Who Is Pulling the Strings On The Dairy Industry?

Are We Puppet Masters or Yo-Yos? There are many things that can be a bother to hard working dairy managers but the one that comes up most often under “it drives me crazy” is the dairy yo-yo effect of rising and falling milk prices. Asked about the state of the dairy industry, 95% of the time you only get two answers from producers:

Milk prices are up.
Milk prices are down.

For some reason these two answers never seem to change. They’re a constant source of stress to everyone in the dairy industry. If they were the only two fluctuating prices it would be one thing but the same dizzying rise and fall happens with commodities such as corn, soybeans, canola, corn gluten, cotton seed and whatever you need at a particular time! Is it predictable? Is there anything to be done about it? Well if there is absolutely nothing that can be done, I find myself asking, “Why stay in the dairy industry?”

Up is Good! Right?

You might think that rising milk prices are a good thing. But unless you have control over keeping them in that beneficial position, you end up feeling like a puppet on a string. Today the show goes on. Tomorrow you’re jumping to someone else’s tune. Instead of always responding to extremes, is there anything to be said about risk management that considers a less reactive and more proactive response?

THE MILK PRICE IS THE UNSEEN HAND MANIPULATING DAIRY MANAGEMENT

Dairy managers will tell you that they buy feed, nutrition rations, replacement cows and other inputs based on the price of milk. Some members of the Hunt family object to this strategy saying, “That is like buying my car based on the price of gas.” Another Hunt responds, “If that were true, we would all drive Chevy volts.” On the farm, reluctance to take a different approach means that we drive ourselves into over-supply situations. When everyone does that it means more total national production. Even when there are farms exiting the industry the total national production goes up. This is definitely not a good scenario. You might even say it’s wooden headed!!

PAST MARKET STRING PULLING FAILS

Back in the 1980’s the publicity over the whole herd buyout program was so negative many were sure that that particular string would never be pulled again. Well not until 2002 that is, when prices dropped from $15 per cwt in 2001 and $12 per cwt in 2002. The terms were different this time but the critics are still debating whether the program actually worked.

Between July 2003 and February 2006 the USA cow numbers which initially went down by 100, 000 head rebounded to the original levels by 2006. Milk prices briefly averaged $26 per cwt in 2004 and $15 per cwt in 2005. But by 2006 prices again averaged less than $13.

2016 MARKET MILLION DOLLAR STRINGS

There are many strings that get pulled on the dairy industry at any given time, but in an election year, The National Milk Producers Federation (NMPF) asked USDA for $100 million to $150 to offset milk surpluses from increased production and declining export sales. The response was unusually quick, but the string was shortened to a $20 million purchase of cheese that was donated to food shelves. This string-pulling had the unforeseen effect of causing cheese prices to fall and had only a negligible effect on cheese inventories which continued to rise.

WHO PULLS YOUR MONEY STRINGS?

As a (Canadian) outsider looking in, it seems that Banks have a lot of say in how dairying Is carried out in the US. They have a lot of pull in Canada too, where we market under Supply Management. We sometimes have asked our American neighbors why they don’t moderate their herd numbers in response to the fluctuating price of milk. They respond, “To keep our banker happy we must maintain our level of income. So the only way to do that in a time of low farm gate price is to milk more cows, ship more milk and personally work longer hours”

HIDDEN PUPPETEERS

Are any of these puppeteers in control of your dairy operation. Whether it’s a nameable politician, political party, banker or government subsidy, we are all too willingly to put the power in their hands. Which puppet master is pulling your strings? How high are they making you jump?

YO-YO or NO GO?

Today’s dairy economy has been dangling on a string in a “sleeper recession for several years. The world dairy economy spins at the bottom in many countries. Everyone wonders how long the “spin” will continue before we witness total collapse of the market. It’s hard to tell whether dairying is improving or not because the economic indicators keep yo-yoing between signs of improvement and indications of collapse

POOR LITTLE PUPPETS

Of course, once you acknowledge you’re being controlled by puppeteers, the inclination is to cry over the manipulation. Perhaps before that dairy farmers need to admit their role. Are we manipulated? Or responsible? Sometimes we are so sure that the market manipulation we support, whether it’s subsidies, supply management or government buy-outs, is right and we insist that our position is right long after failure is right in our face. “It’s not my fault!” is no more believable than “The dog at my homework!” The end result is still failure. Your failure to control your own purse strings!

WHO YA GONNA BLAME

When you like dancing to someone else’s tune then you will likely choose to keep things the way they have always been. Fluctuating markets have always been part of the industry. “It’s not in my hands”. Having said that, it’s 2016 and there are new technologies and approaches. There are consultants who recognize that their only way to survive in the modern dairy industry is to make sure that your bottom line survives. There are many who think assigning blame will keep their hands in your pocket. Actually, you don’t need to know who is at “fault”. You want to know what your nutritionist, genetics company, feed supplier or veterinarian is going to do to help you make money on the correct side of the market. Yes, there are many who will try to talk you out of your different approach. But who wants to be that 80-year-old dairy farmer who remained in the rut so long that he now looks back and blames someone else for not letting him dance to his own tune! Today he would maintain, “I should have taken the risk!” Those who did appear to be thriving.

LET’S BE HONEST

You don’t have to be a market strategist or political economist to recognize some truths about dairy markets. First of all. Do you know of any market on the face of the earth that only moves up? What is your experience? What direction are markets moving? Is your milk market growing? The answer is not, “Wait and see!” It is,” We need to be promoting what is working and getting rid of what isn’t.” We have been through these ups and downs, so we should be planning for them before they come. Being reactive does more harm to dairy business and jobs than being proactive which allows us to take control. We can wait for the invisible hand (the ups and downs of the many players in the dairy industry) to work things out, or we can try out different strategies for getting optimal results based on current conditions

BETTER or WORSE? SMARTER OR STRONGER?

Sometimes we hesitated to take more control because we feel we are not smart enough or strong enough to be in charge. We trade individual independence for group think. We hand over our own strings to someone “Smarter” or “Stronger” rather than take control of our own risk management. We comfort ourselves by saying, “It could be worse” as we look at the dairy convulsion we’ve seen in the UK. The downside is that we could be next.

The dairy marketplace has untold possible outcomes. Its complexity comes from the tremendous variety of inputs that come from countless permutation of ways to do achieve milk production from dairy cows. Furthermore, it is complicated by the many numbers of individuals simultaneously trying to do the same thing and simultaneously affecting the outcomes for each other. Dairy market rules are not written down anywhere. They are not controlled by a single entity. The industry is constantly evolving. Individuals, businesses and governments are all players. At any given time, they may think they are in control. But are they players or being played?

The Bullvine Bottom Line

Puppets and Yo-yos may be good analogies to use in describing aspects of the dairy industry marketplace. However, at the end of the day, we are NOT about playing GAMES, but we are about DOING BUSINESS! … Who’s responsible? … Are you the puppet or the puppeteer?

(T1, D1)