Can a minimum milk price work?

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In this episode of The Milk Check, Ted, T3 and Anna tackle a persistent question in the dairy industry: Would it be feasible to set a minimum milk price for producers?

We want to know what you think, too: Can a minimum milk price work? Why or why not? Email us at podcast@jacoby.com.

The Milk Check #13 T.C. Jacoby & Co. Can a minimum milk price work?

Anna: Welcome to The Milk Check, a podcast from T.C Jacoby & Co. where we share market insights and analysis with dairy farmers in mind.

Today is January 25 and we’ll start with Ted’s impressions coming out of Dairy Forum. Then, as we hoped, we’ll dive into the discussion about minimum pricing that we’ve been planning to have. Before we get started on the minimum pricing discussion we want to say that we know that some of what you’ll hear may be unpopular. We’re not trying to tear down any of the ideas we discuss but rather further the dialogue.

T3: So we just got back from the Dairy Forum. And usually, the Dairy Forum is a gathering where it’s put on by the IDFA, the International Dairy Foods Association which is more processor-based than farmer co-op based though admittedly there’s a lot of co-ops and a lot of farmers that attended, most or all the processors are there. Sometimes there’s a lot of exciting things to talk about in the marketplace and sometimes the market has already digested, you know, what’s gonna happen next by the time you arrive. I would put this year’s Dairy Forum in the latter category. There were no surprises coming out of the Dairy Forum.

Ted: Well, the Dairy Forum was not that big of an event this year.

T3: Not this year. But it was nice to be in Florida with 60, 70-degree weather when it was -8 in northern Wisconsin.

Ted: All right, shall we move into the issue of minimum prices? Guaranteed minimum prices?

T3: Why don’t you lead us off, Anna, with the questions.

Anna: Well, there’s two of them. Two proposals that we’re sitting looking at right now. And the first is just a call for a minimum price that sustains a farm. And the second is for minimum prices, but set in a tier system so that you have, you know, some baseline set. And I think most people who have thrown this out there have set a pretty low volume to that baseline, it’s basically to support a family farm. And then anything above that production gets paid a discounted rate, basically by the co-ops. You would have a set price for that first tier of volume, and then you would have whatever’s left gets divided out among all the remaining volume and paid out.

T3: You want to attack it first?

Ted: I think I can attack it as well as any. So repealing the laws of supply and demand are probably not gonna work.

T3: Why?

Ted: I believe that we have had a cultural aspect to the dairy industry for 100 years that generations were raised with the dairy industry and we can remember when 200 cows was a large dairy. Bear in mind that a truckload is about 350 cows to produce roughly a load of milk every other day. So we had back in the 50s and 60s, you know, you would have six or eight producers on a truck of milk. And those producers basically probably were second or third generation. And they would take their milk check and often go to the grocery store and spend it and they didn’t really have an aspect as to whether they were doing poorly or great, it depended on how much money they had left when they bought tractors and when they bought groceries, and so on.

And so, that was a cultural way of life. And it continues even to some extent today, but it’s diminished. And the people who are proposing these two-tiered systems and minimum prices basically are, I hate to use this word but basically the remnants of that. And of course, our heart goes out to them. But the reality of it is that their cost of production in that environment are much higher than the norm. Basically what that two-tier proposal does is ask the large dairies, the large efficient dairies to subsidize the smaller culturally correct dairies.

And in a real sense, painful though it might be, I don’t believe that you can do that even if the majority of the people in the industry would like to do it, it would still be self-defeating. And now we bring this to our current environment where we have too much milk. The dairies that seem to be dropping out of the industry the quickest are the smaller dairies, the cultural dairies, smaller plots of land, much less efficient, maybe buy more of a percentage of their own feed rather than raising it themselves. I don’t think that we’re gonna be in any position in anytime soon to repeal the laws of supply and demand.

T3: And I can’t argue with your argument. I tend to feel the same way, I look at laws that put in a minimum price and even better yet, you know, a tiered system where the smaller you are, the better price of milk you get, discourages progress. Discourages the motivation of any organization to continue to improve the quality of their organization. And yes, in the dairy industry, when it comes to dairy farming, that means continue to get more efficient by getting larger and it changes the skill sets of the dairy farmer in terms of what they need to do in order to succeed. But those same laws of supply and demand are the same laws that affect the retail industry. The same reasons that Sears Roebuck has gone out of business. The same reason that Amazon has succeeded. And you’re seeing a lot of retailers throughout the countries struggling is as markets evolve, new entrance are allowed to figure out more efficient ways to produce a product or to sell a service. And it makes…it allows our economy to continue to grow.

