John Bunting

 Concentration and Farm Milk Pricing

(John Bunting is a dairy farmer in Delaware County, NY.  He is actively involved in the dairy subcommittee of the National Family Farm Coalition. He also is a researcher/writer on dairy issues.  His writing appears regularly in The Milkweed.)

Complexity or the appearance of complexity has effectively eliminated most scrutiny of farm milk pricing.  Generally speaking, it is assumed that the government has had the best interest of the public in their activities.

There is not a person here who remembers when the government was not involved in milk pricing.  In 1934 the Supreme Court, in Nebbia vs. New York, upheld a “plan to remedy evils in the milk industry which reduced the income of the producer below cost of production and threatened to deprive the community of an assured supply of milk,”.  Most importantly, they said milk pricing, “is subject to control for the public good.”[1]

This idea of “public good” held until the Nixon Administration.[2]  He increased farm milk price for a campaign contribution.  Things have never quite been the same since.

Certainly discussion of milk seems to be a sedative.  Most experts, the high priest, hope everyone will be asleep before they see the big picture.  Although dairy economist like to talk about milk production increases causing farm milk prices to fall, it is important to view the supply relative to the population.

On a per capita basis milk production was quite low on either side of the Nixon presidency. In the 10 year period from 1966 through 1975 imports averaged 217% more per year than during the previous 10 year period.

By the time of Ronald Reagan, milk production per capita had not returned to the pre-Nixon era.  Yet, in a very early news conference, Gary Schuster, of the “Detroit News” said, “Within the last couple of days, your budget director and your Secretary of Agriculture have indicated that the dairy program is too expensive and should be cut back.”[3]

Reagan’s Budget Director, David Stockman developed the concept of “strategic deficits”.  This concept, he told the late Senator Patrick Moynihan, “gives you an argument for cutting back programs that really weren't desired and giving you an argument against establishing new programs you didn't really want."[4]

In December of 1981 Reagan signed the Farm Bill and said, “Returning to the principles of free enterprise will return us all to prosperity.”[5]  He eliminated parity and turned farm milk pricing over to the co-ops and the corporations.  For them, this was the victory of the “Reagan Revolution”.

For this to work, market economics had to be turned upside down.  Market economics dictates that if you want to increase supply, you pay more.  If you want less you pay less.  As anyone knows, however, you get more fruit from a tree by pruning.  After parity was eliminated, farmers received less each year in terms of real dollars. 

Dairy farmers responded in a very logical way.  To just stay even they had to produce more milk for less money.  Dairy farmers needed only to drive down the road to see the threat driving them.  Since Ronald Reagan became president 72.4 % of the dairy farms have gone out of business.

Experts will say the efficient will survive.  Go to any meeting of dairy farmers.  The average age is pushing retirement.  Is there anyone who thinks you become most efficient at age 60? 

Government agencies and corporate promoters alike have said the key to survival is to make milk cheaper.  While there may be some who appear to have done that, for the average farmer, staying in business has meant giving up the fruits of labor.  Looking at USDA data clearly indicates there has not been a positive return to management and risk since 1992.

As can be seen the dairy farmers loss is not the public’s gain.  This should generate outrage.  With mergers and acquisitions at the drop of a hat in both the retail and processor ends, where are the synergies?  Where are the savings?

Any analysis of the dairy system reveals:

• Both Retailers and Processors overpaid for acquisitions
• There have been no real gains in efficiencies
• The cost of concentration is carried by the farmer and the farm community

In comparing 1983 through 2002 we see the farmer lost 8.7%, the processor gained 46.2% and the retailer gained 62.1 %.  The latest Dean Foods annual report shows all gain in sales came from acquisitions.  Gain in profits came from low farm milk price.

At the supermarket end, Kroger recently reported a net loss of $337.4 million…” and this was on, “fourth quarter of fiscal 2003 [sales] increased 4.5% to $13.0 billion”.

Retail prices for dairy, cannot increase any faster than the general CPI.  Since the retailer needs an ever larger slice of the pie, and since concentration began at the retail end, the bulk of the power lies with the retailer. 

The processor in turn also needs a larger slice.  The processor extracts what their needs are and the farmer is given what is left. 

At the same time processors are getting a larger slice, and concentration may be adding to the total profits, the margins are being reduced.  Since the margins for error are reduced, planning and control have become part of every day business.

Although, many like to point to the apparent price volatility as proof we are dealing with a “free market”, the underlying fact is that the price averages out to essentially a fixed amount.  As a fixed amount, long range planning is more predictable.

This benefits three great kingdoms in dairy:

·        Dean Foods - handles primarily fluid milk

·        Kraft – uses primarily American type cheese in their products

·        Leprino – worlds largest maker of mozzarella

Dairy Farmers of America is the main supplier to all three.  With no significant competition between them all three, perhaps four, have an interest in low milk price.  More importantly, all have an interest in predictability.

All of the complexity of farm milk price is related to the individual farmer.  Kraft argued in the NCE  case that  the government set the price of farm milk.  One look at all the formulas and the government surveys might very well lead anyone to think the government set milk price.

Large processors, however, standardize everything.  They are dealing with average milk.  All complexity disappears with average milk price.  When the spotlight was on the NCE through the University of Wisconsin study, this was easy to see.  The Cheese Exchange fled from a room in Richard Gould’s law office in Green Bay to Chicago and the cover of the CME.

USDA added to the cover by creating the NASS weekly survey.  This survey allegedly is a broad survey covering many plants.  What is not mentioned is that all the plants surveyed set their prices from the CME.  It should be add that California has their own pricing system which could be said to be more honest, in that it works directly from CME figures.

