Still confused about how federal orders work and how they impact the market?
Here’s how Joe Oberweis explains it: Instead of milk, let’s establish the same system for oranges.
To create an orderly market, we set up an administration to estimate monthly supply and demand for oranges, and set a price floor to create economic equilibrium. We encourage consumption of orange juice over all other forms of oranges and set the value accordingly, say $2 a bushel more for juice oranges over fruit oranges.
Everyone will pay orange growers the same amount per bushel. To administer this, we collect enough money from juice companies each month to pay fruit companies to reduce their per-bushel cost to $2 less than juice companies, and to pay for running the system.
We also need to ensure there is an adequate supply of oranges in all parts of the country, so we need to build the system to make sure, for example, that enough oranges are grown in Minnesota to meet that state’s demand. The main orange-producing area is Florida, where the production cost is, say, $5 a bushel. But Minnesota’s cost is $25, since to grow oranges year-round there it has to be done indoors.
Since residents of all areas have equal demands for oranges, we must create geographic zones so growers in all areas, regardless of the geography’s production efficiency, can make a profit. Growers in Florida and Minnesota will be paid enough to cover their production costs.
And because everyone is receiving the same retail price from consumers, Florida growers will have to pay Minnesota growers. Assuming the system settles where Florida production is five times Minnesota’s, Florida growers will pay $3.33 to Minnesota growers to bring everyone’s net cost to $8.33 per bushel.
Economically, the system is significantly less efficient, but hey, at least everyone will have enough orange juice.
Ridiculous, right? Of course, but Oberweis notes that’s exactly how the milk market operates.
And the flaws in this antiquated system were never more apparent as they are in this current economy. Farmers’ milk checks won’t even cover their feed bills. Herds are being culled by the thousands because milk prices are so low.
Imagine if we had a free, open market for milk. Producers could negotiate with processors on a price for their milk based on the actual cost of production plus a fair profit. Prices would be based on real cost factors reflecting contemporary uses and demands rather than artificial government formulas created by New Dealers.
True, processors like it when milk prices are low, and for the most part they’re benefiting from current prices. But any benefits will be short lived if this archaic system causes farmers to go bankrupt – there will be no more milk left to buy to make anything.
Oberweis, whose company is featured in Dairy Field Reports this month, sums it up well: The federal order system distorts the market. It actually winds up decreasing consumption of fluid milk. Fluid milk consumers pay higher prices to subsidize cheese consumers. The system creates unfair competitive advantages for co-ops, promotes dairying in inefficient climates and ultimately sticks consumers with the bill to administer the whole mess.
Of course, most of you already know this. But will the current administration see it this way? Processors and producers alike have been paying calls on Washington lawmakers to explain the crisis.
The talk has gone on decades too long. It’s time to stop patching up a fantasy and wake up to market reality.
Apples and Oranges
August 1, 2009