400/85/BQ

Issued in furtherance of Cooperative Extension work, Acts of May 8.and June 30, 1984, in cooperation with the United States Department of Agriculture, William A. Shimel, Director of Extension, University of Vermont, Burlington, Vermont. University of Vermont Extension Service and U.S. Department of Agriculture cooperating, provide equal program and employment opportunities to all.

III

TABLE OF CONTENTS

MINUTES OF THE EXECUTIVE COMMITTEE MEETING AND BUSINESS MEETING .. IV

LESSONS FROM THE DAIRY DIVERSION PROGRAM Edward Coughlin .......... .

MARKETING CHANGES IN FEDERAL MILK MARKETING ORDERS Robert Wellington .......•

THE 1985 DAIRY SITUATION Al~D OUTLOOK Clifford Carmen

ANALYSIS OF PROSPECTS FOR DAIRY SALES Olan Forker ..

THE DAIRY PROMOTION PROGRAM--DAIRY FARMERS MAKING THEIR FUTURE Joseph Westwater

BOVINE GROWTH HORMONE--MODE OF ACTION AND EFFECTS ON DAIRY COWS Robert Collier

BOVINE GROWTH HORMONE--THE POTENTIAL ECONOMIC IMPACT ON THE NORTHEASTERN DAIRY INDUSTRY Robert Kalter

BOVINE GROWTH HORMONE--POTENTIAL IMPACT ON THE NORTHEASTERN DAIRY INDUSTRY Lewe llyn Mix

UNIVERSITY OF MARYLAND DAIRY PEP PROGRAM Robert Peters •.

CONGRESSIONAL VIEW OF THE 185 FAR}l BILL James Jeffords

A LOOK AT DAIRY POLICY Floyd Gaibler •••

A COOPERATIVE VIEW OF FARM POLICY Wayne Boutwe 11

A LOOK AT DAIRY POLICY FROM THE FARM Clyde Rutherford

THE PROCESS AND POLITICS OF THE 1985 FARM BILL Kenneth Robinson

1

4

10

19

31

38

46

57

63

69

73

78

84

87

Edited by Fred C. Webster, The University of Vermont Extension Service, 178 South Prospect St., Burlington, VT 05401. Extra copies may be obtained from the editor.

•

iv

NORTHEASTERN DAIRY CONFERENCE Omni International Hotel

Baltimore, Maryland April 1-2, 1985

Executive Committee Meeting: April I, 1985--12:15 p.m.

Chaired by: Silas Eakins, President

1. Accepted Treasurer's report.

2. Accepted Secretary's report and 1984 Proceedings.

3. Voted to hold Conference in 1986.

4. Voted to recommend acceptance of invitation by Dairylea to host 1986 Conference.

5. Developed list of nominees for officers for coming year.

Business Meeting: April 1, 1985--4:15 p.m.

Chaired by: Silas Eakins, President

1. Report of Treasurer Paul Hand showed balance of $12,550 effective March 20, 1985 vs. $13,381 a year earlier.

2. Officers nominated and elected:

President Vice President Secretary Treasurer

Executive Committee:

Robert McSparran Clyde Rutherford Fred Webs ter Paul Hand

Phi lip Coburn Francis Meahen Lewe llyn Mix Wa Iter Ma rt z Earl Forwood Lloyd Patterson Carl Ytmker

Program Committee for 1986: Officers Executive Committee Host representatives

1988 1988 1987 1987 1986 1986 1986

3. Accepted invitation of Dairylea, Inc. to host 1986 Conference. Preferred dates: (1) 3/31/86-4/1/86, (2) 3/24/86-3/25/86

4. Voted to thank Dairymen, Inc. for a splendid job of hosting the 1985 Conference. Both the facilities and the hosting arrangements showed careful planning and smooth execution.

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LESSONS FROM THE DAIRY DIVERSION PROGR&~

by

Edwa rd Cough 1 in 1

Today marks the first day after the end of the IS-month dairy diversion program. The program was authorized by the Dairy and Tobacco Adjustment Act of 1983. Dairy farmers could contract with the Federal government to reduce thei r mi 1 k market ings for the period of January 1, 1984 to March 31, 1985. Reduc tions of at least 5% but not more than 30% were measured from a base period of 1981 and/or 1982. In return for fulfilling the contract, producers would rece1ve payment at the rate of $10 per hundredweight. Contracts were signed by 37,757 producers or about 20% of all commercial dairy farmers. Some general observations can be made about the program.

1. The participation rate of 20% was generally less than expected. Reasons for this included:

a. Dairy farmers are genera lly not accus tomed to direct government programs. Price adjustments rather than supply management programs have been the tradi tional means used 1n the dairy indus try to bring milk supplies in to closer balance with demand.

b. Dairy farmers had a short time to digest a new and complex program and eval uate the impac t of the regulations on their operations. Like other business people, dairy farmers need sufficient time to put a pencil (or a computer) to a proposed contract.

c. Dairy farmers were unsure whether they qualified.

d. Penalties for not meeting the contract were severe.

e. Dairy farmers may have felt business independence.

the program curtailed thei r

2. Participation in the diversion program and consequently the impacts of the program varied regionally across the country.

3.

--Participation the Midwest areas.

was and

lowest in Pacific

the Northeast and relatively low in reg1ons, the largest milk producing

--Participation was highest in the Southeast and South and was relatively high in the Kansas-Missouri-Kentucky area.

Thirty percent of the producers who did not participate program had 1984 marketings that were 5% or more below marketings in 1983. These producers most likely could have

10 the their

1 . D1rector, Dairy

20250. Division, Agricultural Marketing Service, USDA,

Washington, DC

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qualified for some diversion payment without making any changes in their production units.

4. The diversion program had a certain amount of "free air" (Le., the reduction in milk marketings that would be paid for but which had already occurred). For example, part icipating producers agreed to reduce their marketings in calendar 1984 from their base by 7.5 billion pounds. However, these producers had already reduced their marketings from thei r base to 1983 by 2.2 bi llion pounds. This represent s the So-ca lled "free ai rtf in the program. Consequent ly, the effective reduction in marketings from 1983 to 1984 would have been 5.3 billion pounds.

This "free-air" amount would have been larger and more costly if more of the producers that had already cut production from their base to 1983 had participated.

5. The level of participation in the program made it possible for the 50~ deduction from the price of all milk marketed to nearly equal the diversion payments over the IS-month life of the program. As of the end of February, about $717 mi llion had been paid out under the milk diversion program while about $757 million had been collected from the 50¢ deduction under the 1983 Act.

6. The industry has demonstrated an admirable record in its voluntary compliance with the 50¢ assessment requirement of the program. Collections from the start of the dairy collection program to date total over $1.4 billion. This represents payment on nearly all of the milk marketed by dairy farmers. As a consequence, government costs of administering the deduction program have been quite low. Thus far, expenses have totaled about $1,400 for every $1,000,000 co llected.

7. For the most appear to be aware of some contract.

part, producers who contracted to reduce marketings meeting the required reductions. However, we are

producers who have failed to comply with their

8. Factors other than divers ion payment s contr i buted to the 3% dec line in milk production, the 50% drop in CCC purchases under the dairy price support program, and the $1 billion reduction in taxpayer costs during 1984. About 45% of the producers who did not participate in the program reduced their marketings in 1984.

Less than half of the reduction in the surpl us has been due to reduced milk production--most of the reduction has occurred because of increased commercial sa les and increased "on farm" use. The following factors, in addition to the diversion program, have impacted on production: (1) the 50¢ per hundredweight reduction in the support price on December 1, 1983; (2) the 50~ per hundredweight assessment on commercial marketings by dairy farmers; 0) higher feed costs that occurred early in 1984; and (4) certainty with regard to dairy policy through September 1985.

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9. There appears to have been no fundamental structural change 10

milk production. During March, the last month of the diversion program, eee purchases of dairy products have rebounded to above year-earlier levels. Some of these purchases reflect a clearing of commercial inventories 10 anticipation of the April reduction 1n eee purchase pr1ces.

10. No substantive adjustment has been made 1n the milk processing! manufacturing capacity, which also is 1n surplus. Manufacturing plants continue to aggressively seek additional supplies of milk 1n an effort to keep their manufacturing facilities at an efficient level. They are reluctant to glve up milk to fluid markets without substantial glve-up charges.

In conc 1 us ion, it appears un like ly that th is type of vo lun tary incent i ve program can eliminate a surplus the Slze of the current one. A paid diversion program like the current program may assist 1n partially reduc ing a large surplus.

The final verdict on the diversion program depends on what actions dairy farmers take in 1985. USDA 1S projecting a 1 to 3% rlse in mi lk product ion during the current ca lendar year, and eee purchases under the pr1ce support program are expected to be larger. If these forecasts are an accurate reflection of change, that is, milk production, eee purchases, and taxpayer costs are up, then it would be difficult to contest the conclusion that the diversion program provided but a brief respite from escalating milk production and eee purchases.

In order to take a closer look at the marketing changes Orders, Bob Wellington of the New York-New Jersey Market staff will now review a report compiled for all orders.

1n Federal Milk Administrator's

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MARKETING CHANGES IN FEDERAL MILK MARKETING ORDERS:

A Farm-Level Analysis of Milk Diversion Program Participants and Nonparticipants: January-December 1984

by

Robert Wellingtonl

U.S. milk marketings in calendar year 1984 decreased 4.5 percent from the previous year. This decline lS often attributed primarily to the Milk Diversion Program (}IDP) which was in effect during the entire period. However, a number of other factors were present during the year which could have been responsible for significant declines in marketings. These factors included lower net milk prices and higher feed prices during the first half of the year, high interest rates, an improved economy with better off-farm employment opportunities, and a continuation of depressed "real" net milk prices that has persisted since 1980. These factors might cause all farms, including those not in the diversion program (non-participants), to reduce marketings.

In order to determine the extent of marketing changes by diversion program partiCipants and non-participants, monthly Federal order marketing records for individual producers were analyzed for the period 1981 through 1984. County offices of the Agricultural Stabilization and Conservation Service (ASeS) provided milk market administrators with copies of signed diversion contracts. The Market Administrators' offices compared this information with their records to determine which producers participated in the diversion program. All Market Administrators contributed data to the study, but data was not available for some of the orders. (See Table 1.)

The analysis included only those producers who marketed milk during the current period (1984) and at least one of the comparison periods (1983 and/or 1981/82). Farms also has to be marketing milk in Federal orders at the end of each study period in order to be included in the analysis.

Resul ts for the nine-month period, January through September 1984, have been released in a report which is available from the Dairy Division or any Market Administrator's office. This report includes information for over 100,000 commercial dairy farms representing approximately 60 percent of total U. S. milk marketings. Every milk-producing region of the country, except California, was represented.

During the past week, prelimtnary calendar year 1984 results for many Federal orders have become available. It is thts latter time period, January through December 1984, whi ch will be considered in this discussion. The 1984 period included data from about 16,000 partfcipants and 76,000 non-participants, who combined to market 73 billi.on pounds of milk, over half the milk marketed in the country during 1984.

lOffice of the Market Administrator, NY-NJ Milk Marketing Area, 708 Third Avenue, New York, NY 10017.

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TABLE 1. FEDERAL ORDERS IN STUDY

Federal Order Name No.

New England 1 New York-New Jersey 2 Middle Atlantic 4 Georgj.a 1 7 SEe Florida, et ale Chicago Regional 30 Ohio Valley 33 E. Ohio-We Penn. 36 Southern Michigan 40 Indiana 2 49 St. Louis-Ozarks 62 Greater Kansas City 64 Nebraska-W. Iowa 65 Upper Midwest 68 Black Hills 75 E. South Dakota 76 Iowa 4 79 New Orleans-Miss. 94 Nashville 4 3 98 Southwest Plains 106 Certral Arkansas 108 Oregon-Washington ]24 Pup,et

3Sound-lnland 125

Texas 4 126 Central Arizona 131 SW. Idaho-F. Oregon 135 Rio Grande Valley 138

1 Data for Florida producers in the following orders: Southeastern Florida (13); Tampa Bay (12); and Upper Florida (6).

2 Data for Missouri and Illinois producers in the following orders: Southern IlHnois (32); St. Louis-Ozarks (62); Central Illinois (50); Paducah (99); Southwest Plains (106); and Texas (126). Excludes data for Missouri and Illinois producers in the Chicago Regional Order (30) and Greater Kansas City Order (64).

3 Excludes data for Missouri and Illinois producers in the order. 4 Not included in 12-month analysis; data will not be available until later in

1985.

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Before 1984 resultfl are discussed, however, it is important to examine the marketing hi story of producers who chose to participate in the diversion program as well as the history of non-partj cipants. The MDP used historical base-period marketings to compare with current marketings. The base was defined as either 1982 marketings or the average of marketings in 1981 end 1982. For this analysis, most orders used the higher of the two marketing amounts (1982 or 1981/82 average) as the base if the actual base was unknown. This criterion was also used for estimating base marketings for non-participants.

1983 Vs. Base Period A historical comparison of 1983 verflUS the base periC'd was done for a

group of selected orders, representinp; approximately 11,000 participants and 52.000 non-participa~ts. Approximately 69 percent of all participants in these orders decreased marketings between the base period and 1983. In contrast. only 36 percent of all non-participants decreased marketings during the same period. Conversely, only 31 percent of participants increased marketings from 1981/82 to 1983 while 64 percent of the ron-participants increased marketings. Participants as a group decreased marketingfl by 4.9 percent between the two time periods while non-participants increased marketings by 6.7 percent.

This shows that participants had a greater tendency to decrease marketings even before the MDP began. Therefore, marketing declines incurred by participants between the base period and 1984 were not solely a reaction to the diversion program.

In Federal Order No.2, participants contracted to reduce marketings an average of 22 percent. However, the group had already reduced marketings by seven percent between the base period and 1983. Therefore only an additional 15 percent reduction in marketings (J 984-85) would be needed in order to receive diversion payment on the entire 22 percent reduction. The seven percent reduction which could qualify for payments, yet not contribute to reduce marketings in the 1984-85 period. is often referred to as "air." Since most participants had reduced marketings prior to 1984, a significant proportion of diversion program costs would be used to purchase "air." Based on an average decline of 4.9 percent (base to 1983) and an average contract percentage reduction of 22 percent nationally, approximately one-fifth of diversion costs would be used to purchase air.

1984 Vs. Base Period Returning to the 1984 comparisons. all participants, as a group, decreased

marketings 25.2 percent between the base period and 1984. In almost all orders, the rate of decrease was more than the contracted average. The analysis showed that 98 percent of the 16,198 participants decreased marketings an average of 26.1 percent between the base period and 1984. By the end of 1984, however, almost 300 participants (two percent) were still increasing marketings relativE> to their base period; their 1984 marketings averaged 24 percent above their base period. This group was more likely to be found in Tcxas, Florida, Iowa. South Dakota. and Nebraska. Relatively few participants in the northeast, midwest. and northwest increased their marketings above basc levels.