Ted: And you make a good point with the grocery industry following pretty much the same example with the big-box stores these days.

T3: Well the big-box stores replaced the little box stores and now the big-box stores are being replaced by the internet. That’s what a capitalist society does. In order to be a successful business person. Whether you’re a dairy farmer or you’re the owner of a store or you’re the president of a large corporation, you have to continue to figure out ways to progress, stay ahead of the curve and get better at what you do. And to go to Uncle Sam and to say, “I don’t want to change, you need to protect me.” They have something that the government already provides for that, it’s called unemployment insurance and welfare.

Ted: One of the things that’s occurred, I think, you know, we have organic, we have these specialty milk that appeal to certain aspects of society. I think organic and the rules of organic have done a lot to preserve the existence of small dairies. Whether or not they’ll continue to do that or whether that method of marketing will continue to be viable remains to be seen. It has addressed the ability of a smaller dairy to address a niche in the market. And it’s been successful.

Now, as we know as marketers and brokers that sometimes you get too much more organic milk and you wind up moving it at the same price as you move any other milk. But at the same… It still then provided a niche to preserve some of the smaller ones.

T3: And I agree with that, and there’s a lot of different options. You own a small family farm and you want to continue to be a small family farm, you know. You’re knocking at six, you’re not going to continue to succeed by doing nothing and continuing to be what you are. But if you can feed…find out different ways to go to market with your product, you can succeed. Your organic milk is one-way, non-GMO, grass-fed. Those are all ways. And let’s face it, there probably is a market out there to pay a higher price for something that comes from a small family farm. And in today’s food day and age, you know, being locally sourced, being, you know, more wholesome, I guess is the word maybe you can use, that the small family farm represents there is a market for that. But there’s a requirement to build that market and there’s a requirement to have a strategy to sell that higher price and that’s what’s needed.

Ted: One thing that works against that is the issue of quality. Now understand that Grade A is 100,000 per mil bacteria count. So 20,000 per mil bacteria count is not bad, it’s very good milk, outstanding. However, as we know around here having looked at both large and small dairies, a well-run large dairy can have 1,000 or 2,000 per mil bacteria counts. Whereas often the dairies that are co-mingled, the bacteria counts around in the 20,000-30,000 range. That doesn’t make them bad but it does point to the fact that the efficiencies that come from large well-run dairies and not all large dairies are well-run. But the efficiencies that come from large well-run dairies also apply to quality and it makes a big difference. So when you’re going to some of these particularly nitpicky customers, not only do they want traceability which comes primarily from loads of milk which are not co-mingled. Not mixed with small dairies. They also wanna trace things like feed and so on.

And they have aspects of quality which ignore what Grade A standards are and they set their own standards. For large dairies to meet that it can’t be done, for smaller dairies to do it on co-mingled load is almost impossible. So that’s a direction that things are heading in that area which is gonna be very difficult to accommodate.

T3: I agree. But I would also argue and I think we witness this as organic dairy kind of became something more than just a fad over the last 20 years, and that’s that different consumers have different definitions of quality. We tend to think of quality as something very scientific and this means the bacteria counts are this low and the pH is here and the percentage of butterfat or protein is here and here. Some people think of quality as it doesn’t have any hormones in it. It doesn’t have…it’s being fed a very nutritious diet of certain things and that is their definition of quality. And so if the small dairy farmer wants to continue to exist and continue to succeed, they’re gonna have… That’s the challenge. They need to figure out a way to market what they do.

But one thing I am in favor of is sponsorship in one way or another whether it’s from the government or from some fund of opportunities for those dairy farmers to get together and figure out a way to go to market with their product. There is a lot, there is a growing artisan cheese industry. And a lot of those that artisan cheese industry originate with small family farmers figuring out better ways to go to market with their finished product. You go to New York City, and you go to some of the cheese stores in New York City they’re fascinating in terms of all these cheeses and how cool they are, you know. That is the way to combat this issue. It’s not to impose a minimum price across everybody and to punish someone else, who is investing in their business and growing and figuring how to get better. Punishing them because you can’t keep up is not the right approach, finding out a better way to go to market with your product is the approach.

Ted: I agree with everything you say. And I agree with the artisan cheese and the farmstead aspect of it. It’s gonna be difficult for the cultural part of the people to address that area. A lot of education is involved, a lot of training on the processing side of the industry, as opposed to the producer side of the industry, is necessary. And that’s a little bit of a rarity in today’s environment. But it can be done.

