USDA abandons milk-pricing deal
WASHINGTON — When Congress last revised the nation's milk-pricing laws in 2008, groups representing dairy farmers and the companies that buy their milk struck a rare deal that sounded counterintuitive: buyers and sellers should be able to agree in advance to prices lower than what the federal government says farmers must be paid.
Farmers aren't biting, the latest numbers from the U.S. Department of Agriculture suggest. Participation in the government's forward contracting program for milk is so meager that the USDA has stopped actively tracking it and has no immediate plans to collect the sort of data that would help Congress decide whether to extend the program in next year's rewrite of federal farm policy.
No farmers in the Northeast have signed on to forward contracts since November 2008, the USDA reported. In the upper Midwest, where participation is greatest, just 70 farmers out of 2,000 eligible have tried the option, the department reported.
Dairy cooperatives, which act as middlemen between farmers and plants, are allowed to strike such deals under the program, as are individual farmers who sell to plants — although relatively few plants buy from independent producers anymore. The law applies only to milk used in cheese, yogurt or other manufactured dairy foods, not beverage-class milk.
The use of the contracts by individual farmers has been problematic.
"I don't think right now they can afford to get into them," said Robert D. Wellington, senior vice president for economics at Agri-Mark Inc., a Massachusetts dairy farmers' cooperative with many members in Northern New York. Farmers' cost of production in the Northeast is about $18 per 100 pounds of milk, he said, while federal minimum prices are a few dollars less than that — and no farmer is eager to risk negotiating a price lower than the government dictates.
The wild price swings that the contracts were meant to dull may be working against them, as farmers worry about locking in rock-bottom prices and processors worry about hitting the highs.
"There's so much volatility now that no one on either side wants to get caught," Mr. Wellington said.
The cooperative itself, which deals in huge quantities of milk and runs its own cheese plants, often engages in risk-management tools such as futures, Mr. Wellington said, but individual farmers typically cannot cover their costs with such deals.
Dairy companies hatched the idea in 2000, persuading Congress to launch a pilot program. That program ended in 2004 but was renewed in the 2008 farm bill, to be reviewed again in the 2012 legislation.
A forward contracting program for milk would help to take the highs and lows out of pricing, giving both farmers and milk handlers some predictability, they said. A farmer or farmer-owned bargaining cooperative, for instance, could believe prices will fall sharply in the months ahead and decide to lock in a price in an effort to beat the federal minimum and at least guarantee a buyer.
From a milk plant operator's point of view, a forward fixed price contract assures a supply of milk, said Robert Yonkers, a dairy economist at the International Dairy Foods Association, representing milk buyers such as Kraft Foods and Great Lakes Cheese.
Of course, the federal minimum price could end up being higher than the negotiated price, costing the farmer and benefiting the buyer.
During the last farm bill debate, some farm groups opposed the program, saying it was simply a way for milk processors to wiggle out of paying federal minimum prices. If plant operators decided to accept milk only through such contracts, these groups said, farmers might be forced into them — either individually or by being forced to join co-ops supplying the contracted milk.
Without the law, plants have to pay at least a federally set minimum price based on what product the milk becomes. But co-ops have always been allowed to pay their own members less than the federal minimum, and some do offer their own members forward contracts, co-op officials said.
The biggest dairy co-op in the country, Dairy Farmers of America, is convinced that forward price contracts have a future and are slowly growing in popularity, said Edward Gallagher, president of Dairy Risk Management Services, a division of DFA.
DFA's own participation in risk management strategies, such as the futures market, has attracted attention from regulators and, to critics, undermined farmers' faith in those markets. The cooperative and two principal officers paid the federal Commodity Futures Trading Commission $12 million in 2008 to settle charges of manipulating the dairy futures market at the Chicago Mercantile Exchange, and a lawsuit surrounding those alleged practices remains unsettled.