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~nile any participant who increased marketings relative to his base period is definitely not in compliance with his ASCS contract, participants who decreased marketings are not necessarily in compliance. A participant who contracted for a decline of 30 percent but decreased his marketings only 10 percent is also not in compliance. After the first twelve months of the diversion program, approximately 2,200 participants (14 percent) were markpting more milk than allowed under their diversion contracts. Approximately 6,500 participants (40 percent) were within the allowable three percentage points of their contract percentage, and the remaining 7,500 participants (46 percent) had decreased marketings to a greater extent than called for in their contracts. Combining the latter two groups implies that 86 perc~nt of all participants were meeting or exceeding thpir contract percentage during 1984. For the three northeast Federal orders (Nos. 1, 2, and 4), 92 percent of all participants were meeting or exceeding their contract percentage.

A surprising result of the study is that many producers \lho did not contract with ASCS also reduced their marketings at least five percent between the base period and 1984. Based upon the first twelve months of the diversion period, these producers could have qualified fer diversion payments. There could be a number of reasons why these producers chose not to particip~te

including: (a) implementation of the program was rushed and many producers did not understand it; (b) producers were reluctant to participate in any government program; and (c) producers did not antiCipate production declines which were forced by higher feed prices in early 1984 and relatively poorer quality feed in some areas of the country.

In aggregate, the number of non-participants with marketing dec lines of five percent or greater exceeded the number of participants. Ho,"rever, this did not occur for all orders on an individual basis. In many of the northern orders (including New England, New York-New Jersey, Midd Ie Atlantic, Chicago Regional, and Southern t1ichigan), the number of qualifying non-participants was more than the number of participants. The thrpe northpast Orders (New England, New York-New Jersey, and Middle Atlantic) had fewer than 3,000 participants; however, more than 6, 000 non-participants registered production declines of five percent or more during 1984. In the southern orders (including Georgia, Florida orders, Southwest Plains, Texas, and Central Arkansas), however, the number of participants greatly exceeded the number of qualifying non-participants.

1984 'Is. 1983 Diversion program participants decreased marketings 21.2 percent between

1983 and 1984. This is four percentage points less than the decline registered between the base period and 1984. The difference is accounted for by th(: marketing declines which occurred between the base period and 1983.

As stated earlier, participants decreased marketings between the base period and 1984 to a greater degree than called for in their contracts. Tr.e marketing declines incurred between 1983 and 1984, while less than the base-1984 declines, were approximately equal to the average contract percentage. This implies that most of the lIairll purchased was offset bv marketing declines in excess of those contracted for.

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For all orders combined, non-participants who m<'rketed milk throughout 1984 increased marketings two percent from 1983. However, there was a wide range among the orders. On the upper end, non-participants in Texas and the Florida orders increased marketings 13 and 9 percent, respectively. On the other end, decreases of two percent occurred in the Greater Kansas City and Nebraska-W. Iowa orders.

Approximately 46 percent of all non-participants decreased marketings between 1983 and 1984. The average decrease among this group was 10 percent. The remaining 54 percent increased marketings approximately 12 percent. Those non-participants with increased marketings marketed an average 900,000 pounds of milk in 1984 ,,'hile "decreasing" non-participants averaged 700,000 pounds. Although the average marketings per farm for each group were slightly lower in the northeast, the observation that "increasing" farms tended to be larger than "decreasing" farms also existed in this region.

As a group, the 75,874 non-participants in the study increased marketings by 1.2 billion pounds between 1983 and 1984. However, this group has two distinct segments: those farms lo7hich experienced marketing i.ncreases and those with decreases. The 41,215 non-participants with increasing marketings did so to the extent of +3.8 billion pounds. The remaining 34,659 nen-participants with marketing declines altered marketings by -2.6 billion pounds. This latter group's decline was a significant factor in the total U.S. decline in marketings.

Participants, on the other hand, were responsible for a larger decline in marketings (-3.2 billion pounds). However. given the general tendency of this group to reduce marketing prior to the diversion program, a portion of their reduction in marketings probably would have occurred even if the diversion program had not been implemented.

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SUMMARY

1. Monthly records of about 92.000 farms marketing 73 billion pounds of milk in 1984 were analyzed: 16.000 participants and 76.000 non-participants.

2. Majority of MDP participants had decreased marketings prior to the begi~lling of the program.

3. ~IDP Particip~nts decreased marketings 25.2% from base peri0d to 1984.

4. In most, if not all. Federal orders, participants as a group decreased marketings more than originally contracted.

5. 86 percent of all participants were within allowable contract compliance levels; 92 percent of northeast participants were in compliance.

6. Number of non-participants with marketing declines of five percent or more exceeded total number of participants; however, substantial regional disparity existed.

7. In the three northeast orders, there were twice as mB!ly non-participants with five percent declines as there were total participants (6,008 non-participants vs. 2,923 participants)

8. Participants decreased marketings 21.2% between 1983 and 1984, four percentage points less than base-1984 decline

9. Much of the "Air" purchased was offset by marketing declines in excess of the amounts for which the part:\.cipants would receive payment.

10. Non-participants increased marketings 2.0 percent (1983-84).

11. However, 46 percent of non-participants decreased marketings during period; 54 percent increased marketings.

12. "lncreasing" non-participants changed marketings by +3.8 bj llion PCl1naS, "Decreasing" non-participants changed marketing by -2.6 billion pouY'ds for net change of +1.2 bil1jon pounds (1983-84).

13. Participants changed marketings by -3.2 billion pounds (1983-84).

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THE 1985 DAIRY SITUATION AND OUTLOOK

by 1

Clifford Carman

Excess dairy supplies were reduced in 1984 as government purchases were lower, but recently purchase amounts have increased. A continuation of this pattern will be a key factor for the 1985 outlook. In addition, the level of purchases and their budget costs may influence the legislative de­bate on dairy provisions of the farm bill this year.

Surpl us removals (net purchases) by the Commodi ty Credi t Corporation (CCC) in 1984 were equivalent to 8.6 billion pounds of milk (fat basis), down by nearly half because of larger commercial disappearance and lower milk marketings (lower production and additional farm use). This year, milk production is expected to be up about 2%, but farm use will be down; thus, marketings will grow by about 2.5%. Commercial disappearance is also ex­pected to be up about 1%; thus, USDA net removals are expected to be about 10 billion pounds. These relatively large purchases are above the "trigger" levels; thus, CCC purchase prices are expected to be reduced again on July 1. With lower purchase prices, wholesale prices are likely to decline; thus, pay prices to farmers are likely to be lower. Meanwhile, retail prices should remain about unchanged, since wholesale to retail margins are expected to increase with the general price level.

Did the Dairy Paid-Diversion Program Work?

It's too early to make a final judgment. On the one hand, dairy farm­ers produced and marketed 8.6 billion more pounds of milk than we used. On the other hand, the program certainly contributed to a reduction in the amount of milk marketed, and that was one of the reasons for a sharp drop in surplus removals (purchases) by the CCC. Another reason for lower purchases was because commercial use was up. Production last year was 135.4 billion pounds, down 4.2 billion, 3% less than last year. Milk marketings were down even more because of additional farm use. Meanwhile, commercial disappear­ance (a proxy for retail demand) as currently estimated, was 126.2 billion pounds, up 3.7 billion (3%).

Current Support Price Lower

Before looking at the 1985 out look 10 detail for supply, use, and price of milk and dairy products, let's review the legislation signed into law during November 1983. That law, enti tIed the Dairy and Tobacco Adjust­ment Act of 1983, superseded all dairy provisions of the Omnibus Budget ReconciUa- tion Act of 1982. If you will remember, the 1982 Budget Act was the law allowing the deductions that were held up for a time in court but finally started on April 16, 1983.

ID . . . a1 ry Econom1st, Econom1C Research Service, U.S. Department of Agriculture, Washington, DC 20250.

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As required by the law, USDA set the support price for milk at $12.60 per cwt. on December 1, 1983. That was the level of support until today. The Department of Agriculture has estimated that projected CCC purchases for the next 12 months would exceed 6 bill ion pounds, milk equivalent. Thus, the support price has been reduced by 50C per cwt. An additional 50C-per­cwt. cut in the support level could be made on July 1, 1985, if purchases were projected to exceed 5 billion pounds, milk equivalent, from July 1 to June 30, 1986.

The law inc ludes a mandatory deduction of l5C per cwt. for da iry prod­uct promotion, research, and nutrition education but allows up to We cred­it for qual ifying state or regiona 1 promotion programs. An order implement ing the promotion program was issued in la te March. The deduc dons for this promotion program started on May 1. Additional promotions under this program started in September. The program must be approved by the dairy farmers if it is to be continued after September 30, 1985.

The law contained a manda tory 50c-per cwt. deduction on all mil k mar­keted from December 1, 1983 to March 31, 1985 to encourage the adjustment of production to levels that are consistent with demand. The funds collected are being used to help fund the paid diversion program.

The paid diversion program started January I, 1984. The payment rate was $10 per cwt. for reductions in marketings of 5 to 30% from a base. The base was calendar 1982 marketings, or the average of calendar 1981 and 1982 marketings, whichever the participant elected to use. Producers who con­tracted signed up by January 31, 1984 for the l5-month program.

Nearly 38,000 dairy farmers signed contracts with USDA to reduce their milk marketings. They signed up for a total milk diversion of 7.5 billion pounds during calendar 1984, 5.5% of 1983 marketings and 22.9% of their base. In 1983, the participants milked about 19% of all U.S. dairy cows and marketed about 22% of the milk sold. They represent 12% of all operations with milk cows and about 20% of all commercial dairy farms. Because some participants were el igible for program payments for cuts in marketings made by the end of 1983, actual diversions in 1984 are estimated at about 5.3 billion pounds, 3.9% of 1983 marketings.

Expansion Returns

Milk production during January and February was 1.5% and 2.7% below a year earl ier, respect i ve ly. However, average da ily production (adjusted for leap year) during February 1985 was up 0.8% from a year earlier. The gain was the result of a 1. 7% average daily gain in output per cow and 0.9% fewer milk cows. The gain in yields was likely the result of the much improved milk-feed price relationships and the approach of the end of the paid diver­sion program.

Of 33 states surveyed during February, 17 posted average daily gains in production during February from a year earlier. Of the five leading milk production states, New York (ranked 3rd) had production 1.2% below the ad­justed 1984 level, Minnesota (4th) had output 0.2% below last year's ad­justed production, while Pennsylvania (5th) was still 0.9% below a year ear­lier. Meanwhile, Wisconsin (lst) and California (2nd) had daily average gains in total output of 3.3 and 4.8%, respectively.

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1984 Production Down 3%

Milk production dipped to 135.4 billion pounds in 1984, down 3% from 1983. This was the first decline in annual output since 1978 and the largest drop since 1973. The decrease resulted from the milk diversion program, as well as from lower average milk prices and higher feed costs.

Declines from a year earlier sharpened from 2% (daily average basis) in the first quarter to 3% in the second quarter and 4% in the last 2 quarters. This pattern reflected both the time needed for participants in the diversion program to adjust their production and the cumulative effect of deterioration in milk-feed price relationships.

A special study of producers delivering to federal order markets for the first 3 quarters of 1984 indicates that marketings of both participants and nonparticipants weakened as the year progressed. Marketings by participants declined 19% from 1983 in the first quarter, followed by drops of 24 and 25% in the second and third quarters, respectively. During spring and summer, a majority of participants reduced marketings more than called for in their contracts. The reductions may have allowed those participants to start rebuilding production levels before the end of the diversion program.

Marketings by nonparticipants eased to a 3% daily average increase in the first quarter of 1984, a 1% gain in the second quarter, and a slight decline in the third quarter. These producers were reacting to the less favorable milk-feed price relationships. Adjusted for the deductions, the effective milk-feed price ratio averaged 1.35 in 1984, the lowest since 1975. However, falling feed prices and nSlng milk prices late in 1984 restored this ratio to levels similar to the 'early 1980 I s.

Milk cow numbers dropped rapidly between November 1983 and April 1984. Following this 3% decline, cow numbers slipped further through July. Despite the large replacement herd, the summer-fall buildup was less than in recent years. At year-end, cow numbers were close to the Apri 1 level. For all of 1984, cow numbers averaged 2.3% below 1983.

Output per cow totaled 12,495 pounds last year, down 0.7% from a year earl ier. This was only the second such decl ine in 40 years. Most of the weakness re suIted from reduced feeding and other management changes by diversion program partlclpants. However, nonparticipants probably posted relatively small annual gains because of the less favorable milk-feed price relationships.

Milk production in 1984 was down In every region except the Pacific. The Northern Plains, Southeast, Appalachian, Delta, and Corn Be It regions posted large declines. Milk production was relatively strong in the major dairy regions, down only 2.6% in both the Northeast and Lake States and up 2.5% in the Pacific region. While regional patterns were strongly affected by differences in partic ipation, other factors had an impact. The Northern Plains, Corn Belt, and Appalachian regions were down more than could be explained by their participation rates, while the reverse was true for the Delta, Southern Plains, and Mountain regions.

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Among the five major dairy states, only Minnesota had a large decline (5.3%) in milk production. New York's output was down 2.1% while production in Wisconsin and Pennsylvania slipped slightly less than 1%. Meanwhile, California's producers turned out 3.6% more milk than in 1983. Only four of the remaInIng 45 states increased milk production, and they in total had less than 2% of the national production. Nebraska, Kentucky, Kansas, Utah, Missouri, and Florida had very sharp drops.

Feed Prices Lower

The 1984/85 corn crop was 7.66 billion bushels. Corn use will likely be smaller than the crop; thus, carryover stocks will be larger. As a result, farm prices of corn will be lower In 1984/85 than a year earlier, when the market was dominated by drought and the effects of PIK. Prices at the farm are likely to range between $2.60 and $2.70 a bushel, compared with last year's season-average price of $3.25.

Last year's soybean crop was 1.86 billion bushels. Soybean use, like corn, is expected to be smaller than the crop, thus increasing carryover stocks. With additional stocks, soybean prices at the farm during 1984/85 are projected to be $5.55 to $6.25 a bushel, compared with last year's season-average price of $7.75. Prices for soybean meal (Decatur) are forecast to be between $125 and $135 a ton, down from the 1983/84 average of $188.20.

The average prIce paid by farmers for 16% protein dairy feed has In general decl ined since January 1984. Mid-February prices averaged $174 a ton, down $27 03%) from a year earlier. With all-milk prices higher during February, the dairy farmer was able to buy 159 pounds of grain for each cwt. of milk sold--up 26 pounds (20%) from a year earlier.

The relationship between forage suppl ies and demand IS shifting toward a more than ample condition. For example, hay stocks on January 1, 1985 were 13% larger than a year earlier, while the total cattle and calf inventory declined almost 4 million head (3%). In addition, prospects point to more forage and less ruminant livestock in 1985/86. The cattle herds and sheep flocks are expected to be down again on January 1, 1986, and farmers have indicated intentions to harvest additional hay acreage this year. As a result, if weather conditions are normal, 1985/86 could become a year of large hay supplies and lower prices.

