Case in point No. 1. With milk markets in the doldrums and dairy budgets bleeding red all spring, farm organizations and pleaded with USDA for help. The National Milk Producers Federation (NMPF) asked USDA for $100 million to $150 million in dairy product purchases to soak up milk surpluses brought on by increasing production and weak export sales. The American Farm Bureau Federation asked for $50 million in product purchases; 60 U.S. congressmen and women and the National Farmers Union also asked for assistance with no specific amount.
Being that 2016 is an election year, USDA responded with almost unprecedented speed that it would purchase $20 million of cheese and donate it to food shelves.
At current prices, that $20 million will purchase less than 10 million pounds of cheese, or less than 1% of cheese currently in inventory. In fact, it represents less than the amount of increased cheese made this summer from increased milk supplies.
The market responded exactly the way everyone thought it would not: Cheese prices fell. Purchases of $100 million to $150 million might have made a dent in inventories; purchases of $20 million only slowed the rate of inventory growth.
Case in point No. 2. Everyone in the dairy industry of any age remembers the whole herd buyout program of the 1980s. The government accepted bids from farmers to buy-out entire herds to reduce milk production and increase prices.
The publicity over the program was so bad farmers knew USDA would never revisit the program, no matter how bad prices got.
But milk prices once again tanked in the early 2000s, dropping from $15 per cwt in 2001 to $12 per cwt in 2002. So NMPF recreated the buy-out program, this time on its own terms and funded by dairy farmers.
There’s still some debate whether the program actually worked. U.S. cow numbers were at 9.09 million head in July 2003 when the program started, and fell 100,000 head by the following March. Milk prices responded, averaging $16 per cwt in 2004 and $15 per cwt in 2005. But by February 2006, cow numbers had rebounded to the same level as they were at the beginning of the program. By then, milk prices again averaged less than $13.
In 2011, a class action suit was brought against NMPF, CWT, Dairy Farmers of America, Land O’Lakes, Dairylea and AgriMark claiming they conspired to raise milk prices. This September, a settlement of $52 million was reached.
The point of all of this is not to Monday-morning quarterback these decisions. But we should be smart enough to know when we mess with markets, the law of unintended consequences is going to bite us.