Last week I sat listening to a panel of experts at the Dairy Conference at SUNY Morrisville try to explain the intricacies of milk pricing. I say “try” because, despite my economics degree, much of it still sounded like Greek to my ears.
As every student learns in their high school econ class, one of the most basic principles of economics is that of supply and demand. Here, I’ll give you a little refresher using “widgets,” which is what one of my favorite college professors, Dr. Abdulahad, always as his example.
The premise is that the price of widgets is set by the interaction of buyers and sellers in the marketplace. As supply of widgets increases, the price in the marketplace decreases. If the supply decreases, creating scarcity, the price will increase. The opposite is true for demand shifts. With greater demand, the price will rise. If demand drops off for widgets, the price will fall. Seems logical enough, right?
While outside factors may cause fluctuations, over time markets tend to reach an equilibrium. If the price is higher, more producers will be willing to make widgets, while less consumers will buy at the higher price. The surplus will cause the price to drop, as sellers compete for buyers. And while the lower price will make widgets more attractive to buyers, producing them will be less attractive. You get the picture.
Or at least you would if I hadn’t put you to sleep with all that mumbo-jumbo.
In general, the principle is the same whether you are looking at a micro level (think of your own buying habits) or on a macro level. It’s true on the stock exchange and even in commodities markets.
But all that sound economic theory seems to get thrown out the window when you look at milk pricing. Dairy farmers are struggling to survive on milk checks half of what they were last year, while at the same time, the price of dairy products at the grocery store are higher than ever.
Hmmmm. I wish Dr. Abdulahad was around to explain that one to me.
According to John Bunting, who presented his whitepaper on the crisis in the dairy industry during the conference, one of the biggest problems is that the price of fluid milk is determined on the Chicago Mercantile Exchange, where it is tied to the price at which block cheddar cheese is traded. Bunting described it as an “oligopsony,” a term which even I had to look up.
Basically it boils down to the fact that the market where milk prices are determined is fatally flawed. There are so few buyers on the market, that any one can cause huge fluctuations based on their behavior. They control the price, and the sellers have to go along with it.
Adding to (my) confusion were discussions around pooling and de-pooling, and class II versus class III pricing. I tried to make sense of it all as I sat frantically scribbling notes.
I was a bit relieved, actually, when talking to others during the break for lunch, that I wasn’t the only one confused by all of this. In fact, the consensus was that not even all dairy farmers understand how milk prices are determined. (Producers who attended the conference were asked if they understood the milk pricing system as it pertained to them. 60 percent said they did not.)
This shouldn’t make me feel better, of course. It’s pretty scary, I think, that the livelihoods of our nation’s dairy farmers depends on a system they don’t even comprehend.
Then there are the consumers, who are still paying a premium. I think David Rama, one of the conference’s organizers, summed it up best. “Someone’s getting rich,” he said.
I think we all know it’s not the dairy farmers.
I have listened to far too many of them talk about how they have eaten through their savings and are now relying on credit to keep the family farm alive for my comfort.
There have been federal investigations into the CME already, and hefty fines levied against some who have been implicated for wrongdoing in regards to milk pricing, but the problem is a long way from being solved.
Too many farmers are still getting less for their milk than it costs to produce. If the price stays arbitrarily low, some of those farms will dropping out of production. It’s just basic economics.
But these aren’t widgets we’re talking about. They are family farms that are the backbone of our nation’s food supply. They are part of upstate New York’s rich agricultural heritage. They are part of the largest industry in this state and in this county.
Can we afford to lose them?