January Cow Inventory Smaller; Replacements Larger

Milk cows on farms on January 1, 1985 numbered 10.819 million head, a decline of 290,000 (2.6%) from a year earlier, but up 19,000 from July 1, 1984. Dairy heifers (500 pounds and over) held for herd replacements were 4.757 million, an increase of 225,000 (5%) from January 1, 1984, and the largest January 1 number since 1965. With a gain in replacements and a decline in the milk cow herd, the nlUTIber of heifers per 100 cows on January 1 was 44, the largest January 1 ratio of heifers to milk cows on record.

A record rate of culling during 1984 offset the large number of re­placements available on January 1, 1984 to calve and enter the herd, hence the 290,000-head decline In the milk cow inventory last year. Federally

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inspected implying compared was the third to

(FI) dairy cow slaughter in 1984 was about 3.2 million head,

program.

341,000 additional dairy cows went to slaughter in 1984, When with 1983. However, not all of the additional dairy cow slaughter result of the diversion program. In fact, it seems likely that a a half of the extra kills last year would have occurred without the

Total FI cow slaughter in 1984 was 8.2 million head, implying that 5 million were beef cows. The total FI cow kill last year was nearly 1 million more than 1983. Thus, the additional dairy cows were 34% of extra kills 1n 1984. FI cow kills through March 9, 1985 (9 weeks) totaled 1.3 million head, a decline of 8.4%. Dairy kills are down by nearly 40%, while beef is up 15%.

Production Will Be Larger

With low feed price s, the number of mi 1 k cows on farms may increase as the diversion program ends, but the gains are likely to be limited because of tight cash flow and the expected lower support prices. For 1985, the average number of cows 1S projected to rema1n about unchanged from last year. Milk per cow is anticipated to average 1.5 to 2.5% above 1984. Calendar 1984's reduced yield due to the diversion program could be overcome in a relatively short time. In addition, the underlying genetic advance­ment has continued and will add upward pressure on yields. For all of Cal­endar 1985, milk production is forecast to be 1 to 3% greater than in 1984.

Farm Milk Prices To Decline

Prices received by farmers for all milk during 1984 averaged $13.42 per cwt., l5~ below a year earlier. The effective all-milk price (adjusted for differences in deductions) was down 23¢. Milk prices received by farmers 1n February were slightly above a year earlier, but prices are expected to be lower by midspring because of surpl us suppl ies and the lower support price. Price s for the last 4 years have fallen seasonally 50 to 60~ per cwt. from February through midsummer. However, this year the drop may be in the range of $1.00 t.o $1.50. With supply more than ample, little price strength relative to the support price is expected. Thus, assuming a reduction in the support price on July 1 to $11.60 per cwt. and assuming the price to be unchanged on October 1, milk prices during second-half 1985 may be 80~ to $1.20 per cwt. below a year earlier. In 1985, the all-milk price may average 20 to 50~ lower than 1984. The effective price for 1985 would be unchanged to 25~ lower than last year.

Cash Receipts Lower

Cash receipts during 1984 are estimated at $17.8 billion, down 5.3%. Based on preliminary data, farm marketings of milk and cream to plants and dealers and direct sales to consumers decl ined about 4.1% in 1984, while the all-milk price was down about 1.1%. However, both 1983 and 1984 cash rece ipt s were impacted directly by provisions of the price-support program. After making adjustments to cash receipts for diversion payments and net deductions, the total effective receipts were about $18.2 billion in 1983 and about $17.7 billion in 1984, compared with $18.2 billion in 1982.

"

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The financial condition of the dairy enterprise has deteriorated since 1980. For example, in 1984 an average 60-cow dairy enterprise with output per cow of 12,495 pounds generated a return above cash expenses and replace­ment costs of about $15,100. In 1981, an average 53-cow enterprise with yield per cow of 12,183 pounds had a return above cash expenses and re­placement costs of nearly $23,000. This decline came despite growth in th,~ number of cows and yield per cow for the average dairy enterprise. On January 1, 1984, the proportion of dairy farms highly leveraged (debt-to­asset ratios 40 to 70%) was 17.8%, up by nearly two-thirds from 1980. Similarly, the proportion of da iry farms very highly leveraged (debt-to-asset ratios greater than 70%) waS 8.7%, four times more than 1980. In 1985, given a substantial drop in the all-milk price, the highly leveraged and very highly leveraged dairy farms will likely increase.

Wholesale Prices Lower

Surpl us suppl ies and CCC purchase price s unchanged from a year earl ier have been reflected in wholesale prices for butter, cheddar cheese, and non­fat dry milk. Cheddar cheese (Wisconsin assembly points, 40-lb. blocks) during February averaged l34.26¢ a pound, 10¢ lower than September, about 1 ¢ be low a year ear 1 ier, and O. 5¢ be low the current purchase price. Like­wise, the price of nonfat dry milk (high heat, Central States area), at 90.57¢ a pound during February, was down slightly from a few months ago, a year earlier, and the support price.

Meanwhile, the price of butter (Grade A, Chicago) during February averaged l41.25¢, even with a year earlier, but down nearly 17¢ Slnce November and 2¢ below the support price. During 1985, wi th lower support price on April 1, and assuming continued surplus supplies and a support reduction on July 1, the spot prices of butter, cheddar cheese, and nonfat dry milk are likely to be below year-earlier levels.

Ref lecting lower wholesale spot prices, the Bureau of Labor Stati st ics (BLS) wholesale price index for all dairy products during February was 254.1 (1967=100), down 1.3% since November, but 2.3% above a year earlier. Last year, the index averaged 251.7 (1967=100), a gain of only 0.4% from the average for 1983. During 1984, wholesale price gains in ice cream (2.4%) and butter (1%) were above the average rate of gain, wh ile cheese prices averaged 0.8% lower in 1984 than in 1983. The index for all dairy products in 1985 is expected to average 1% lower to 1% higher than last year.

Retail Dairy Prices Up Less Than All Food

In 1985, the BLS retail price index for all food items is expected to average 2 to 4% higher than 1984. In 1984, the all-food index averaged 302.9 (1967=100), up 3.8% from the previous year. In contrast, the dairy price index this year is expected to average unchanged to 2% larger than last year. In 1984, the dairy index averaged 253.2 (1967=100), a gain of 1.3% from 1983. The BLS retail dairy index in February was 3.3% above a year earlier, but not all of the wholesale price declines since November have been reflected at the retail counter. In addition, given the expected lower support prlces, retail prices may decline from current levels later th is year.

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In 1984, retail prices for a half-gallon of Grade A vitamin fortified who Ie mil k aver aged 112. 7 ¢, down sligh t ly from the aver age pr ice in 1983 and only a penny higher than in 1981. In contrast, retail prices for a half-ga llon of whole milk increased 8.5¢ a year during 1978-81. Although sma 11, the drop from 1983 to 1984 was the fi rs t year-to-year dec! ine in almost 2 decades.

The 1984 farm value was 58.2¢, down 1.3¢ from 1983. This decline resulted from the December 1983 reduction in the support price of milk. The lower farm value pushed the farmer's share of the consumer's milk dollars below 52¢, down a penny from 1983 and a nickel below the 1976 peak.

The combined processing and wholesaling margin in 1984 was 33.3¢ a half-gallon, unchanged from a year earlier but 2.5¢ below 1982. Retailing margins rose l.l¢ in 1984, as declines in prices paid to processors­distributors were not reflected in retail prices. The retai 1 ing margins of l6.8¢ represented 15% of the retail price, up from less than 10% in 1980.

Manufactured Output Reduced

Production of manufactured dairy products on a milkfat basis in 1984 was equivalent to about 78.5 billion pounds of milk, down 5.5 billion (6.5%). The decrease resulted in part from additional fluid sales but primarily from reduced farm marketings of raw milk. The decrease in raw milk use in the manufactured products sector resulted in less butter and nonfat dry milk and American-type cheese production. Butter output in 1984 declined 13.8% and used 3.7 billion pounds less milk. Likewise, American­type cheese production in 1984 was down 7.9% and used 2.4 billion pooods less milk than a year earlier. The reduced sum of milk used to make butter and American-type cheese is greater than the total reduction in raw milk used in manufacturing because of the 700-million-pound increased use of milk to make other than American-type cheese.

Commercial Use Higher

Preliminary data for fourth-quarter 1984 indicate commercial disappearance of all milk, and dairy products on a milkfat basis was up 0.6%, following a gain of nearly 4% during January-September. Sales for all of 1984 are currently estimated up 3%. For 1985, commercial sales are expected to be oochanged to 2% higher.

A comparison of commercial disappearance of major dairy products during 1984 with a year earlier indicates that butter was up 4.2%; American-type cheese, 10.5%; cheese other than American; 6.7%; frozen dairy products, 0.6%; fluid products, 0.8%; and nonfat dry milk, 13.8%. Meanwhile, canned milk sales were aga1n lower, down 8.6%.

Per-Capita Use Higher

Civilian per-capita domestic disappearance (including USDA donations) increased 6 pounds to 582 on a milkfat basis during 1984. An increase in per-capita commercial sales overcame the reduced USDA donations to make the

•

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•

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gain. Per-capita disappearance of fluid milk and cream (milkfat basis) dur ing 1984 was unchanged wh ile both American-type and other than American­type cheese posted gains. Butter and ice cream were down sl igh tly. Meanwhile, nonfat dry milk per-capita disappearance was down sharply, but this result is suspect because of the large gains in sales during 1984.

During 1984, domestic disappearance from USDA sources totaled 269 million pounds of butter, down 11% from 1983. Cheese donations totaled 594 mill ion, a decl ine of 10%. Canned milk at 19 mill ion was 23% less than in 1983, while nonfat dry milk domestic giveaways, as currently estimated, were sharply lower. On a milkfat basis, the donations equaled 11.5 billion pounds of milk in 1984, down from 12.9 billion the prior year.

USDA Stocks Lower

Stocks hel d by USDA on February 1 were equivalent to 10.6 bill ion pounds of milk (milkfat basis), down 7.1 billion (40%) from a year earlier. Holdings by the Government have fa lIen sharply since June 1, 1984, due to the reduced amount of purchases relative to the amount of program uses. Government stocks are not likely to decline from current levels given the projected program uses and the expected increase in removals this year.

USDA holdings of cold-storage butter on February 1 were 236 million pounds, a decline of 234.3 million (50%) from a year earlier. Meanwhile, American cheese stocks (including processed American) held by USDA in cold storage were 578 million pounds, a drop of 230 million (28%) •

Stocks held by the trade on February 1 were equal to about 5 billion pounds of milk (milkfat basis), a drop of 200 million from 1 year earlier. The trade held 34 million pounds of butter, about 6 million less than last year. They have also reduced their total stocks of cheese by about 7 million pounds from February 1, 1984.

cee Purchases Equal To a Year Earlier

USDA net removals (delivery basis) under the milk pnce support program totaled 8.6 billion pounds (milkfat basis) in calendar 1984, down by nearly half from 1983. Removals were lower because of reduced marketings (lower production and additional farm use) and increased commercia 1 disappearance. However, during February 1985, USDA ne t remova Is under the program were equivalent to 1.4 bill ion pounds of milk, the same as 1 year earlier. In 1985, removals are expected to be somewhat larger than last year.

Dairy Support Costs Lower

There are a number of ways to compute the cost of the da i ry price support program. One method is to look at the taxpayer's cost. With this method, you sum the cost of net purchases for a marketing year, reduce the total for any deductions, and then add on diversion payments. Under this method the costs in 1982/83 were about $2.5 billion, up 16% from a year earlier. In 1983/84 costs dropped sharply to about $1.5 billion and are projected to be about $1.5 billion in 1984/85.

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Summary

While a drop of about one-half in the level of removals is impressive, it does not give the final verdict on the paid-diversion program. That depends on what actions dairy farmers take in the coming year. The diversion payments were intended to offer short-term reI ief, allowing farmers time to adjust their production resources to create a closer, longer term b~lance between milk supply and demand. If producers increase milk marketings significantly, we could end up back in circumstances similar to that of 1983 by 1986.

To recap, milk production in 1985 is expected to be up about 2%, but farm use will be down; thus, marketings and total supply will grow by about 2.5%. Commercial disappearance is also expected to be up about 1%; thus, USDA net removals are expected to be about 10 billion pounds. The relatively large level of purchases will keep wholesale prices near the lower CCC purchase prices. With lower products prices, pay prices to farmers are likely to be lower, while retail prices remain about unchanged.

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ANALYSIS OF PROSPECTS FOR DAIRY SALES

by

1 Olan Forker

This is an interesting challenge because the topic defies analysis. As an economist, I can predict the likely impact on sales, of a change in price, of a change in weather, or of a change in the amount of money spent on advertising. But, it is difficult to predict the weather, or the government's decision on price, or the vote of dairy farmers on the upcoming promotion referendum.

But, the question of the likely prospects for dairy sales is a reasonable one and one that I am pleased to be asked to address.

Before I proceed with the discussion of the prospects, I'd like to make a few points. There are certain concepts that we need to keep in mind.

My first point. The industry cannot sell more milk than is produced. If one observes the year to year changes in total sales of all dairy products in milk equivalent for the past twenty years, there is a sUbstantial amount of up and down movement. Those year-to-year variations are primarily the result of changes in the quantity of milk produced each year, because that is what total sales represents. It is the total quantity of milk produced and then converted into dairy products, plus net trade volumes, less government purchases and waste.

My second point. The quantity of dairy products sold in commercial channels is greatly influenced by the level of price and the level of supports. The lower the price at retail the more sales we can expect. The higher the price support the greater the portion of total production that will not reach the commercial market.

1professor, Agricultural Economics, Cornell University, Ithaca, NY 14853.

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My third point. The total demand or market for milk as produced by the farmer will be stronger when more attention is devoted to the development of new markets, new products, new containers, exciting new product names (e.g., the Hershey and Nestle chocolate milk phenomena), new blends that might compete more strongly against imitation products, and new methods of delivery, e.g., milk vending machines.

A fourth point. processing cost and distribution efficien­cies can reduce costs and margins and, thus, narrow the gap between farm prices and retail prices. The result is increased sales volume at any given farm price. However, efficiencies by themselves will not guarantee large sales volume. A great deal of attention needs to be given to the development of high quality, high margin products as well. Products that consumers are happy and delighted to buy because they taste good or satisfy some personal, social or nutritional value, will also increase sales volume.

And, a fifth point. Individuals cannot buy things unless they are available which calls for creative product development, marketing and distribution.

So, what are the prospects for dairy sales? The signals are mixed. There are some negative and some positive signals. First, and before I hit you with the negative signals, let's look at some of the positive signs.