T3: And it needs to be done, you know. What’s the old saying? The only constant is change?

Ted: Well, the only thing that I would add, you know, caution against would be the raw milk. You know, every day we pick up the paper and we’ve got problems with people trying to market raw milk because they want to maintain the family farm and that’s an area of distribution which they feel they can have because they think their milk is quite good and so on, and it is good. We forget the fact that over the years people have gotten used to drinking pasteurized milk and they don’t have the immunities anymore to salmonella and listeria that they had 50 years ago. And then, in addition to that, they’re rolling the dice because the testing is so much better and so much quicker.

Shall we move on to the other is aspect of minimum prices and address the class one price, the minimum price under the order?

Anna: Well, I think I have a slightly different way I’d like to come at it. You guys have kind of taken the 10,000-foot universal view of what that means for this size farm versus another. But really for a supply chain as a whole to be healthy, they all have to cooperate. And so if we say, I mean, it makes sense, you have a product that it cost you X amount of dollars to make, you should be able to cover those costs and hopefully make a little money. So it makes sense that people think there should be a minimum price that covers their cost of production. But I think—

Ted: You mean you understand why people feel that way.

Anna: I understand, it makes sense that people would feel that way. But I think the way you get a bigger solution, a better solution that doesn’t just help a farmer or just help a plant is to help people understand why that doesn’t work for the other people down the road. So why does that end up hurting the producer that it helps if you actually put that kind of a system in place? Not just because they aren’t making progress but, I mean, if you have a minimum price and your balancing plants can’t afford it, then you’re dumping it out being the most obvious easy answer to that but I think there are other—

T3: So what happens if you have a minimum price and that minimum price guarantees either a minimum loss or even a profit? Who’s ever gonna go out of business and how is supply ever going to correct? You’ll end up having oversupply across the board. And what happens with oversupply across the board? You will basically have a market where the supply exceeds the demand and the product rests on that minimum price or very, very close to that minimum price for an extended period of time because there’s no incentive to go out of business. What the laws of supply and demand do is they make a market correct at both ends. Everybody loves it when the price goes really, really high because that is the market sending the signal that there need to be more dairy farms. And everybody’s winning if they’re a dairy farmer.

Well, unfortunately, the same is true to the other extreme. When the prices are really low like they are right now, the market is sending a very, very clear signal that there’s too much milk and some of the milk needs to go away.

Anna: So as people are trying to come up with more universal solutions that address that, what would you say are the problems at the plant level, problems at the consumer level that we would need to address? Not to make that happen but why is that bad for… you know, why are those signals interrupted? Why is that not working?

T3: How does it ultimately hurt the producer to have a…to force the plant to pay a minimum price?

Anna: Yes, yes.

T3: Because what is the best way for a marketer of milk, cheese, butter, whatever, to increase sales? Lower their price, promote the product, do things to increase demand. Lower prices increase demand, you know, if a consumer has $5 to spend, and with a minimum price, a pound of butter costs $4.50, they’re gonna buy a pound of butter. But if price goes down and the price of butter gets to $2.50, they can buy two pounds of butter. And that helps clear product. It also internationally means the same thing. If we’re not just competing almost, you know, 16% of our milk production these days is exported. And so our market is not only a domestic market, our market is an international market. And if we want to be competitive in Mexico, if we want to be competitive in the Middle East, in Southeast Asia, there are times when minimum price… I wouldn’t even say there are times, I would say 99% of the times a minimum price would literally price us out of that market. And that would put us in a very difficult place to be competitive internationally. And the international market is usually pretty finicky. If you’re not the most price competitive product in that market, they’re gonna buy from someone else and you lose that demand almost immediately.

The other thing that a minimum price does is it discourages innovation. Companies like to invest the time in trying to figure out new products to go to market with. The more expensive it is to create a new product, the less likely they are to figure out how to utilize that product. And so, or utilize that ingredient. Companies spend a lot of time and effort trying to figure out especially as they get bigger, I’m not saying that they do this successfully. A lot of times they shoot themselves in the foot. But what they do is they spend a lot of time and effort saying today it cost me this much to make this food product that I sell in a big store. Is there a way that I can reduce that cost, that ingredient cost and still have the same product?

