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Posted by Harry Stugart on August 18, 2018 at 12:00 pm
Thank You Melissa for your questions. i do not see this system causing fluid production to ramp up to chase higher premiums. Class I milk production will be based on demand or consumption. But since the price will be so much more stable I believe it will be easier to build demand and especially not open the door to imitations or substitutes during times such as 2014. Areas of the country that are much higher class I will automatically have a much more stable milk check and if the stability causes some expansion in these areas that might not be a bad thing since these area are generally very deficient in milk to start with. To answer the last part of your question about how it would deal with the surplus is entirely determined by each farm and how much stability vs risk they want. The main intention of this pricing program is to more properly value the milk and milk products that are consumed on a daily basis by using the 36 months moving averages. Once we have applied that concept to the class I milk which is roughly 30% of current US production then I believe we will see the value of using the same concept to forward contract some percentage of the rest of the production. I believe the wholesalers and retailers our processors sell to would welcome being able to forward contract some percentage to a large percentage instead of dealing with the daily, weekly and monthly variations we have currently. Once you have a rolling contract based on a 36 month moving average between the processor and who they are selling to, then that same amount of milk can be contracted with the producer. For example if you are shipping milk in western Pa. where Class I is about 30% usage and you forward contract 50% of the rest of your milk production also using this concept then only 20% of your milk production is priced as it is now and subjected to the volatility of the world supply and demand prices. If the price of the milk not contracted drops dramatically as it has this year it is a much easier decision for a producer to produce less of that milk because he is still receiving the 36 month average for his contracted milk. Whereas it is now when the price drops on all of milk produced the farmer tries to cash flow by producing more milk magnifying the surplus and extending the length of time the price is down.
Posted by Melissa Bravo on August 17, 2018 at 10:02 am
These graphs, I am sure, are what every producer would wish to see if their milk checks were presented this way over time and I hope they are included in any Dairy Task Force state discussions from this point forward.
Could you comment on how your proposal would look with or without a quality-quantity - quota? I.E., if this were done, and no quota on production were mandated, would a two tier mandated pricing system structured as you perceive cause fluid production to ramp up even more (chasing that higher premium value in the retail setting) or would it (what mechanism) stabilize and drop below current surplus?
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