Positive Signals

There are several positive signs.

Per capita consumption is up. There has been more activity and excitement about new product development in the past two to three years than we have seen for several years. The per capita consumption of several dairy products such as cheese, yogurt, and low-fat products has been increasing for several years. And, we have seen increases in the per capita consumption of butter the past two to three years.

Just the fact that an increase is occurring makes for more optimism and results in added investments in new processes, new technology, and new product development.

These investments indirectly generate a greater demand for milk at the farm level. But be cautious. To be profitable, these investments need a readily available supply of milk at reasonable prices. The investments, I believe, have been made with the expectation that the milk supply will continue to increase.

- 21 -

Price - I think we will continue to see milk prices in real terms continue to soften. If this happens, consumers are likely to increase purchases of many of the products. It will also create a more favorable environment for innovations in marketing.

If lower prices occur we are likely to see modest increases in fluid milk sales. The more dramatic changes in milk equiva­lent sales will occur with decreases in the price of manufactured products such as cheese, yogurt, and butter.

Health and Nutrition - We currently have a health craze on our hands. Everyone wants to be healthy, young, and vigorous. The non-fat portions of milk can be emphasized and exploited. The calcium phenomena should have a positive impact on the sales of dairy products. But, this trend, if handled properly, should result in more sales.

Promotion - We have seen a tremendous increase in promotion this past year - the upward trend has been going on for several years. The expanded promotion program put in place by the National Dairy Promotion and Research Board in 1983 is still being evaluated. But, based on previous research we know that the more money spent on advertising the greater consumption and sales. The important management issues involve questions about how much should be invested or spent, where, when, and how it should be invested to maximize sales.

We have been involved in evaluation efforts at Cornell since Mandatory Assessment was put in place in New York in 1972. Over the period 1972 - 1982, dairy farmers invested an average of over $2 million per year in advertising just in New York city. We conclude from our research that the sale of fluid milk in New York City was probably 10 percent more over that ten-year period than it would have been if the generic milk promotion had not occurred. We also conclude that the fall cheese campaigns of 1980 and 1981 probably resulted in 8 percent more cheese sales than would have occurred if there had been zero generic cheese promotion.

In 1980, 1981 and 1982 over $500,000 were invested in generic advertising each year. But, this was almost nothing compared to the amount cheese companies spent on brand adver­tising. Between 1979-81, they spent about $5-6 million; in 1982 they spent $9.5 million on brand cheese advertising.

Let me show you some of the results. First, let's discuss fluid milk, Figure 1.

At 1985 prices (i.e., the price of buying advertising time), the advertising program in New York City of the 70s and early 80s averaged 25 cents per capita. Month-to-month variation

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was such that we observed annualized rates as high as 70 cents and as low as almost zero. This variation allowed us to measure the impact on sales. Other things being equal, sales at zero advertising levels would be less than 8 ounces per capita per day while advertising expenditures at the higher end of the range result in sales above 9 ounces per capita per day. A one ounce difference in New York City represents 14.8 million pounds of fluid milk. At a Class I-II price spread of $2.40 per hundredweight, that represents an increased revenue of $9.8 million per year in the blend return.

The most interesting thing about our New York City cheese study was our ability to measure not only the impact of generic advertising, but the impact of brand advertising on aggregate sales as well. Figure 2 depicts the net effect of brand adver­tising on sales at expenditure levels from 20 cents to 90 cents per person per year. The difference from high to low is .17 oz./per capita/day or 70 million pounds of cheese per year. This converts to about 700 million pounds of milk. At $13 per hundredweight, that increase represents $91 million of additional milk used to produce cheese for the New York City market.

Depicted in Figure 3 is the estimated impact of generic advertising expenditures on sales in ounces of product per person per day. The three lines represent three different expenditure levels for brand advertising - 30 cents, 48 cents and 66 cents. If we first concentrate on the middle curve (i.e., brand adver­tising at 48 cents per person per year) we see that sales increase from .4497 ounces per person per day when generic advertising is at 1 cent per person per year to .5029 ounces if at 10 cents. This is a .05 ounce per person per day difference. Translated into total market terms, this represents an increase in cheese sales of 20 million pounds or about 200 million pounds milk equivalent. At $13 per hundredweight, that represents $2.73 million of additional milk to produce cheese for the New York City market.

How optimistic should we be about prospects for dairy sales? It depends in part on the amount of money that will be spent on generic and branded advertising.

If the referendum concerning the continuation of the national promotion program passes, then we know that a substan­tial amount of money - in excess of $115 million per year - will be spent on advertising. This will likely contribute to a more optimistic view about prospects for dairy sales.

with large amounts of generic advertising, you are likely to see substantial increases in the amount of brand advertising. Dairy companies will find it to their advantage to increase expenditures to more fully exploit for their own good the optimism created by generic advertising. Our research indicates

- 23 -

that brand advertising of cheese is more effective when generic advertising is also occurring and generic advertising is much more effective when brand advertising is at high levels.

Some caution is warranted. Do not use the results of the New York studies to predict the impact of the national program. The results are apparently market specific. Not all markets in the US are likely to respond in the same way the New York city market responds. We know from our studies of other New York State markets that they all do not respond in the same way. The response to generic fluid milk advertising was much less in the smaller Upstate markets than it was in New York city.

But, that does not detract from the importance and value of the New York studies in understanding the impact of advertising. And, that should not detract from any optimism that should prevail if the promotion program continues at relatively high levels of expenditure.

Available Supplies

As I indicated earlier, one cannot be optimistic about future sales volume unless there is an adequate amount of milk available in commercial channels that can be used for market expansion. There certainly has been an adequate supply available for the past three years. But, the government has been a stronger buyer at the margin than the private sector.

But even though the government has been a strong competitor during the past two to three years, we have had sUbstantial investments in new processing and handling technology, new plants, and in market development. Some of these investments have resulted in the increased sales volume 'of cheese, butter, yogurt, and fluid milk ,products. But, it still hasn't been enough to draw all the milk away from the government. Of course, some investments have been made with the idea of selling product to the government.

If the support price is dropped to the point of lowering substantially the amount of government purchases, the processing and distribution sector will view the future more optimistically and you will then see more investment and more initiative in new processing and product technology, and market development. This would further improve the prospects for dairy sales.

Attempts to control production through quotas or other means will result in a less optimistic view by processors and distributors and thus less investment in new processes, products or markets.

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Negative Signals

Now let's analyze some signals that appear to be negative.

Demographics - The most negative factor for several years has been the changing demographics. Most of us in academia, and most in industry, view the changing demographics as the culprit and the reason for decreases in the sales of some dairy pro­ducts. Our research continually indicates that older people drink less milk and eat fewer dairy products. And, our popula­tion is getting older. But, some recent information indicates that the current youth generation is consuming less milk.

Our research also indicates that non-caucasians drink less milk per capita than caucasians. And, the proportion of the population is becoming more non-caucasian.

The argument is that the demographics have turned against the industry and that is the reason for the decline in per capita consumption. It is factual; it follows from our analysis; it is reality. But, I also conclude that it is a self-fulfilling prophesy. It is an excuse, a justification used for not in~ vesting in new technology, new product development and creative marketing. Thus little is created that appeals to or exploits the changing demographics. Unless industry recognizes the nature of the changing demographics and adjusts marketing to satisfy their current needs, this will continue as a negative factor.

Health Concerns - There is still some concern over the effect of dairy products on health. Butterfat is still con­sidered dangerous to health by many. And, it causes gas and diarrhea in many.

Ever since I can remember, the industry has been fighting a defensive battle over prevailing attitudes and scientific evidence that milk is bad for your health. The defensive attitude and the defensive approach taken by the industry and firms in it have resulted in a great deal of time and effort being spent on trying to pass laws, rules and regulations designed to prevent competing products from being available to consumers. I am convinced that time and money spent on defensive actions have been and are in large part non-productive. In general, time and money spent on new innovations, new product forms and product modifications to satisfy or exploit the social and health concerns of consumers, in my view have been and will be more productive. And, I believe that we are seeing some change in attitude in that direction.

There has been and continues to be a substantial amount of evidence that many of the ingredients of milk are good for you.

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In summary, the demographics and the health concerns can be viewed as negative or positive. The industry can try to fight the trends in consumer attitudes and beliefs or the industry can adapt to and exploit those changes as demand opportunities. If price supports are held high enough to make the US government a major buyer or if we have production controls, one cannot expect increases in dairy product sales.

summary

On balance, I think we can be optimistic about future increases in dairy product sales. The negative signs from the expected changes in demographics and health concerns are offset by the expectation that milk supplies will continue to press against the market, that real prices of milk will continue to trend downward, that there will be a sUbstantial amount of money spent on advertising (generic and brand), and that the image of milk will fit nicely with the current craze over consuming natural foods, foods that are good for your health.

I know it is dangerous to make predictions or to provide specific numbers, but just to make clear my point, let me give you some.

A 10 percent reduction in the real price of milk at the farm will result in an increase in sales at retail. If one allows 2-3 years for investments to be made and the process of new product and market development to be worked out, I think one can expect an increase in sales of near 10 percent. I think there is evidence to suggest that the aggregate demand for all products is less negative than many studies conclude.

New technology in production will continue to occur, this will increase productivity and decrease the cost of produc­tion. Thus, decreases will occur in the real price of milk and milk products.

If the expanded or national promotion program continues, one can expect, commercial sales at least five percent greater than if generic advertising expenditures return to the 1983 level.

I expect the changes in demographics and the concern over fat to continue to affect sales negatively. But, I expect this to be offset by the tendency toward eating and drinking more natural foods and food that is naturally nutritious. The calcium craze is merely a current example.

But, sales increases will not be realized unless the dairy industry is optimistic, positive and aggressive about quality control, about new process and new product technology and market development.

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As a closing statement, I want to remind you that we need to remind ourselves that the market will absorb all of the milk produced at a market clearing price and at a market clearing price the total sales of dairy products in milk equivalents will equal the quantity of milk produced.

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References:

Kinnucan, H. and Fearon, D. Econometric Measurement of the Sales Response to Generic and Brand Advertising of Cheese. Cornell Agricultural Economics Staff Paper No. 84-21. August, 1984.

Kinnucan, H. and Forker O. Asymmetry in the Retail Pricing of Major Dairy Products with Implications for US Dairy Policy. Cornell Agricultural Economics Staff Paper 84-14. May, 1984.

Kinnucan, H. Demographic vs. Media Advertising Effects on Milk Demand: The Case of the New York city Market. Cornell Agricultural Economics Staff Paper 82-5. March, 1982.

Dahlgren, R. A. A Synthesis of Microeconomic Duality Theory and Distributed Lag Modeling with Implications for US Dairy Policy. North Central Journal of Agricultural Economics, Vol.7, No.1, January, 1985. pp. 132-144.

Oz./Person/Year

9.5

9

8.5

8

7.5

7

6.5

Figure 1. Impact of Generic Advertising on Fluid Milk Sales. NYC. 1979-81

N 00

61 I I I I I I I I I I I I I I I I o 5 W ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ H

Generic Advertising Expenditures (Cents/Person/Year. 1985 /dollars)

0.6

0.5

0.4

Oz. /Person/Year 0.3

0.2

0.1

o

Figure 2. Impact of Brand Advertising on Cheese Sales, NYC, 1979-81

N \0

~ ~ ~ ~ ~ ~ ~ ~ u ~ M ~ • e ~ E Brand Advertising Expenditures

(Cents/Person/Year. 1985 Dollars)

Oz./Person/Year

0.6

0.5

" " " , ,,-

Figure 3. Impact of Generic Advertising on Cheese Sales, NYC, 1979-81

Brand ~ 66 cts

'" ........... --------_ ..... -------------_ .... _-----_._--_ ... _----------.-----------------------.-.... --_ ... ---, ... -.

~rand @ 48 cts VI o

o . ~ .-••••• , •••••.••• - •.•.• -••.• -•••. -••.. -.•.. -...••.•... -.... -.... -.~~:~: .. ~-~:.-:~.~ .••.•••

0.3 I I I I I I I I I I I I I I I I I I I I 1 2 3 ~ 5 6 7 8 9 10 n 12 13 14 15 16 17 18 19 20

Generic Advertising Expenditures (Cents/Person/Year, 1985 do lIars)

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THE nAIRY PROMOTION PROGRAM DAIRY FARMERS MAKING TIIEIR FUTURE

by 1 Joseph J. Westwater

Good morning. I am happy to be here wi th you today tCI talk about the National Dairy Promotion and Research Board. To explain not only what it is but, more importantly, how it is working to improve the po~,ition of the American dairyman and the entire dairy industry.

The National Dairy Board was created by Congress to administer and oversee a unified, nationwide advertising and promotional campaign to boost the consumption of U.S. dairy products.

And frankly, it is high time dairy farmers began to market their products more aggressively. For too long the dairy industry has focused largely on production and all too often ignored the flip side of the coin -- marketing their products. Dairy farmers have assuned that consumers will continue to consume what they supply. Yet dairy farmers are now facing the reality of the situation -- that, year after year, the market refuses to accept, to consume, as much as they can supply.

The dairy industry is certainly not alone in its need to promote its products more aggressively. Listen to what Fritz Gwin has to say on the subject. Fritz is the Chairman of the Board of Farmland Industries of Kansas City, the nation's largest cooperative. Last June he said, and I quote,

"Farmers have invested about 98 percent of their financial resources in production and only two percent in marketing. At this time, production is not our problem. We must be willing to invest a larger portion of our resources into marketing if we are going to solve our problems.

"This new effort will take Vision, patience, compromise and, most important, grassroots financial commitment and participation to do for ourselves what no one else is going to do for us. 1t End quote.

Milk has done a little better, I believe, but let me briefly review the dairy situation as it stands today.

In 1983, dairymen produced a record 140 billion pounds of milk. Of that total, 123 billion pounds were sold commercially. That left this nation with an extra 17 billion pounds of milk on the Board's hands. That is an overproduction of more than 13 percent.

1Chief Executive Officer, National Dairy Promotion and Research Board, 1901 N. Moore Street, Suite 1200, Arlington, VA 22209.

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USDA estimates that production dropped about 3 percent last year due to the diversion program and other factors. USDA also says that consumption jumped 2.6 percent. That consumption gain is very exciting and we are doing everything we can to make it continue.

We are headed in the right direction, but we are still a long way from getting supply and demand balanced. The government bought about 8 billion pounds of surplus last year. That is half of what it bought the year before. But even so, let me ask you -- how long do you think the government is going to continue spending more than a billion dollars a year to buy that amount of excess production?

Dairy farmers in this industry must decide where their best future lies. Is the industry's future in Washington? Or is it in the marketplace? ,

Over the last 30 years, per capita consumption of dairy products, on a fats-solids basis, has dropped 160 pounds. In the last 10 years it has been relatively static. As fluid milk consumption has dropped, cheese consumption has increased. In fact, cheese consumption has gone up nearly 9 pounds per person in the last 14 years.