Many refer to the CME cheese trading as a genuine market even though it meets none of

the criteria for a market.  A look is revealing:

·        Trading occurs for 15 minutes with prices written on a chalkboard.

·        Very few traders

·        Very little cheese is actually traded

·        Kraft is the dominant seller on the Exchange

·        Kraft is a net buyer off the Exchange

·        DFA is the dominant buyer on the Exchange

DFA’s position was evident last year when the price of block cheese did not vary from July 31^st until October 28^th.  In July 48loads of cheese were traded. Throughout the nearly three month period 60 loads of cheese were traded.  On October 8^th Moody’s assigned a rating.  On October 16^th the bonds went on sale.  Twelve days later the price of cheese crashed.  Through manipulations of the Federal Orders and other shenanigans, farmers saw very little of the high price.

In spite of the fact that it lacks the attributes of a market, it is still held to be a reliable barometer of supply and demand.  It is not.

For instance, in 2001 cheese prices rose steadily through the year until October when they crashed.  Prices continued in the basement.  By 2003 experts were explaining the continuing low price by saying “demand” fell as a result of 9/11 and production rose 2.6 per cent in 2002 versus 2001. 

If demand had actually fallen cheese imports would not have risen to a record level in 2002.  Cheese imports rose 6.8 percent in 2002. 

Did prices fall because of reduced demand?  Kraft’s most recent annual filing with the SEC makes no mention of reduced demand.[6]  In the section discussing 2002 vs. 2001 they state, “In cheese, volume declined as lower dairy costs resulted in aggressive competitive activity by private label manufacturers as they reduced prices and increased merchandising levels.”  “Aggressive competition” tells us more cheese was sold – hence the need for imports.

Two paragraphs later Kraft states, “Operating companies income increased $78 million (3.7%), due primarily to favorable margins ($63 million, due primarily to lower cheese commodity costs and productivity savings),”.  As could be expected Kraft made more with lower milk prices.  Analysis by the Bureau of Economic Analysis show corporate profits in the food sector rose 19.3 % in 2002.[7]

Dairy experts are inclined to point to growing milk production in the West, commonly California and Idaho.  They also seem to be fond of mentioning we are part of a global economy.  They fail to grasp the meaning of their own words. 

If we are in a global economy and if we have concentration and control at the global level, then it is logical that there is milk pricing at a global level. Over a five year period, annually, U.S. and U.K. farm milk prices changed in a lockstep pattern.

Further investigation reveals some curious numbers.  Even though there is a strong correlation of milk price between the UK and the US (0.988264), the connection falls apart when milk production is correlated (0.101866).

On the other side of the globe, Australia deregulated milk price in 2000 therefore the same period cannot be examined.  However, when comparing 2002 to 2001, Australian farm milk price fell the same percentage as the CME block price.  The only logical conclusion is that a couple players on the CME sets world milk price.  Imports are largely tied to the value of the dollar and not production efficiencies.  That is troubling.

There will be those who are not troubled.  Their argument is that “thin markets” are just fine.  However, a look at the structural changes in US milk, caused by the pricing system, should start the warning lights of imminent meltdown flashing.

As most everyone knows milk production is moving west.  In the period 1998 through 2002 milk production increased in the 5 major Western states while in the rest of the country production actually fell.  Total farm numbers fell at the same time.

Expansion of milk production has occurred in total disregard for any price signal.  Closer examination of the data reveals this phenomena is actually a function of farm size and not location. The West has simply had a greater access to capital as a result of suburban real estate value in California. Each 1000 cow expansion has driven 25 to 30, fifty cow farms out of business because large farms push more milk out per cow. 

We can then conclude:

·        Concentrated pricing power has seized a larger slice of the pie.  This is both anti-capitalistic and anti-market.

·        Farms have expanded to survive

·        The resulting large farms cannot respond to negative price signals – they must expand

·        Small farm attrition has acted as a shock absorber to the pricing system

·        With fewer traditional sized family farms acting as shock absorbers chaos will result

·        All signs indicate we have already entered the zone of chaos

The path taken, as a result of concentrated power, has been long and twisted.  It is evident that we cannot continue much further in this path.  Those who have brought us to this point cannot be trusted to take us to a new path.  We may need new tools, a new compass, but, most importantly we need to have a new vision.  I would suggest that as the Supreme Court said in Nebbia, milk is clothed in public interest.

We do not have a system, as in Rome where all roads lead to Washington D.C.   There are many paths which lead to the public’s interest.  We do not have to take the path to legislation which has become a toll road bought and paid for by lobbyist.  Both at the state and private level there are tools to open up these rotten cans of worms.  As Theodore Roosevelt did 100 years ago, it is once again time to bust the trust.

Note:

Graphs and Tables under Additional Resources

Additional Resources

The following site at University of Connecticut has extensive information on dairy issues and concentration at the processor and retailer level: http://www.fmpc.uconn.edu/milk/ 

American Antitrust Institute has recently completed a paper on a dairy merger: http://www.antitrustinstitute.org/

Dairy Cooperative Transaction Questioned in AAI Briefing Paper: Dairy Farmers of America/NDH/Hood transaction currently under investigation by DOJ placed in context of increased concentration and vertical alliances in paper by AAI Research Fellow Hiromitsu Miyakawa with preface by Albert A. Foer.  Paper is at: http://www.antitrustinstitute.org/recent2/299.cfm

Raw Data at: Dairy Yearbook USDA ERS  http://usda.mannlib.cornell.edu/data-sets/livestock/89032/