Dairy Channel: Why are dairymen getting squeezed, and will new MILC program help?

The check is in the mail, or in the wire we might say in these days of automatic wire transfers. So said the USDA last week of the MILC program transition payments.

For farms that signed up for the optional program that essentially creates a national milk compact, that “check” may be substantial.

Is this program in the best long-term interest of dairy producers? The answer to that question remains to be seen, but the likely answer is “no.” Is the check welcome this year? Yes. Will it be in 2003? Probably.

Let’s look at why. The September Class III price was announced at $9.92. For the first time since June, the Class III is above the federally mandated $9.90 support price. So far this year, Class III prices are averaging $10.53/hundredweight. In 2000, the Class III average was $9.74; in 2001, $13.10.

While our final prices are calculated on “the higher of” Class III or Class IV prices, to try to look at prices in a relatively uniform way over time, the milk market administrator calculates the Statistical Uniform Price (SUP).

One of the few relatively understandable calculations in milk pricing, the SUP is the sum of the Class III price and the Producer Price Differential (PPD) for a given month.

The Producer Price Differential is different for each federal order and essentially reflects the relative use of milk in the marketing order. The greater the proportion of milk that goes for fluid use, the higher the PPD (think Florida). If more milk goes for cheese, ice cream, butter and other manufactured products, the PPD is lower (think Wisconsin.)

So, while the Class III average in 2000 of $9.74 is lower than our $10.53 average so far this year, the 2000 uniform price was actually higher at $12.08 for the year ($12.10 for Jan.-Sept.) compared to the $11.69/cwt. statistical uniform price for Jan.-Sept. 2002. The difference has to be in the producer price differential.

Pool raiders. This year, we are feeling the full impact of “pool riding,” an issue that we have discussed in the past.

In a quick review, dairies or their milk marketing agents, either milk plants or cooperatives, found loopholes in the federal order laws that allowed them to qualify their milk production to share in the PPD dollars from another federal order while not requiring them to actually deliver their milk production (except for a small amount to “qualify” for the year.).

Their milk could then be sold as usual in their federal order, while they sucked money, in the form of producer price differentials, on the same milk from another federal order.

If they actually had to ship all their milk into the other federal order, transportation costs would make this activity unprofitable.

The net effect on our order is twofold. First, many many more pounds of milk are pooling in the order. Second, the greater volume of milk results in a smaller percentage of milk going into fluid sales. Same pool of dollars divided more ways means less dollars per hundredweight for your PPD.

Loopholes sewed shut. Fortunately, through the hearing and rules process, most of these loopholes are being closed and the volume of milk from outside of our order that is pooled in the order for the sole purpose of sucking dollars out for non-delivered milk will decline.

It will take time for the numbers and dollars in your milk check to reflect this change as outside milk is not able to re-pool on our federal order over the next year.

While we were certainly impacted by this situation last year, lower PPDs were masked by very good milk prices. In 2001, the Class III price averaged $13.10 and the SUP averaged $14.52. The higher Class III compensated for a PPD that averaged $1.42.

Compare $1.42 in 2001 to $2.34 for 2000 and $1.81 for 1999. The bad news is that so far this year, the PPD is averaging just $1.17.

Back to the original question – will the MILC program help this year? The short-term answer has to be “yes.” Large or small, the additional dollars will help to offset milk prices and PPDs that can only be described as poor.

Spend wisely. How those dollars are spent can impact the financial health of your farm both short and long term. Many farms will have to use them to pay off open accounts and lines of credit. Accounts with the highest interest rates should be paid off first.

Credit card debts for farm operations are appearing more frequently on farm balance sheets. Unsuspecting folks are often lured into the practice by offers of low or 0 percent interest terms. Unfortunately, rates often increase to 12, 18, even 24 percent in three to six months.

An unpaid balance of $5,000 at 20 percent interest can easily accumulate at least $1,000 in interest charges in a year. Late or no-payment penalties can pile up on top of steep interest charges. Pay these balances off first and then cut up the credit cards and close the accounts.

Work with your lender to set up a workable line-of-credit for future operating capital needs.

Looking ahead. After open accounts, review other debt and cash flow projections for the next 12 months. Don’t forget to project income tax liabilities and purchased-feed cost increases. Reserve funds for those needs in your cash flow projections.

After these needs are planned for, then review other capital needs in your three- to five-year plan. Invest in those areas that will help you produce more efficiently, reduce production costs and/or address production or quality-limiting concerns on your farm. Look for cost-effective ways to maximize the quality and component additions to your milk checks.

While we can’t predict the future, current production statistics do not bode well for a quick turn-around in milk prices. When milk prices have been strong, production has equaled or been slightly below demand. Demand increases hover around 2 percent per year. In spite of drought, heat and rising feed prices, national milk production has been increasing well over 2 percent this year.

USDA just adjusted August production increases up to a whopping 4.1 percent over a year earlier. September’s production was pegged at 3.3 percent higher than a year ago.

Get out the calculator and sharpen the pencil. If you’re going to keep milking cows, it will be an interesting ride.

(The author is the northeast Ohio district dairy specialist with OSU Extension. Send comments or questions in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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