If per capita consumption had remained steady -- if everyone was consuming as much dairy products as they were in 1955 -- then we would not have a surplus. In fact, we would have needed 157 billion pounds worth of production last year just to meet demand!

The surplus is not unmanageable. We could eradicate it this year if every person in the country were to drink an extra 2 ounces of milk a day, or eat just one ounce of cheese a week. The surplus was not built in a year and it won't disappear in a year. But recent history shows we can and we are making strides to reduce it.

Dairy farmers have needed a dynamic, hard-hitting effort to sell what they produce. And that is what the National Dairy Board is about -- selling. Getting aggressive. Going out into the marketplace and fighting for customers.

By launching this effort to take their future into their own hands, dairy producers are helping themselves now - instead of relying on just the government.

Last May 16, the Secretary of Agriculture appointed 36 members to the Board from 151 nominees. All are dairy producers. Many of them hold top leadership positions in cooperatives or farm organizations. They come from different regions, different cooperatives, different farm organizations, and milk different breeds. But they are united in the belief that they must work together if this promotion program is to succeed.

I want to emphasize that the Board is controlled by, run by, dairy producers. They seek the best outside expertise, but in the end the decisions are up to the Board of dairy farmers.

- 33 -

The National Dairy Board's job, first and foremost, was to invest dairy farmers money wisely and put it to work immediately. That is what it did.

Less than 100 days after the members were sworn in, the Board began running fluid milk and cheese commercials on network TV. These ads were joined in October by butter commercials, in December by magazine ads, and in January by a series of dairy calcium commercials on TV.

In all, the Board is spending $68-1/2 million on advertising and promotion between last September and this April. Dairy farmers, represented by the Board, are now the 33rd largest network TV advertiser in America.

Let me give you a more precise rundown: On fluid milk: We are spending $17 million to put nearly 400 commercials on network TV, aimed at children and at young adults up to age 34.

On cheese: We're spending $28.6 million -- for: * Almost 600 national network TV commercials; * A cheese recipe insert section in Parade Magazine in

February and April; * Materials for the fall and spring cheese promotions in

grocery stores nationwide.

On butter: * $6.6 million is going for TV ads in 19 markets chosen for

their good potential for increased butter sales. And between January and April alone, the Board will sponsor 3,225 commercials in these areas.

* In addition, we are sponsoring 19 ads in national magazines such as Better Homes & Gardens, McCalls and Ebony.

On calcium: We're spending just over $16 million -- which is buying: * More than 200 network TV commercials * Hore than 1,000 cable TV commercials * 84 ads in magazines directed primarily at women of all

ages, from Seventeen to Family Circle; and other magazines such as Time, Newsweek, Reader's Digest and American Health.

This adds up to about 1,200 national network commercials, more than 4,000 on local stations and on cable TV, and 103 ads in national magazines.

People ask why we are spending so much -- $16 million -- on calcium.

The average American woman takes in only half to two-thirds the amount of calcium she needs to prevent osteoporosis. There is a new, massive surge of public interest in the health problems that result from too little calcium in the diet.

- 34 -

Pharmaceutical companies are spending millions advertising their calcium pills. We are trying to make consumers aware that dfiiry calcium is nature's purest form of calcium. If every woman over 15 met er minimum recommended daily allowance of calcium with dairy products, there wouldn't be a surplus. In fact, last year dairy farmers would have had to use the entire surplus and produce another 12 billion pounds of milk just to meet demand.

I think the scope of our advertising is pretty impressive. But the Board hasn't stopped there. We are spending $2.1 million on major education and awareness programs aimed at consumers and at health professionals.

Health professionals choices about their diet. educated and aware of the for women.

can influence millions of people's knowledge and We think it's critically important that they are

importance of dairy calcium in the diet, especially

To reach this group the Board sponsored a satellite teleconference linking 6,000 health professionals at SO sites across the nation. The teleconference featured a panel of outstanding scientists who presented their research on the role of calcium as it relates to osteoporosis, or brittle bone disease, and to hypertension.

We are also: * sponsoring 103 ads in medical journalS and magazines that

reach 3/4 of a million readers; * mailing 20,000 brochures to doctors; and * have set up a hotline to provide more information and

materials.

As for consumers we are: * placing in supermarkets some 4 million calcium leaflets,

200 million recipe cards and 300 million recipe tear-off pads;

* holding regional seminars for food, health and nutrition writers; and

* creating audio and video tapes, a newsletter and press releases for food writers, and setting up consumer exhibits.

Again, these are only some of the outreach activities the Board is sponsoring.

So there you have a good picture of our advertising, promotion and education efforts.

The Board is also involved in long-term work -- sponsoring research projects that we expect will give the dairy industry a bigger piece of the market.

We are spending $2.1 million to fund 41 nutrition research project~ on the relationship between calcium and bone health and between calcium and

- 35 -

hypertension. Studies point to a possible link between increased calcium intake and lowered blood pressure. If this can be documented, it could be one of the biggest boosts the industry has ever had.

We are also funding 19 product research projects with another $1.2 million. These are aimed at either developing new products or finding ways to lower processing costs. Examples of the kinds of projects funded are -­improving the flavor of lowfat cheddar cheese, or developing a yogurt for milk-intolerant people.

An evaluation is being carried out to see just what the program's impact is, and how much it is accomplishing. This evaluation is mandated by Congress. While the Board contracted for it, it is a completely independent evaluation and is being done by 5 outside firms.

But our work does not stop here.

We are charged with ensuring compliance in this program by all milk producers and handlers. It is also our job to let the dairy farmers and Congress know just what we are doing, and why. In other words, to communicate with them about our work.

Finally, the Board believes that Congress saw that the Board could and should provide a strong linkage with the existing program organizations. And that, as part of this responsibility, it should act as a conduit and coordinator for existing promotional programs.

The financing mechanism -- the gas that makes this engine run is, as you all know, a IS-cent assessment on every hundredweight of milk marketed commercially.

The assessment is expected to bring in approximately $197 million in the fiscal year that began last May 1 and ends this April 30.

Of each 15 cents, the National Board is receiving in the neighborhood of 6.2 cents. Approximately 8.8 cents is going to the state, regional and federal milk marketing order promotion boards around the country.

Before this legislation was passed, annual contributions to promotion efforts ranged around 90 million dollars. The legislation has basically more than doubled the resources with which we have to work.

For many years the state and regional promotion and education organizations have done a fine job of working with the resources at hand. When the National Dairy Board came into existence last May 30, there were organizations in many states, covering dairy farmers throughout most of the country. But not all producers had such representation, though all need and deserve strong promotion efforts.

Until now, contributions have been a chancey business. In some states, they have been voluntary. In other areas, state laws mandated

- 36 -

contributions. In still other areas, federal milk marketing orders did this job. But when you come right down to it, all farmers were benefitting from promotion, though not all were supporting it.

Now, though, we have a comprehensive, all-encompassing funding system. The local promotion organizations provided a solid framework and concept that dairy farmers took and expanded into a national program. They needed a national. program to deal with the national economy. Congress views the dairy surplus as a national problem and the best way to address that was with a national program that would, for the first time, use national television and magazines to reach a national audience.

:Best estimates are that the National Dairy Board's income will total about $82 million. The state, regional and federal milk marketing order programs, in turn, are getting around $115 million.

These funds are dispersed widely. The National Dairy Board is the largest single entity to carry out promotional work. With that position comes a unique challenge and responsibility -- for the National Dairy Board to play a leadership role in coordinating promotional efforts across the country.

Coordination is really the key word here. Without it there is duplication of effort. There are wasted resources. And there is -- regrettably -- often inconsistent performance.

With proper coordination, dairy farmers can bring their resources to bear where they are needed most. They can marshall their forces, direct their resources, meet more needs, tap new markets and expand old ones. It is a system under which we all can gain.

Dairy farmers will get a much bigger bang for their buck -- or should I say, for their fifteen cents -- if we mesh and coordinate our efforts and blanket the available markets. In the end, the fifteen cents will be worth more than face value. The whole will be greater than the sum of its parts.

But, should we fail to coordinate our work, very possibly that 15 cents may not be worth even its face value.

As I said earlier, Congress will require from the National Dairy Board a complete evaluation of the impact of this entire program. Not just the work done by the National Board, but the work carried out with the extra funds that have gone to the state and regional promotion boards.

The evaluation will be done before August's referendum on whether to continue the milk assessment. Whether to continue the entire promotional ~rogram. The referendum will be a critical juncture on the path this Industry is taking toward the future, and toward greater stability and growth.

By the time that referendum is held, I am confident that we will be able to point to significantac~omplishments in our work.

•

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But making these accomplishments happen will take cooperation among us all -- dairymen, handlers, state and regional boards, the National Board. In this effort we will truly all succeed if we work together.

I believe that by working together, we can lead the American dairy industry toward a higher level of success and into an era of greater stability and profitability.

Thank you.

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BOVINE GROWTH HORMONE MODE OF ACTION AND EF~ECTS ON DAIRY COWS

by

Robert Collier1

Biotechnology may be a new term for many people but it's really something very familiar to farmers. Biotechnology is the use of living organisms or their components in industry. Agriculture is an industry that has always used bio­technologies. Therefore, it is not surprising that breakthroughs in molecular genetics would have its greatest application in agriculture. Biotechnology will in the next few years generate a wide array of new products for farmers to use such as vaccines, feed additives, cloned cattle and hormones such as bovine growth hormone. Bovine growth hormone is a hormone produced in the pituitary of the cow that promotes growth in growing animals and milk production in lactating animals. We have known for some time that injecting growth hormone into lac­tating cattle caused dramatic and rapid increases in milk yield. However, there was not enough growth hormone available to attempt long term studies of its effects. However, we now have the ability to remove the gene that controls production of this molecule from the cells in the cows pituitary and place this gene into ordinary bacteria. This permits essentially limitless production of this hormone for commercial use in the dairy industry. Since large quantities of this hormone can be produced we can now study its short and long term effects.

Short term studies of growth hormone effects are summarized in Table 1. Injection of growth hormone increased milk yield in early and late lactation. Because animals in late lactation were producing much less milk the percent increase in milk yield following growth hormone injection was greater. Certainly the short term studies were very positive and indicated that long term trials were justified. The first long term study comparing the effects of pituitary and bacterial produced bovine growth hormone was conducted at Cornell University in cooperation with Monsanto Company of St. Louis, Mo. The treatment period in this study was 188 days commencing at approximately peak lactation. These results are summarized in Table 2 and Figure 1. Figure 1 is the milk yield and net energy response in untreated animals versus those given the 27 mg dose of recombinant growth hormone. As can be seen high producing dairy cattle readily respond to growth hormone treatment with dramatic increases in milk yield. Furthermore, this compound appears safe to use. All health and reproductive parameters of treated animals were at or better than resident herd averages at Cornell. Clearly, long term use of growth hormone had no adverse effect on milk yield or net energy intake. Thyroxine also increases milk yield in cattle. However, long term use of thyroxine had negative effects on cattle performance. Presently there is no indication that growth hormone will cause such an adverse effect with long term use.

A study at the University of Florida examined how growth hormone and thyroxine affected metabolism in lactating cattle. As shown in Table 3, both growth hormone and thyroxine treatment resulted in substantial increases in milk yield and fat yield. Also, both treatments resulted in large increases in mammary blood flow, Table 3. Increasing mammary blood flow would greatly increase nutrient availability to the udder. The increase in blood supply to

1Associate Professor, Animal Sciences, University of Florida, Gainesville, FL 32611.

"

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the mammary gland was achieved by increasing the output of the heart, Table 3. This demonstrates that the heart acting as a pump increased its output to deliver more blood to the mammary gland. Did the growth hormone and thyroxine injection directly cause the increase in blood supply to the mammary gland? Probably not since blood flow is largely determined by metabolic activity of the tissue. An alternative explanation is that growth hormone and thyroxine increase the rate of milk synthesis. This increased metabolic activity results in the increase in mammary blood flow.

Data in Tables 4 and 5 demonstrate the difference between growth hormone and thyroxine treatment. Growth hormone injection did not result in any change in blood glucose, free fatty acids or triglycerides. This indicates that the increase in milk yield caused by growth hormone injection did not cause an excessive increase in fat metabolism. However, thyroxine treatment resulted in large increases in arterial free fatty acid and glucose concentrations and a decrease in triglyceride concentrations, Tables 4 and 5. This indicates that substantial mobilization of body reserves occurs in the thyroxine treated animal due in part to the fact that thyroxine treatment results in an increase in whole body metabolism while growth hormone treatment primarily increase the metabolic rate of the mammary gland. Of practical importance to the dairy farmer is the possibility that long term use of growth hormone in lactating cows should not be detrimental to their health or lifetime production.

To summarize, there is presently no indication of any adverse effects of bovine growth hormone in cattle after short or long term exposure. Obviously, additional studies examining effects on subsequent lactation, lifetime yield and reproduction are all planned before this compound will be approved by FDA. The key point, however, is that there is no evidence presently to indicate it cannot be used to increase milk yield in cattle.

TABLE 1 EFFECT OF GROWTH HORMONE INJECTIONS AT VARIOUS STAGES OF LACTATION ON MILK YIELD IN DAIRY CATTLE

Control GHa

Duration Stage of milk yield, tJ. Milk tJ. Milk dose GH

Reference Breed lactation kg yield, kg yield, % mg treatment Diet

Brumby and Mixed Peak 11.0 7.0 64 50 12 wk Grass + Meal Hancock (1955) breeds (oats:bran, 4: 1)

Brumby and Mixed Late 7.0 3.0 43 50 4 wk Pasture only Hancock (1955) breeds (265 d)

Bines et ale Friesian 7 mo 18.0 2.3 12.5 30 1 wk Hay concentrate (1980)

Davis et al. ~"ersey 3-6 mo 16.2 3.0 18.7 40 4 wk Complete diet .j:::.

(1983 ) 0

Machlin Holstein NR l3.3 3.3 25 33 10 d Complete diet (1973)

Machlin Holstein NR 14 5.0 35 40 8 wk Complete diet

Peel et al. Holstein Early 28 4.3 14 44 10 wk Complete diet

Peel et al. Holstein Late 12 3.9 31 44 10 d Complete diet (1983)

a GH = growth hormone. NR = not reported. From: Collier, R. J., J. P. McNamara, C. R. Wallace and M. H. Dehoff. Endocrine regulation of metabolism during lactation. J. Anim. Sci. 59:498.

..

TABLE 2 1

EFFECT OF EXOGENOUS GROWTH HORMONE ON LACTATIONAL PERFORMANCE.