One of the criticisms I have of the Federal Order system is that fluid milk price, the class one milk price is the highest price in the order. Naturally, most companies are trying to innovate ways to not have to pay Class I price because that’s the expensive price. Go to a convenience store rather than a supermarket and look in the beverage case, at what are the products that include dairy in the beverage case? There’s a lot more products that have dairy in it that originally were powders than were directly fluid milk. Now think about it, you have to take fluid milk, you have to dry it, you have to reconstitute it, then you have to put it in that product. But because Class I price is always higher than Class IV price, it is cheaper for them to innovate that way than just to use fluid milk. Literally, the Federal Order has incentivized those companies to not utilize fresh milk in their product.

Anna: That is true and also a little misleading because ultimately your finished product is what dictates what the class is. Now when you’re talking about powders, it’s different because it’s been dried so it’s already been classified as IV.

T3:Once it’s been, exactly.

Anna: Once it’s been dried it is.

T3:That’s my point.

Ted: There’s another aspect to it too. In our business, we have to balance whether it’s a cheese plant or whatever it is. If you’re faced with a producer who’s got a guaranteed price and you’ve got to go out and sell his milk, what if nobody wants to buy it? Now what? In a practical, in the real-world environment, it doesn’t work.

T3: I think you asked a really good question. If you have a tier one, tier two milk pricing system, will buyers be able to say I only want tier two milk?

Ted: Sure.

T3: I’m pretty sure the person who wrote this didn’t think that way—

Ted: I think the person who wrote that is thinking that he could equalize this through the Federal Order and that the buyer would never realize the difference.

Anna: I was looking at it more as you would get whatever price you could from your customers. You pay your tier one people whatever that minimum price is, wherever you’ve set that and then you divide up what’s left among everybody. But that could, I mean, that’s assuming that there’s gonna be something left, you know.

Ted: There’ll be something left. When you get in today’s environment that where we’re selling at a discount, there isn’t much left. It’s hard…

Anna: Especially once you take hauling and all of those other things out, yeah.

T3: You know, you’re looking at tier one, tier two-price system and the devil’s in the details. But to me a system like that it’s easy for me to imagine a thousand different ways that you can arrange your farm and just the right way to say you’re tier one and still get the efficiencies of a tier two farm. You know, for example, if you have one building where you have divided up the cow, let’s say a tier one is under 100 cows. You have one building where you have 100 different rooms that fit 100 cows and therefore you go in and you claim, well, there’s 100 different owners of these 100 different farms, and they all are tier one. To me, that seems to me that there would end up being a lot of ways to game the system of a tier one, tier two production quota system.

Ted: I agree. I think it exposes you to that probably more than anything else.

Anna: What about the idea of taking your co-op, let’s say, and taking their production and saying, “This is everyone’s production today, and if anyone wants to increase they have to pay in and that money gets split among all the people who will stay where they are.” As an incentive to stay where you are.

T3: So basically, a variation of a quota system?

Anna: Yes.

T3: I don’t like quota systems.

Anna: I don’t think most people like quota systems.

Ted: Most large dairies despise quota systems.

T3: Well, considering how…

Ted: They’d like to run the maximum efficiency.

T3: Considering how the quota system right now is under serious assault in the state of California, that the proof may be in the pudding right there.

Ted: Yeah. We used to have base access plans in Northeast Iowa and down in Memphis and so on years ago and they were voted out for a reason. And when I say voted out, they’re voted out by the producer. Producers wanna be more efficient. They wanna lower their costs, they wanna produce milk at lower costs. For better milk at lower costs. And if you’re sitting there with a base access plan, you know, and you can’t expand your herd and buy the neighbor’s property and build a new barn with that kind of a system. So and that’s one of the reasons why up in Canada with their quota system. Because most of the Canadians want that to go.

T3: Only the ones who own the quota don’t.

Ted: Yeah. Only the ones who are sitting there, who were gonna lose on their quota are the ones that want it to stay. Everybody else wants it gone.

T3: To me I think you point out a really good point. The biggest problem with the quota system is in reality, it’s a caste system. Are you in the club or not?

Ted: That’s right.

T3: And that is never a productive way to run a business because the most successful people in a business or in an industry should be those who are figuring out ways to become more efficient, more progressive, better marketing ideas. Those who are actively trying to change for the better. Those are the ones who should be the winners in an industry. Not the people who are gifted a quota and all they wanna do is not change.

Ted: Agreed.

Anna: This topic and our discussion today has probably stirred up some strong opinions and emotions. We’d love to hear them so we can continue this discussion in coming months. We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Tech is a production of T.C Jacoby and Company.

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Dairy cooperative support

We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.

Listen to The Milk Check—the most compreshensive podcast in the dairy industry.

Listen to the Milk Check

Read our weekly market reports for the sharpest analysis on industry topics and trends.

Read Recent Reports