Over Order Premiums Soften Support Price Cuts
BY TOM JURCHAK
SCRANTON (Lackawanna
Co.) — By now everyone in the
dairy industry should know that on
January 1 the support price for
milk was dropped 50 cents from
$ll.lO to $10.60 for milk of 3.67
percent butterfat or $10.33 for 3.5
percent butterfat These are to be
the target prices for the national
average of manufacturing grade
milk. To achieve this the Com
modity Credit Corporation has
announced their purchase prices
for butter, powder and cheese. The
butter price was dropped 3.75
cents to $1.32 a pound; the powder
price is down four cents to 72.75
cents and 40 pound blocks of
cheese are down 4.75 cents to
$1.15 a pound. The lowered sup
port price was made to comply
with the Farm Security Act of 1985
that required such a drop if CCC
purchases in the next year were
expected to be higher than five bil
lion pounds of milk equivalent
Without a lower support price total
purchases were expected to exceed
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seven billion pounds and with the
lower price are still estimated at six
billion pounds.
In addition to the lower price an
assessment of 2.5 cents a hundred
will be paid by producers to satisfy
the Gramm-Rudman-Hollings
legislation requiring cuts of 8.5
percent in spending on all govern
ment programs. This could have
meant a drop of $1.05 in the sup
port price for milk but because the
milk price is supported indirectly
through the CCC purchases of but
ter, powder and cheese the reqired
cuts in program costs could be
made with the assessment These
assessments are expected to pro
duce $26 million this year but the
cut in the support price would have
cost dairy farmers $750 million.
Price cuts or assessments are never
welcomed by producers but in this
case with both the 1985 farm bill
and the G-R-H bill, things could
have been worse when you consid
er that Congress was trying to
reduce farm program costs by $3
billion this year. In addition, the
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support price cannot be changed
again until next year and assess
ments, not price cuts must be used
by G-R-H in the future.
In spite of, or because of, the cut
in the support price and the assess
ment, most forecasters don’t see
big changes in government prog
rams in 1988. This will be the first
time in five years that there haven’t
been one or more changes in sup
port prices, assessments, diver
sions or buy outs. Under the pres
ent law the Secretary could start a
diversion program in 1988 but it
isn’t likely at least not until he
hears the final report from the
National Commission on Dairy
Policy that is due in April. Discus
sions on regional government
programs for dairy will speed up
but don’t look for any new legisla
tion this year. Even a diversion
program may be avoided because
of regional differences. Besides, if
the dairy program is changed other
commodity groups will be looking
for consideration too. Increases in
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milk production expected next
year will just about be used up by
increases in consumption so the
national supply/demand picture
won’t change much and govern
ment costs will be lowered by sup
port price cuts and the assessment.
That may be as good as you can
expect in an election year so while
there may be a lot of legislation
proposed, reports made and
analyzed; meetings conducted and
ideas aired the most important
thing to happen to influence the
dairy industry next year may be the
price of feed.
There is a Way
With government inaction for
whatever reasons but mainly
because it has provided the answer
in other markets, over order pric
ing can be used to close the gap
between lower prices and higher
costs. It’s the biggest obstacle to
regional price support programs
because everyone else in the coun
try is using it except the northeast.
Most dairymen nationally don’t
want more government control
they want less - so they use over
order premiums to get from the
market what that don’t get from
government programs. They
organize cooperatives to regulate
the over order premiums to insure
that all dealers pay the same and all
producers share equally. Here in
the northeast RCMA is the vehicle
for producers to use the same
strategies in Order 2 in New York
and Order 4 in New England. So
far New England producers have
participated in sufficient numbers
to negotiate a 37 cent premium
while Order 2 producers have
ignored the opportunity in suffi
cient numbers to achieve only a
nine cent premium. Some handlers
in Order 2 have opposed the for
mation of RCMA by offering pre-
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milling directly to producers; dis
couraging them from joining
RCMA .and refusing to provide
information on milk receipts for
RCMA members. Many dealers
who want to cooperate are discour
aged by the few who refuse to par
ticipate. Withholding action could
be the next step but even that will
be less than effective if producers
themselves don’t participate in lar
ger numbers. Premiums paid by
handlers directly to producers
serve to meet producer needs tem
porarily but may disappear with
increasing milk supplies or the fai
lure of RCMA.
Order 2 Prices
The real skid in Federal Order
milk prices started in December
with a 22 cent drop in the
Minnesota-Wisconsin Price Series
to $11.12. This is expected to con
tinue until spring when it bottoms
out at a support price of $10.33 for
3.5 milk. That’s $1.09 less than the
$11.42 when the M-W peaked last
September. If you could make
RCMA work and hold their price
of $14.45 for Class I milk it would
mean a premium of $1.57 on fluid
milk or about 66 cents on the
blend. Forecasters looking at
Order 2 prices for 1988 are esti
mating a difference of 66 cents less
in 1988 than 1987 considering all
support price changes and assess
ments for both years. Fascinating
arithmetic but it takes cooperation
to make ends meet The blend
price for December in Order 2 was
$12.21 or 48 cents less than
November and 57 cents less than
last year. It just widened the gap
from last year by 21 cents from
November to December. In Sep
tember it was only four cents
below the year before now it’s 57
cents. Get ready for a longer and
faster drop.