Pituitary bovine

somatotropin Methionyl bovine somatotropin Variable Control 27.0 mg/d 13.5 mg/d 27.0 mg/d 40.5 mg/d

cow~ (n) 6 6 6 6 6 (kg/d)

a ab be c c FCM 27.9 32.5 34.4 38.0 39.4 Milk fat (%) 3.6 3.3 3.8 3.6 3.6

protein (%) 3.4 3.4 3.4 3.4 3.4 lactose (%) 4.8 4.8 4.9 4.8 3.4

Net energy intake (Meal/d) 34.1 35.1 36.7 39.2 37.5b

(Meal/d) a ab ab ab

balance 4.7 2.9 3.7 2.8 1.7

Gross effi~iency Observed (kg FCM/Mcal

NE int~ke) a ab abc be c

.83 .90ab

.93 1.00b

1. 03b

.94a ab

Corrected 5 1.04 1. 03 1.10b 1. 12b a a ab

Theoretical .96 1. 00 1.03 1. 07 1.07

1 Treatment period was 188 d commencing at 84±10 d postpartum. Means within rows with different

2 superscripts differ (P<.05).

SE=standard error. 3 .

FCM=3.5% fat-corrected m1lk. NE-net energy. 4corrected for body weight gain. Corrected efficiency=kg FCM/[Mcal NE intake - (weight gain x 6.0 Mcal/kg)]. See reference 6.

5calculated as kg FCM divided by NE requirements for maintenance and milk (see reference 7).

From Eppard, P. J., and D. E. Bauman, 1984 Nutrition Conference, p5.

..

2 SE

1.8 .1 .1 .1

1.8 1.0

~ ......

.04

.03

.02

TABLE 3 EFFECT OF GROWTH HORMONE AND THYROXINE ON MILK YIELD, MILK FAT % AND MILK FAT YIELD

Parameter

Milk yield (kg/day)

Milk fat %

Milk fat yield (g/udder half)

~40 mg/day Miles Lot #12. 25 ng/day.

Control

16.2

4.86

307.7

2 Growth Hormone

Treatment SEM

19.2 0.2

5.11 0.08

495.6 29.6

From Davis et al., Proc. N.Z. Soc. Endocrinol. 26:31.

Thyroxine 2

l\ (%) Control Treatment SEM

+18.7 15.5 19.4 0.4

+5.1 4.63 5.41 0.14

+33.7 365.6 527.6 12.1

l\ (%)

+24.8

+16.5

+44.3

"

-I» tv

TABLE 4 EFFECT OF GROWTH HORMONE AND THYROXINE ON MAMMARY BLOOD FLOW

AND CARDIAC OUTPUT IN JERSEY COWS

Control Parameter

Half udder blood flow (L/min) 2.43

Cardiac output (L/min) 46.20

~40 mg/day Miles Lot #12. 25 mg/day.

2 Growth Hormone

Treatment SEM

3.22 0.06

50.30 1.07

From Davis, et aJ., Proc. N.Z. Soc. Endocrino1. 26:31.

h . 2

T yroxlne L\ (%) Control Treatment SEM t. (%)

+31. 5 2.57 4.04 0.07 +57.3

+8.8 45.44 51. 30 1. 36 +11. 2

"'" V-I

TABLE 5. EFFECT OF GROWTH HORMONE AND .THYROXINE ON MAMMARY ACETATE AND GLUCOSE UPTAKE

Parameter

Arterial glucose (mg %)

Glucose uptake (mg/min)

Acetate A-V (mg %) difference

Acetate uptake (mg/min)

140 mg/day Miles Lot #19. 225 mg/day.

Control

70.7

429.3

6.62

160.9

2 Growth Hormone

Treatment SEM

70.7 0.8

507.4 15.5

7.79 0.54

250.8

From Davis et al., Proc. N.Z. Soc. Endocrinol. 26:31.

. 2 Thyroxlne

t. (%) Control Treatment SEM t. (%)

0.0 66.78 78.7 1.5 +17.9

+18.2 36.3 484 16.7 +34.7

+17.6 6.62 6.15 0.42 -7.1

+55.9 170.1 248.5 +46.1

~

..,. ..,.

..

- 45 -

415

40

~ .. , 3~ • ,

• \ \

, .... ;II" ''II - ' ..... ,

~ , ,

30 , , Cl I ••

I .:rt. \ .. , -J;z 2~

. " .

~ , .

\ , \

.:rt. , -20 , -..

:::E

0+ -10 -~ 0 ~ 10 I~ 20 2~ 30

Week of Treatment

4~

40

.-, - ,~ ...... , ~. .

~ '-' ........... '"

\ I ,

c; . . (J '-, , ~ ,

30 'I.

I"

! \ I \

oS \

'-~ 2~ e' ~

oJ UJ -Q)

Z -10 -~ 0 5 10 I~ 20 2~ 30

Week of Treatment

Figure 1. Effect of recombinant1y-derived bovine growth hormone on milk yield and net energy intake. Commencing at week 0 (84 = 10 days postpartum), cows received a daily injection of excipient (dotted line) of recombinant bGH (solid line; 27 mg/day) for 26 weeks.

From Eppard, P. J., and D. E. BaUman, 1984 Nutrition Conference, pS.

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BOVINE GROWTH HORMOI\IE: THE POTENTIAL ECONOMIC IMPACT ON THE NORTHEASTERN DAIRY INDUSTRY

by

Robert J. Kalter

Bovine growth hormone (bGH) is a naturally occurring protein produced by dairy cattle. It is one factor regulating the volume of milk production. The gene responsible for its production in animals causes minute quantities to be manufactured by the pituitary gland. Consequently. the isolation and extraction of the protein from animals is expensive. time consuming and limited to the quantities which can be obtained from the pituitary glands of slaughtered animals.

However. the gene responsible for bGH production has been isolated and transferred from animal to ordinary bacteria cells. The altered bacteria can then be reproduced on a large scale by standard fermentation techniques and the resulting growth hormone (which is produced by the bacteria) can be isolated. purified and made available for commercial use. When injected into dairy cows at the rate of 44 milligrams per cow per day, the hormone has resulted in significant increases in milk production. Recently. Cornell researchers have completed long term trials utilizing recombinantly produced bGH with demonstrated responses in milk production ranging as high as 40 percent during the period of injection.

With this type of potential. various private sector firms are investigating the commercial production of bGH. Several have announced their intention to bring bGH to the market as soon as 1987 or 1988. Commercial introduction requires Food and Drug Administration (FDA) approval. However. it seems likely that the approval process will be expedited in ligh t of the product's poten tial and the fact that it is a na turall y occuring protein.

Eventual FDA approval does not establish bGH's commercial viability nor provide any creditable evidence regarding its potential economic and social impacts. I will investigate those implications from a number of different perspectives in this paper.

PRODUCTION COSTS FOR COMMERCIAL bGH

If the technical promise of bGH is realized in on-farm use. the economic viability will initially depend on its market price. Market price cannot yet be predicted accurately. However. the cost of production can be approximated using standard cost engineering studies. Using such techniques. a price floor can be established and compared with possible returns to determine whether the product has a chance of commercial success.

Consequently. a preliminary cost engineering analysis of fermentation facilities for bGH production using genetically engineered bacteria was conducted by Cornell's Department of Agricultural Economics (in conjunction with the Department of Chemical Engineering), Particular attention was given to the size of production facilities required and whether scale economies would exist. The estimated plant capital and operating costs were then subjected to a comprehensive evaluation of economic and financial feasibility.

1 Department of Agricultural Economics, Cornell University, Ithaca, NY 14853.

..

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The resulting price to produce is clearly related to plant size indicating that substantial economies of scale exist. Production costs ranged from $0.18 to $0.08 per cow dose (production facilities of 0.5 million and 7.0 million average daily doses, respectively). Reasonable changes in key variables did not have a major impact on production cost economics when converted to a per dosage basis. Plant profitability is highly sensitive to minor absolute changes in dosage price although the percentage change may be substantiaL However, selling prices for the hormone will be higher than the dosage costs given due to marketing costs, mark-ups through the distribution chain and, perhaps most importantly, the cost of hormone purification and enhancement. For example, use of implant devices for delivery, rather than daily injection, could substantially change the effective selling price.

If commercial viability is tied to production costs, a tentative evaluation of bGH's potential can be given. To sustain a cow receiving bGH, more feed will be required and hence higher feed costs will result. We will discusss the issue of a balanced ra tion and the associated cost below. However, assume for sake of argument that, for an average cow, the extra feed costs for an additional pound of milk induced by bGH will average between 4 and 6 cents. If one conservatively assumes that bGH will stimulate an additional eight pounds of milk per cow daily, the marginal revenue received at prices as low as $9.50 per hundredweight would be adequate to support the commercial introduction of bGH (given the analysis of its production costs).

Two other factors are important to understanding the market potential of bGH. First, substantial scale economies appear to exist with respect to production. This suggests that a single large manufacturing facility is economically preferred if market monopolization is not a factor. Conversely, it implies that monopoly power could develop with the resultant effect being bGH market prices substantially higher than production, marketing and delivery costs. The impact on farm profitability, adoption rates and, ultimately, on milk markets is unknown (depending on the amount of economic rent that the conferred market power would permit the firm to extract).

The other factor potentially impacting the market price of bGH relates to the technical issue of fermentation yield from the industrial production process. The above evaluation assumed a product yield of 0.09g per liter. If improved yields could be obtained and engineering problems involved in scale-up solved, the production costs of the product would be substantially reduced.

In summary, although important to the ultimate market price of bGH, the sensitivity of production plant economics to changes in technical coefficients or economic assumptions will only be one factor determining the ultimate economic success of bGH. The marginal costs of additional feed requirements, the associated increase in daily milk production, the impacts on farm management decisions and the market price of milk appear to be equally important considerations in determining farm adoption rates and economic impacts.

ECONOMIC IMPLICATIONS FOR REPRESENTATIVE FARMS

As implied above, the rate of bGH adoption by individual dairy managers will depend on a number of factors in addition to product cost. The potential response in productivity, ease of inclusion in overall herd management, and actual response under a variety of management situations will contribute to profitability and extent of usage. This section

- 48 -

seeks to provide a basis for analyzing the "macro" implications of bGH by evaluating the potential impact on dairy production at the "micro" or farm level.

Potential profitability of using bGH is investigated by analysis of three representative dairy farms. These three farms are constructed to represent the broad diversity of resources available to dairy farm managers in New York State, the Northeast and the Lake States. The resources on these representative farms, cost and return information from enterprise budgets, and milk production and feed requirements with and without bGH are used to obtain profit maximizing enterprise levels using linear programming methods. Results are then used to analyze farm firm level issues including:

• What is the potential effect of bGH on farm profitability?

• Does profitability vary with assumptions on feed intake response of the dairy cow?

D Are there significant differences in profitability from using bGH among the representative farms?

• What are the impacts on crop rotation patterns?

• What are the impacts on farm profitability as milk price is reduced?

The three representative farms consist of a 200 acre, 65 cow, forage only farm, capable of raising mixed mostly grass hay and corn silage; a 250 acre, 100 cow, corn grain farm, capable of raising mixed mostly legume hay, corn silage and corn grain for farm use; and a 400 acre, 100 cow, crop sales farm, raising mixed mostly legume hay, corn silage and corn grain for farm use and sale. The feeding ration for each is formulated for three alternative forage compositions. The three are: hay.only; 50 percent hay and 50 percent corn silage on a dry matter basis; and 75 percent corn silage and 25 percent hay on a dry matter basis. Nutrient requirements are based on recommendations of the National Research Council and are met by feedstuffs specified as being a vailable for a particular farm.

It is assumed that cows are divided into three feeding groups according to production level and that a total mixed ration is formulated in which all ingredients except hay are fed in a complete feed. Thus, the ration varies according to the characteristics of the group rather than the individual and a lead factor is used to balance the ration for a higher production level than the group average. Since milk production per cow is highly variable and crucial to the analysis, each representative farm is evaluated at an assumed no bGH production level of 13,000 and 16,000 pounds of milk sold per cow.

The optimal ration for each farm, production level, stage of lactation and for each of five bGH response levels (no bGH, and 10,20, 30 and 40 percent response during administration) is formulated for the three alternative forage compositions. [Note that since bGH has usually been administered post peak production, the response values studied average 6.4, 12.8, 19.2 and 25.6 percent, respectively, over the entire period.] This information is used to obtain the annual feed requirements per cow under each feeding program. Adjusted for actual intake, the rations are incorporated into a "representative farm" linear programming model as three possible means of meeting feed requirements. The model then maximizes return over variable costs by combining rations if a different

- 49 -

roughage composition than that specified is optimal. Replacement heifer rations are formulated in a similar manner.

RESUL TS OF FEED RATION MODEL

The exact milk output response to the application of bGH is not known with certainty. However, based on recent Cornell trials, it is felt that the feed requirements of a lactating cow could change in one of two ways:

~ Voluntary feed intake changes are insufficient to support increased milk production. Thus, diets need to be reformulated at higher nutrient densities to support the nutrient requirements. This adjustment implies that intake response is insufficient to avoid increasing the energy density of the rations. We will call this the normal intake assumption.

~ Voluntary intake increases such that the diets formulated for the early lactation period are of sufficient nutrient density to support the increased daily milk production during the treatment period. This alternative implies that intake response is sufficient to allow feeding of the same diets but for different periods of time. We will call this the enhanced intake assumption.

Table I presents the results of the feed ration model for a representative case. The results portray a significant increase in both costs and profits per cow with bGH administration. The total intake of feed increases less rapidly than the increase in milk production, especially with normal intake assumptions. As a result, the nutrient densities of the rations must increase, resulting in larger proportions of concentrates. Concentrate cost increases dramatically, and as concentrate prices exceed forage costs, total costs are proportionally greater than production increases. Because the enhanced intake requirements presume bGH results in extra stimulation to both production and intake, the increases in concentrate and total cost are moderated. Return over feed and milk marketing costs shows a dramatic increase, although usually proportionately less than the increase in production. In percentage terms, results do not differ substantially with changes in either hay crop quality, forage composition of the ration or the production level of the herd.

The true test of bGH will be the return over feed and marketing costs compared to the cost of obtaining and administering it. Table 2 provides a perspective on profitability. As shown, with milk prices of $12.69, the return exceeds the costs for all combinations at both response levels shown. This return is available for bGH purchase, administration costs and enhanced profit.

RESULTS OF REPRESENTATIVE FARM ANALYSIS

In analyzing the impact of bGH, it is important to realize that a change of this magnitude in feed rations has ripple effects throughout the farm operation. In addition to the expected changes in feed requirements and profitabiilty, crop acres, feed purchases and/or sales and labor requirements may change.

Using the enhanced intake assumption and the 16,000 pound initial herd production average, the general impacts of the overall farm operation can be represented. These results adequately mirror the general impacts of the analysis for all farms and situations. Table 3 summarizes these results. The return over variable costs increases with increasing

- so -

response to bGH. The increase ranges from just under 5 percent for all farms at the 6.4 percent response rate to 25 percent at the 25.6 percent response rate. At any given response rate, the economic benefits of administering the hormone are similar across the three farm types. On a per cow basis, increased return is the greatest on the large farm with corn grain sales and decreases progressively with farm size. Likewise, the increase in return per hundredweight of increased milk production increases with farm size.

