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Economists scrutinize proposals

Groups, experts offer ideas on smoothing rapid fluctuations of the milk price


Capital Press

Several proposals to reform national dairy policy have bubbled up in the wake of the devastatingly low milk prices producers faced in 2009.

Some proposals focus on one or two issues, while others are broader.

Economists have analyzed some of the proposals, but most are reluctant to say what course should be taken, said Mark Stephenson, director of dairy policy analysis at University of Wisconsin.

"Most of the economists, who are academically oriented, are less likely to be prescriptive of what 'should' happen," he said.

Their analyses look at what "would" happen.

In his analysis of three proposals -- National Milk Producers Federation's, Agri-Mark's and legislation by U.S. Rep. Jim Costa and Sen. Bernie Sanders -- Stephenson found all would decrease price volatility.

Agri-Mark is a New England dairy cooperative with 1,300 members.

"The biggest challenge that dairy farmers are facing is not the price of milk but volatility in the price of milk," Stephenson said. "Big movements in price make it hard to plan ahead."

Chuck Nicholson, an associate professor of agri-business at California Polytechnic State University, worked with Stephenson on the analysis.

One of the things that could be done to decrease volatility is supply management, a component of all three proposals, he said. But supply management is a divisive issue, among producers and between producers and processors.

"All these programs are working on the supply side, but they could act on the price side ... smoothing out the average minimum price," Nicholson said.

Instead of averaging prices on a monthly basis, which has probably led to overreaction and a quick production response when prices are good, USDA could average the milk price over a few months, he said.

Smoothing out prices could reduce the sudden increases in production and limit the peaks and valleys of prices, he said.

On the flip side, if prices are smoothed too much, it might lead to a market that doesn't respond quickly enough, he said.

There are relatively few things that can be done in a marketplace that isn't well coordinated, he said.

If he were "king for a day," Nicholson said, he'd focus on producers' risk management.

"As economists, our instinct is to let the markets prescribe what should be done," Nicholson said. "But I think there's an awful lot more individuals can do with risk-management tools. We may have to be more actually involved in the marketing of our products."

Producers could use the futures market, forward contracting and gross margin insurance to help manage risks. But that takes time, he said.

If those risk-management tools aren't quite up to the task, improving them should be the focus, he said.


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