not perfect, can provide producers with needed management tools so as to effect for themselves a sustainable price from the marketplace-if they are willing to implement needed restraint in their eternal quest to fill every river and lake in the country with unwanted and expensive overproduction.
 
The message we offer from The National Dairy Producers Organization, Inc., the caution we send to all dairy producers across the country direct from us, is to not be fooled into chasing the price of milk with more production of milk on your farm. If you were reviewing the USDA Profitability Index, as you should be, you will find that due to the price of feed versus the price dairy producers are paid for the milk they bring to the market, that profitability index is at the lowest levels ever, even compared to 2009, when we all know everyone felt things were at their all-time worst.
 
The most important message we can bring to each of you today is that the "all-time worst profitability index ever" did not occur on those hot summer days in 2009. They are occurring right now on the hot summer and fall days of 2012. The profitability index for the second and the third quarters of this year are lower than any month in 2009. The latest numbers show that even the USDA's cost of production numbers, when compared to the current pay price of milk paid to dairy producers, has dairy producers producing milk at a cost that is as much as $11 per hundredweight more than what you are being paid to produce it.
 
Here we are, back, one year after we warned every dairy producer in the country that a national production reduction in milk was necessary if we were to avoid the extreme devastation that $14 milk would bring to the producer sector of this country. We told you then, and I quote, "Milk will never be worth more than the cost of producing it unless producers are willing to keep the production of milk at or below profitable demand for their milk."
 
The worry we have, based on a very long history of tracking the reaction of dairy producers to an elevating pay price for milk, is that producers will do all they can to produce the maximum amount of milk possible to take full advantage of the potential to maximize dollars paid to their specific operation. Worse than overproduction will be the continuation and perpetuation of producer apathy that comes to the producer sector when higher prices are paid to them for milk even though there remains no sign of profitability in those higher prices.
 
Every article we have read these past 12 months (as producer prices have eroded to margins below the cost of production, which has exceeded $8 and now $10 per cwt) has said that the number one cause for the price being at and staying at those levels was because producers were overproducing milk on the farm, relative to the demand for that milk in the domestic and world market. Without exception, regardless of the publication or the author, overproduction on the farm was identified as the culprit that led to the miserable prices paid to producers.
 
So someone tell me why we are now hearing processors and co-ops calling for more milk from producers. Everywhere we turn, someone is looking for or hinting that they need more milk production. If that is so-and believe me, it is-then one would have to ask oneself why. Why would processors, manufacturers and co-ops want more milk from producers, knowing that we just came from a period of too much milk and low prices paid to producers because of too much milk? Now, when future prices are rising, the tables have turned and they-the processors, the manufacturers and the co-ops-want more milk. They have even resorted to using scare tactics to consumers and the industry that there will be shortages.
 
Well, the real answer is they don't need more milk. Yes, they have more capacity to process more milk, but what they know all too well will happen when producers chase these high future prices with more milk production on the farm is what they really want most. More milk. More milk will equal lower prices. Lower prices are the holy grail for co-ops, processors, manufacturers, exporters and retailers. For dairy producers, it is a fatal race to the bottom if they ignore market signals and out-produce profitable demand for domestic and exported consumption.
 
The National Dairy Producers Organization, Inc. therefore calls on all of its members and every dairy producer in the country to weigh these words and percentages very carefully. 60% more money for all of your milk is a whole lot better than 4% too much milk nationwide. Not to mention the added costs incurred by producers to produce milk the market will not pay you a profitable price for, but milk processors will greedily take at a greatly reduced price even as much as $11 under the cost of production. Why would you do that? Even now, this very day, the excess taken by processors, manufacturers and co-ops helps them justify paying you as much as $9.60 per cwt less for all of your milk, even Class I and Class II utilization.
 
These numbers are real. The equations and the formulas have been tested month in and month out. We don't need production quotas. We don't need penalties for overproduction. You are already paying as much as a $50,000,000-per-day penalty. We don't even need margin protection insurance, which we have already proven is a scheme to prevent the marketplace from fairly paying producers what they justly deserve. You don't need any of these so-called management tools if you will simply follow the irrevocable law of supply and demand.
 
By following the recommendations and business-minded management proposals provided by the dairy producer members of the board of directors of the National Dairy Producers Organization, Inc., you can and will provide for your farm and your family a sustainable and predictable future. Without this plan, without unification, without self-reliance and self-discipline, you will continue to have total chaos and extreme volatility that is the death knell for thousands more producers.
 
With more than 300 collective years of dairy producer and dairy industry experience, these board members have outlined for you the most profitable method of managing the dairy industry in the history of the U.S. dairy industry. They have a plan for profitability. They have a plan for sustainability. They have a plan for growth. They have a plan to manage stored inventories of Class III and Class IV utilization. They have a management plan that does not require them to regulate Class I or Class II production. They have a plan to increase domestic and even foreign consumption of milk and milk products. They have a plan to improve the taste and quality of the product you produce, especially in the eyes of every consumer. They have a plan to curb and even stop the unneeded importation of milk products into this country. They have a plan to increase domestic consumption of milk and milk products in America. They have a plan to keep you and your family on your farm. They have a plan to make your dairy profitable. All we ask for is your support. And we are even working on a plan that will more than fairly compensate you for the cost of that support.
 
After all, ladies and gentlemen, if this producer-led board was not here, what would you have to fall back on? The Farm Bill? The Dairy Security Act? The status quo? $15 milk or even $19 milk when the cost of production now exceeds $28.00 per cwt? As we have said here before and heard said again by many others, that dog don't hunt. We encourage you to learn more about all of the recommendations and policy proposals from the board of directors by visiting our website at www.nationaldairyproducers.org.  Please join us on our Tuesday evening National Call for all dairy producers. Call in at 5 p.m. Pacific Time or 8 p.m. Eastern by dialing 712-432-0900. Use pin number 782091. Also feel free to call our office any time at 1-888-343-5489.