On the other hand, marginal feed costs per hundredweight of milk production generally decline as production response to bGH improves. This is not unexpected since the ration is not reformulated, and the greater the production response the greater the benefit of the intake assumption. The resulting values range from 3 to 6 cents per pound of production. At high response levels this marginal cost is more than a dollar a hundredweight less than the normal intake assumption. The savings result from the greater use of forage.

Purchased feed requirements increase on all farms as response rates increase, and for the 400 acre farm corn grain sales decline. Purchases are substantially below those with the normal intake assumption. At the 25.6 percent response, net feed purchase increases are 15 (crop sales) to 42 (corn grain) percent less. The crop acres adjustment is dramatic on the large farms as land shifts from from silage to hay production. Finally, the marginal returns to cows and associated facilities are uniformly higher with increased response rates. The marginal return to land is generally stable across all scenarios.

Response to Changing Milk Prices

Perhaps a more interesting question, however, relates to the implications for the changing marginal values when market prices for milk respond to increased production. Figures 1 and 2 portray the return over variable cost and the return over all costs for different milk prices. The direction of the change in returns is obvious. In all cases, the percentage decline in returns substantially exceeds the percentage change in market milk prices. For example, a 33 percent reduction in milk prices results in a return over variable cost reduction which varies between 44 and 54 percent. The crop sales farm maintains its higher return regardless of the response rate or production level. For all farms, returns over variable costs fell below the no bGH level with a $l.OO/cwt price decline at 12.8 percent bGH response rates and with a $1.70/cwt decline at 25.6 percent response rates. Thus, a 14 percent reduction in the market price for milk is sufficient to make all farmers worse off even with a 25.6 percent bGH production response.

In order to provide further insight into the impact of the change in price, fixed costs are estimated for each of the representative farms. Total fixed costs, including operator labor and management, a capital charge, dereciation, property taxes and insurance, are $70,000, $90,000 and $95,000 for the forage only, corn grain and crop sale representative farms, respectively. Figures 1 and 2 depict the point where returns over variable costs, for each farm, are no longer sufficient to cover fixed costs.

Summary

The administration of bGH and the subsequent production response will result in major changes in dairy cow enterprises and some adjustments in crop rotations. Total feed requirements increase although less than proportionately with production response. If crop acres remain constant, the extra feed requirements result in increased feed purchases and/or decreased crop sales. Changes in the required forage are generally met through changes in the cropping program.

- 51 -

When intake is assumed to respond in a normal pattern, the total forage requirement decreases and forage acreage generally declines. Purchases concentrate increases two to four times as rapidly on the forage only and corn grain representative farms. On the crop sales farm, corn grain sales decrease dramatically. With the enhanced intake assumption, more forage and concentrate are required. Increases in purchased feed are ameliorated since more nutrients are provided by an acre of forage than by an acre of corn grain. For farms similar to the forage only farm with no surplus forage, forage purchases would be required with bGH.

With stable milk prices, return over variable costs to the representative farms increase 5 to 26 percent depending on farm characteristics and response rate. The return over variable cost per cow increases with response rate, is greater for higher base production, is greater with the enhanced intake assumption, and is greater for the crop sales representative farm. Marginal values are generally constant on land and associated machinery and increasing on cows and buildings.

As aggregate production responds to bGH administration, milk price will fall reducing or erasing the short-term increase in returns. The financial position of individual farms after these adjustments will depend on the ability to actually achieve response to bGH, the success of feeding management strategies to increase intake, the current financial position and use of short-term returns from bGH, and the economic and political environment of the industry.

THE ADOPTION ISSUE

A factor key to determining whether the adjustment to a new equilibrium will be rapid and difficult or gradual and smooth is the rate of acceptance of bGH by dairy farmers. Despite the impressiveness of the test results for bGH there are reasons to believe adoption would be more gradual than some expect. Historical experiences with other farm innovations suggest farmers may perceive obstacles to adoption that are not apparent to outside observers. In order to facilitate planning for the dairy sector under the prospects of such major technological change, it is necessary to formulate expectations for the rate and extent of bGH adoption. The purpose of this Section is to explore issues related to the adoption of bGH and to provide an ex ante estimate of the rate of bGH adoption and its ceiling level of use.

Predicting the rates of adoption and diffusion for an entirely new product such as bGH is necessarily a speculative exercise. The only relevant source of information is the judgment of potential users, in this case dairymen. The problem of obtaining useful indications of an innovation's attractiveness consists both of communicating the innovation's potential advantages and disadvantages as well as eliciting meaningful reactions from potential users. For generating a prediction of dairy farms response to bGH, a survey procedure was developed that involved both these elements.

A two-tiered sampling procedure was used, consisting of 40 personal interviews in seven representative dairy counties followed by a mail survey to 1,025 farmers. The overall response was 173, or about I percent of all New York dairy farms. The characteristics of respondents match closely State averages, suggesting that the sample is representative. Results show a rapid adoption rate with at least half of the State herd on treatment within the first year of availability. An 85 percent level of adoption is achieved by about the third year. However, our approach did not account for downward price effects

- 52 -

of widespread use of bGH. Should bGH become widely used and prices allowed to adjust, it is unlikely that nonadopters could survive. Thus, in a dynamic environment, we expect use of bGH to approach 100 percent within 3 years after introduction.

Earily adopters are characterized by higher herd production averages and use of free stall barns. These factors provide a basis for projecting adoption rates outside New York, al though further research is required to determine the relevan t factors in those areas. Also requiring further analysis are the price effects of various rates of adoption and possible policies to manage the effects of raipd increases in milk supplies.

CONCLUSIONS

If approved by the Food and Drug Administration, bGH is a viable commercial product for increasing milk production from dairy cows and improving short term dairy farm profitability. Production costs for the recombinantly derived hormone are low relative to other factor inputs and the marginal cost per hundredweight of additional milk produced ranges between 25 and 45 percent of the current price paid to farmers. This coupled with potential productivty increases which could reach 25 percent or higher with well managed herds provides the basis for rapid adoption of the product.

Surveys of New York dairymen indicated the strong probability of rapid adoption and further suggest that large herds will most rapidly implement this new approach to increasing milk production. If, as indicated by survey results, 80 to 90 percent of the dairymen adopt within the first three years of market availability, unprecedented implications for farm management practices, milk markets and prices, and farm structure will follow.

At the dairy cow enterprise level, total feed requirements will increase although less than proportionately with production response. On a farm firm level, this will result in increased feed purchases and/or decrease crop sales. Depending on the feeding management program and production response by the animals being administered the hormone, requirements for concentrate will increase from 30 to 110 percent. As a result, crop rotations will change to accommodate the need for more nutrients. Overall, with stable milk prices, farm returns over variable costs increase 5 to 26 percent depending on farm characteristics and the response of animals to hormone administration. Increased farm returns result in higher marginal values for cows and buildings but generally constant marginal values for land and associated machinery.

In the aggregate, as production increases due to the hormone, milk prices will fall reducing the short-term gain in farm returns. The number of dairymen and the size of the national diry herd will, by necessity, decline as the market seeks a new equilibrium. The size of this adjustment and its timing will depend not only on the production response to bGH and the rate of adoption but on the level and scope of government price support programs for milk. However, with the possibility of such a rapid and large production increase, many dairymen, in the three to five years after hormone introduction, will be placed in the position of obtaining returns over variable costs which are below their fixed costs of operation. Farms with low debt loads, good soil resources, and superior management will be better able to survive the transition. The financial position of individual farms after these adjustments will depend on the ability to actually achieve response to bGH, the success of feeding management strategies to increase intake, the current financial position and use of short-term returns from bGH, and the economic and political environment of the dairy industry.

- 53 -

Table 1. Comparison of percent increases in feed requirement by response to bGH and feed intake assumption for base case (percent).a

12.8% response 25.6% response

Annual requirements, Normal Enhanced Normal Enhanced co st s , or returns intake intake intake intake

Produc tion 12.8 12.8 25.6 25.6 Concentrate cost 44.7 21.5 96.4 43.4 Total ration cost 15.9 14.1 34.9 25.4 Return over feed and marketing cost s 11. 2 12.1 20.7 25.7

Total intake 4.7 10.7 10.0 17.6

a 16 ,OOO production without bGH and forage half from corn silage and half from MML.

Table 2. Per cow increase in return over feed and milk marketing costs per day of administration of bGH ($).a

12.8% increase 25.6% increase

Normal Enhanced Normal Enhanced intake intake intake intake

Base b 0.69 0.75 1. 28 1. 60

Base, with MMG instead of MML 0.70 0.72 1.22 1.52

Base, with all MML hay instead of half and half 0.75 0.80 1.42 1.71

Base, with 13,000 instead of 16,000 0.60 1.18

alncrease in return over feed and marketing costs compared to no bGH divided by 215 days of response to bGH.

b16 ,OOO pounds production without bGH using half MML hay and half corn silage.

- 54 -

Table 3. Representative farm changes due to bGH response with 16,000 pounds base production and the enhanced intake assumption.

12.8% response 25.6% response

Forage Corn Crop Forage Corn Crop only grain sales only grain sales

Increase in ROVCa

Farm ($) 9,943 15,934 17,142 21 ,385 34,708 37,672 Per cow ($) 153 159 171 329 347 377

Marginal feed Cost (cwt. ) ($ ) 5.13 4.82 4.22 4.66 4.22 3.49

Change in crop acres Hay - 3 + 9 +89 - 3 +36 +93 Corn silage + 3 + 6 -62 + 3 -11 -62 Corn grain -14 -27 -25 -31

Net purchase d feed Change ($ ) +6,562 +10,133 +14,517 +12,263 +19,453 +20,628 Change (% ) + 30.4 + 39.2 + 56.8 + 75.2

aRe turn over variable costs.

200000

$

l5JJOOO

100000

BOOOO

Figure 1

IMPACTS OF MILK MARKET PRICES ON RETURN OVER VARIABLE COSTS AND FARM RETURNS FOR REPRESENTATIVE FARMS AT 19.2 PERCENT bGH

PRODUCTION RESPONSE (13,000 Base Production)

.... Crop Sales ... ~ •••••• . . . . . . . ' . ... -... -" ......... . ..... . --. . .... ----.. . ..... .... . ... ..... .. • if,

Corn Grain

-----.-. ~-..... ...... . ..... -.-. -" ----~ .. . ...... . •••• ••••••••••• t ••••••••••••••••• ~ ••••••••••••••••••• " ........... a ••••••••••• f ••••••• _"."' •••••• •.•••••

. -.. -" ------........... ------.......... 1r--------------.---.-----~ b~-------.-.. __ ---_---------~~.----\t Fixed Costs ............ -............ . ... . .........

•

Forage

o I I 12.89 I 11.5 10.5

Price 9.5 8.5

til til

200000

$

150000

100000

50000

Figure 2

IMPACTS OF MILK MARKET PRICES ON RETURN OVER VARIABLE COSTS AND FARM RETURNS FOR REPRESENT A TIVE FARMS AT 19.2 PERCENT bGH

PRODUCTION RESPONSE (16,000 Base Production)

........ . . . . . . . . .

...... ..... -... .... . . . . . . . . .

............... .... _-. ...... ...... ........ ...... ...... ...... .....

Crop Sales . .......... " .............. .

. ...

.... Corn Grain

.... .......... -.......... ~ -.... -... '. ........ . .... ........ . .... -........ . ..... . -... -', .... -is ._ •••••••••••••••••••••••••••••••••••••• !' ...................................... :. ••••••••••.••••••••••

---------------------------\j.r------------------------------------~~~--------------r Fixed Costs ............................ ..

Forage

o I I I I I 12.&9 lI.5 10.5 9.5 8.5

Price

VI 0\

- 57

POTENTIAL IMPACT ON THE NORTHEASTERN DAIRY INDUSTRY

by

Lewellyn Mix1

Many factors will impact on the size and the composition of the dairy industry in the northeast by the year 2000. Among these will be changes in the size and demographics of the population, changes in consumer attitudes and demand, changes in milk production and processing technology, as well as trends in monetary and fiscal policy. Of this list, perhaps the greatest potential impact for change will come from new technology.

Population Projections

In forecasting the future of the dairy industry in the northeast, one must first look at population trends and consumer demand. The U.S. Census Bureau 1 lists the population of the eleven northeastern states, (New England, New York, Pennsyl vania, New Jersey, Maryland and Delaware) in 1980 as 53,948,400. Their projection for the same eleven states in the year 2000 is 51,620,600, a loss of 2,327,800 or 4.3%. The Middle Atlantic states are projected to lose 3, 162, 800 or 8.6%, while New England gains 426,500 or 3.5% and Delaware and Maryland gain 408,500 or 8.5%. While the northeast is forecast to lose 2.3 million population, states like Florida and Texas are expected to gain about 6.0 million each. The U.S. population for year 2000 is projected to be 267,462,000 an increase of 18% over 1980.

Not only will a population loss in the northeast region affect demand for dairy products, but an estimated decrease of 1,524,000 or 14% in the 0 to 141 age bracket and an increase of 979,800 or , 5% in those over 65 will make it extremely difficult to maintain per capita consumption. The northeast, there­fore, will suffer from both a population decrease and a shift toward older people who currently consume less dairy products.

Per Capita Consumption

Per capita consumption of milk in all forms for the northeast was 544 pounds in 1980,2 578 pounds in 1983 and is projected at 5923 pounds in the year 2000. I believe that this 2.4% increase can be achieved through increased advertising of fluid milk and cheese and relatively more favorably priced dairy foods. The per capita supply of milk for the northeast and New England was about 5164 and 383 pounds respectively in 1983. Thus, the northeast region and especially New England are currently both deficit areas. This deficit is currently supplied by domestic dairy products shipped in from outside the region and by foreign imports.

1D' lrector Farm Management, Agway, Inc., Box 4933, Syracuse, NY 13201.

- 58 -

Genetic Improvement

The continued use of high PD sires and dams, advances in genetic engineering, embryo transfers and on-going testing and culling should increase avera~e production a minimum of 75 to 100 pounds of milk per cow per year.

Improved Feeding and Management

New higher protein forages and improved harvesting and storage techniques will be developed. Adoption of breakthrough in ruminant physiology such as the use of iso-acids6 and regulated protein and carbohydrate solubility in computer balanced rations will improve milk production and feed efficiency. Individual computerized feeders will help to maximize milk production. Coupled with better reproductive management, improved milking equipment and milking procedures plus advanced disease control methods, we can expect an annual increase of about 75 pounds per cow per year.

