The U.S. government guarantees a profit for processors. The irony is that the dairy case is a profit center for a retail grocer. They can return to the processor the dairy products that do not sell. But that is okay for the processor because the US government guaranteed a profit for the processors. And the dairy cooperatives allow this? They think the changes in pricing to favor processors is good? What for the dairy farmer? Our pay price goes down again! Why is it that farmers are always the ones that can be disposed of at the whim of an ignorant consuming public? Isn't it time that the consumer realizes that it only sets presidence for their own lives if we dairy farmers are disposable and allowed to be taken advantage of? They are being treated in much the same way only cannot look and see that they are disadvantaged just like us. Heck, Mitt Romney - Gov of MA - even said that there isn't enough of a distance in income between haves and have nots. Are we the average American to pay for their luxuries? I'd forgo diamonds and designer outfits for something as simple as a health insurance plan.
See the article below!
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Weekly Dairy Market Outlook
By Ken Bailey
Penn State University
January 20, 2006
Headline: USDA To Hold a Public Hearing on “Make Allowances”
· Processors facing higher costs
· Make allowances expected to increase
· Farm-gate milk prices could decline $0.25-$0.46/cwt
USDA announced in the Federal Register earlier this month that they will hold a public hearing on January 24, 2006, to consider amending Class III and IV milk price formulas (see URL: http://www.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htm ) . This hearing will focus on receiving testimony to potentially adjust what processors pay dairy producers for their milk. USDA will do this by making changes in the make allowances to reflect processing costs for butter, cheese, nonfat dry milk and whey. My preliminary analysis indicates that using the changes in make allowances presented by USDA in the Federal Register will lower farm-gate milk prices roughly $0.25-$0.46 per cwt in 2006.
Processors located in federal orders must pay dairy producers class prices for milk depending on how it is used. These class prices are based on formulas that set minimum prices for milk components (milk fat, protein, other dairy solids) which are in turn based on the wholesale value of dairy commodities (cheese, butter, nonfat dry milk and whey). The formulas include “make allowances” that reflect the cost of processing various dairy products. According to Agri-Mark, current make allowances used in federal orders are based on an outdated cost survey and should be updated to reflect higher processing costs.
If the hearing results in make allowances being raised to reflect these higher processing costs, processors will end up paying dairy producers less for their milk. The opposite is also true; if make allowances are reduced, farm prices will rise.
USDA conducted a preliminary analysis of the impact of three scenarios that reflected changes in make allowances. For all three scenarios make allowances were raised 36 percent for butter production, 15 percent for nonfat dry milk, and 10 percent for dry whey. The cheese make allowance was increased successively in each scenario by 1 cent per pound (6 percent) in Scenario 1, 2.5 cents per pound (15 percent) in Scenario 2, and 4 cents (24 percent) in Scenario 3.
I applied these make allowances to formulas I use to forecast 2006 milk prices. Federal order blend prices were then estimated by using class utilization rates from 2004. The results of my one year analysis are in Table 1. They indicate that depending on the scenario, farm-gate milk prices will likely decline $0.25-$0.46 per cwt in 2006. (this study is preliminary and does not reflect simultaneous changes in supply and demand over time).
The current formulas used in federal orders are designed to basically guarantee processors a profit margin. These formulas look at wholesale market prices for basic dairy commodities and then set a cost for the milk. Inside that formula is the processors fixed profit margin. Assuming the margin is set right, high cost processors will be able to process dairy products, and low cost processors will make an above-average profit. Dairy farmers, of course, have no such guaranteed profit margins. However, there is no other good way to run federal orders without these formulas. One can make the argument that these formulas and make allowances are necessary if dairy producers are to receive federal order protection.
Milk cooperatives are proposing these changes in light of escalating energy costs, as well as higher costs for labor and insurance. Also, they argue that make allowances used in California are higher than they are in federal orders.
There is no such thing as make allowances and guaranteed margins in the rest of the U.S. economy. Input costs and sale prices for products change over time, thus margins fluctuate. Companies that face such variability use contracts and forward pricing tools to lock in their margins. They also rapidly adopt technology and expand market share in order to protect margins and increase sales volumes. In fact, that is exactly what has happened to U.S. dairy producers over the past 20 years.
The national hearing is simply a meeting to gather data. If dairy processing costs have risen, then it is possible and even likely that higher make allowances will be adopted. This in turn will directly lower farm-gate milk prices. But it should also be understood that dairy producers don’t have such protection and are expected to adopt new technology, expand production, lower production costs, and even relocate their operations in order to remain competitive. U.S. dairy processors should ultimately face these same competitive pressures.
Table 1. Impact of Changes in Federal Order Make Allowances on Class
Prices and Uniform Blend Prices, 2006 1/
Estimated Changes Relative to a 2006 Baseline:
----USDA Proposals----
Scenario 1
Scenario 2
Scenario 3
Federal Order Prices:
Class I mover
-0.21
-0.35
-0.50
Class II price
-0.36
-0.36
-0.36
Class III price
-0.21
-0.35
-0.50
Class IV price
-0.36
-0.36
-0.36
Federal Order Uniform Blend Prices:
Northeast
-0.25
-0.35
-0.46
Appalachian
-0.25
-0.35
-0.46
Southeast
-0.24
-0.35
-0.47
Florida
-0.23
-0.35
-0.48
Mideast
-0.24
-0.35
-0.47
Upper Midwest
-0.23
-0.35
-0.47
Central
-0.24
-0.35
-0.46
Southwest
-0.26
-0.35
-0.45
Arizona-Las Vegas
-0.25
-0.35
-0.46
Pacific Northwest
-0.27
-0.36
-0.44
All markets
-0.25
-0.35
-0.46
Assumptions used in analysis: 1) used 2004 utilization rates, 2) 2-week average
commodity price forecasts used monthly average forecasts from the prior month,
3) based on commodity forecasts by Ken Bailey, Penn State as of January 2006.
NOTE: this is a preliminary analysis that is subject to change. The spreadsheet used to generate these numbers can be downloaded on my website: http://dairyoutlook.aers.psu.edu/ .
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