Adoption and Widespread Use of Bovine Growth Hormone

It is anticipated that the growth hormone will be cleared by FDA for commercial use by 1988. Consumer attitudes toward growth hormone could slow its approval. The cost-benefit ratio of this synthesized hormone is expected to be very favorable. The adoption rate is less certain. Some feel that most dairymen will be using it in two years. In my projections, I assume that 65% of dairymen will be using it by 1995 and by 2000 about 90%7 of the cows will be injected with the hormone. Average increase in production is assumed to be 15% per cow per year due to the growth hormone. Ranges of 10% to 40% have been reported. 8 Average production per cow as a combined result of genetic improvement, improved feeding and management and use of the growth hormone will reach an estimated 13,804 pound average level bg 1990, 15,639 by 1995, and 17,025 pounds by 2000 in the northeastern states.

Herd Size will Continue to Increase

The average number of cows per farm in the northeast may increase from 62 in 1983 to 80 10 in 2000, a 29% increase. If the adoption rate of growth hormone comes rapidly and on-farm ultra filtration - reverse osmosis and blanching technology become commercially feasible for fa rm use, the rate of herd size increase may come faster than indicated above. More haylage and corn silage and less dry hay will be fed. More high moisture corn will be fed to dairy cattle.

- S9 -

Cow Numbers May Drop 22%, Dairy Farms 39%

If we assume that the Census Bureau projections for population and demo­graphics are approximately correct, that our per capita consumption and production per cow figures are reasonable, that total milk production will increase by 5% or less 11 by 2000, then we can estimate the approximate number of dairy cows and dairy farms required to produce this volume of milk. This logic produces some shocking results.

The number of dairy cows in the northeast may drop from 2,226,000 in 1983 to 1, 737,000 in 2000, a drop of 489,000 head or 22%. 12 The number of commercial dairy farms in the northeast may drop from 35,739 in .1983 to 21,116 in 2000, a drop of 14,023 farms or 39%.13 The potential impact of these reductions on northeastern agriculture and agri-business and the regional economy are tremendous.

The impact on milk prices, farm employment, land values, lenders, A .1. coops, DH IA associations, suppliers of feed, seed fertilizer, chemicals, and farm equipment will be particularly noticeable. This in turn will impact farming communities as a whole.

Other Changes on Dairy Farms

Capital required per cow may increase from $5500 in 1983 to $16,240 per cow, assuming 7% inflation compounded annually. Capital per dairy farm worker may increase from $148,500 14 in 1983 to $568,400 by 2000. Nominal interest rates could average 10% and real interest rates therefore, about 3%.

Cows per worker may increase from 27 to 35 through further mechanization of feeding and manure handling. Total mixed rations supplemented with extra grain for high producers portioned electronically will be commonplace. Manure storages and biogas systems on the larger farms will no longer be a novelty.

Output per farm, per cow and per worker, as well as capital efficiency and cost control will remain key factors affecting profitability. Therefore, further mechanization will occur to lift milk sales per worker from the present average of 337,50015 pounds to an average of 588,000 by 2000. Ten percent of dairymen may be selling 700,000 pounds of milk or more per worker by 2000.

On-farm microcomputers will be in use on 60 to 90% of dairy farms by 2000. They wilr be used for farm accounting, herd health records, action lists for improved herd management, recording and transmitting production data, cropping records and programs, ration balancing, computing break-even

- 60 -

costs of production and many other uses. These microcomputers will be linked by telephone to centrally located computers and data banks at universities, dairy record centers and videotex networks that supply market-weather, technical and cost of production data.

Farm operations that are subject to rapid change and further mechanization are: cow identification, heat detection and pregnancy confirmation, milk recording, feed processing, generation of electricity and water heating from farm produced methane gas, manure storage and unloading and decision-making using computer stored data.

Changes in the Milk Marketing Structure

If the northeast is to remain a viable milk producing region, and it will if we plan and act carefully, certain changes in the marketing structu re must come. The population, consumption and production changes already pre­sented will raise the milk supply per capita from 516 16 pounds in 1983 to 563 pounds by 2000, a 9% increase. However, the midwest may be expected to remain a major competitor shipping large quantities of butter and cheese into the northeast. This means that northeastern cooperatives and proprie­tary firms must develop new strategies and marketing plans to capture a major share of the rapidly growing sunbelt market for dairy products. This cannot be accomplished by small, under-financed local marketers. Rather, it means regional heavily advertised quality brands, professionally ma rketed.

To achieve this Objective, further consolidation of producer cooperatives and proprietary firms will be necessary to provide the leadership, captial and marketing muscle. Joint ventures between cooperatives and food marketers may provide one approach. The opportunity for cooperation between northeastern state departments of agriculture and private marketers in developing a whole new marketing structure is unprecedented. Dairymen in seeking out markets for their milk in the future should be mindful of these marketing changes which are likely to come.

The dairy industry will remain the number one source of agricultural in­come in the northeast. However, the industry will have fewer producers and processors. Some of those who exit dairy farming will turn to related enter­prises such as veal calf production, heifer raising, cash grain, and where soil and climate permit, to fruit and vegetable growing and retail marketing.

What Can We Do to Change the Course?

The scenario presented so far is rather pessimistic for the northeastern dairy industry. Suppose for a moment, however, that we get our act together here in the northeast and set about making some things happen instead of watching them happen.

•

..

- 61 -

Suppose that through improved product quality, innovative new products, intensive advertising and sales promotion and aggressive marketing we could increase per capita consumption to 650 pounds of milk equivalent by the year 2000.17 What would that mean in terms of cow numbers and numbers of dairy farms by the year 20007

It would mean a drop of 285,000 cows instead of 489,000 and a decrease in the number of dairy farms of 12,000 instead of 14,000 by the year 2000. It would mean a total sufficient region instead of a milk deficient region.

I submit to you that the dairy industry has a challenge to achieve these goals to help maintain a viable northeastern agriculture. It can be accomplished if we plan carefully, layout a course of action, then act to make it happen.

Summary

Many factors will impact the future of the northeastern dairy industry. Of these, the adoption of the growth hormone may have the greatest impact. A declining population and a 4300 pound increase in production per cow will result in the need for 14,000 fewer dairy farms and 489,000 fewer dairy cows than we had in 1983 unless per capita consumption can be increased to 650 pounds of milk equivalent by the year 2000.

Numerous changes in farming and marketing structure will be required to maintain a viable dairy industry in the northeast. The dairy industry will re-main the number one source of agricultural income in the northeast. Some

of those who exit dairy farming will engage in heifer raising, beef, sheep and swine production, cash grain production, aquaculture and where soil and climate permit, fruit and vegetable production .

- 62 -

REFERENCES

1. U.S. Census Bureau, Current Population Report, P. 25, #936

2. Dairy Outlook Situation, USFA-ERS, September 1984

3. Mix, L.S., Agway Inc., Personal Estimate

4. Ibid.

S. Everett, Robert, Department of Animal Science, Cornell University, Personal Communication

6. Cook, R.M., lsoacids A New Feed Additive for Lactating Dairy Cows., Department of Animal Science, Michigan State University, October 1984

7. Mix, L.S., Agway Inc., Personal Estimate

8. Bauman, Dale - Symposium on Emerging Biotechnology in the Dairy Industry, Department of Animal Science, Cornell University - Agway Inc., College Conference 1984

9. Mix, L.S., Agway Inc., Personal Estimate

10. Ibid.

11. Ibid.

12. Ibid.

13. . Ibid.

14. Smith, S.F. and Putnam, L. D., Dairy Farm Management Business Summary, New York, 1983-A.E. Res. 84-10, Cornell University

1 S. Ibid.

16. Mix, L.S., Agway Inc., Personal Estimate

17. Ibid.

.,

- 63 -

UNIVERSITY OF MARYLAND DAIRY PEP PROGRAM

by 1

Robert Peters

In the fall of 1981 and winter of 1982, the Profitable and Efficient Production (PEP) program was planned by a core of Extension specialists in the Department of Animal Sciences and the Virginia-Maryland Regional College of Veterinary Medicine -- Maryland Campus, in conjunction with county agents and dairy producers. The long-term goal of the PEP program is to assist the dairy producer in increasing the milk yield of each cow and, therefore, the profit per cow rather than increasing herd size. Because profitability of dairying can be improved without increasing the total milk supply, an in­depth educational program was started to emphasize management practices that increase profitability through greater efficiency.

Since the thrust of the PEP program is to increase profits through more efficient production of milk, it was necessary to expand the original core of expertise. Extension specialists in other departments in the College of Agriculture were invited to participate and form a broader interdisciplinary team to integrate the current production technology into an overall dairy management program. We are fortunate at the University of Maryland to have a relatively young and ambitious team of faculty dedicated to helping dairy producers. Each of the following individuals have been involved in all or part of the PEP program and each has made a significant contribution towards making this a successful program.

Faculty

Dr. E. Kim Cassel Dr. Richard A. Erdman *Regina C. Eickelberger Dr. Raymond L. King Dr. J. Lee Majeskie Dr. Robert R. Peters Oro Mark A. Varner

Dr. Larry E. Stewart Dr. Lester R. Vough Dr. Richard Levins

Dr. Joe E. Manspeaker County Agricultural

Agent

The UM PEP Extension Team

Area of Expertise

Nutrition Nutrition Management Mil k Qua I i ty DHI Records Mastitis and Milking Integrated Reproductive

Management Farmstead Engineering Forage Crops Farm Management

Herd Health Depends on Agent

Involved

Department

Animal Sciences Animal Sciences Animal Sciences Animal Sciences Animal Sciences Animal Sciences Animal Sciences

Agricultural Engineering Agronomy Agricultural and Resource

Econom ics Veterinary Medicine

lExtension Dairy Specialist, University of Maryland, College Park, MD 20742.

- 70 -

Last ly, we said that we would be in a pOS1 t10n when the program ended to enact a more far-reaching program, one that would require significant change s but would gi ve us a program for the fut ure. Tha t' s obvious ly the stage we're at right now. Whether we can succeed is, of course, uncertain. We had hoped that we would get all the farmers in the country to agree and realize that milk production would have to be reduced but production indicates that we haven't.

Where do we go from here? Fortunately or unfortunately, depending upon how you look at it, the dominant factor in the next farm bill is not going to be dairying. The dominant factor is going to be whether or not the administration and the grain farmers in the midwest can come to an agreement on what the wheat and feed grains program ought to be. In the farm bill, we have traditionally included everything in one package. We try not to go on the floor, as perhaps the administration would like us to do, one commodity at a time. That could be very disastrous. In addi tion, we throw the food stamp program into the same bill in order to obtain the support of the urban Congre ssmen.

We, as dairy farmers, have a considerable amount of credibility and the ability to go in and probably get a good program accepted. However, we have to recognize that, in order to have the farm bill pass we must have an acceptable program for the other commodity groups as well as for the food stamp advocator. That is not going to be easy. The administration has sent their farm bill up to the Hill. Right now, I do not believe that there 1S one member on the Agriculture Committee who will vote for that bill. That's true with respect to the dairy program, that's true with respect to the grains.

We have a tremendous dispari ty between what the Administration wants to do and what the members of the Agricultural Committee and the full Congress would do. We have to keep that in mind because, if we are unable to reach an accommodation between the Congress and the Admin istra tion, we probably will not have a farm bill this year. What does that mean? Well, hopefully it does not mean that we go back to the '49 law.

That would be a disaster. As you well know, dairy farmers would be happy for a little while--lIDtil they got shot one-by-one in retail stores as consumers realized that support price for dairy products has been raised to $18 per cwt. If you think that's bad, you should take a look at what would happen to corn and wheat prices. Obviously, that is not going to occur.

What may well occur, and we have to be ready it, is a freeze of some sort at levels that will prevail on October 1. I'm hopeful that we will have a better program, but my best guess is that we're going to end up with an $11.60 price through next year. Not that that's what we want but my guess is that's what we're going to have. It doe s not appear that the bills that te 11 the secretary he cannot take the July 1 price cut will move. Most likely they will not move and quite frankly they would be vetoed if they did move.

- 71 -

Wha t, then, are we going to try to de sign as a program in the House? First of all, we have a budget. In order to be able to get through the budget process, we have to come in with a program that costs less than $1.5 billion. The support price at $12.10 will not do that. The support price of $11.60 will hopefully do that. So, I'm afraid that we're going to be stuck with an $11.60 pnce at best.

In addition to that, there is a strong feeling that we should get back to a program similar to what we had in the past but with dairy specific economic formula. My guess is that we may very well wi th that kind of program if we can avoid the" freeze" approach.

try to a new

end up

There are other alternatives that will be examined. There is, of course, the administration's program which would gradually reduce the support price lD1til their was effectively no program at all. The deficiency payments that the Secretary proposes under their program would probably never be paid. In my estimation, this is a misleading program.

In addition, we may find things that we want to try. Should there be any regionalism in the program? That's very difficult to do. I am looking at and examining the possibility of creating two programs. One, in essence, for the west coast and one for the rest of the country under the premise that you cannot make any profit by driving over the Rockies to deliver milk to a dairy where you might get a slightly better price. We might be able, for inst ance, to allocate the surpl us that the government buys for soc ia 1 programs part to one side and part to the other side and then charge a user fee for using the CCC if you exceed your quota. If the west coast continues to be a surplus producer while the rest of the country has its act together, why should the rest of the country be penalized? That's one possibility we're taking a look at.

Further, there are supply management programs being suggested. Steve Gunderson from Wisconsin has a target price and loan-type programs--similar to grain programs. Obviously, th is could require a base plan of some sort. That's another that's being looked at. There will be a lot of imagination used.

Incidentally, the We, therefore, have commi ttee from the interesting debate.

chairman of the somebody from the east si de of the

subcommittee comes from California. west side and the rest of the

Rockies. That may cause some

All 1n all, as we look towards the future, we're going to have to recognize certain facts. The dairy industry has been very productive and energetic, both in researching and commercializing technologies to enhance productivity, whether it be hormones or better feeding. The hard work of the dairy farmer has helped dairying to become productive and will help it continue to be one of the most productive industries in the United States.

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Well, that's an overview. We're all going to be rather brief and then open it up to questions. I can assure you that this 1S going to be an extremely important year for all of you. We will hopefully design a program that we can live with and will give the kind of signals and the kind of stability to the dairy industry that I want, that you want, and I'm sure everyone in the industry wants. I will close here and wait for your questions.

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A LOOK AT DAIRY POLICY

by

Floyd Gaiblerl

On behalf of Secretary Block, I appreciate the opportunity to partlclpate in the Northeastern Dairy Conference today and discuss dairy price support policy, inc luding the da iry provis ions of the Administrat ion IS

proposal--the Agricultural Adjustment Act of 198.5. As you all know, a substantial amount of time and effort has been spent in recent years debating and legislating dairy price support policy. As we begin consideration of the 1985 Farm Bill, the development of appropriate dairy policy will be necessary if we are to ach ieve a long-term and responsive agricultural policy.

Past Legislation

Between March 1981 and November 1983, there were seven separate pieces of legislation enacted dealing with the milk price support program. The most recent was the Dairy and Tobacco Adjustment Act of 1983 (the 1983 Act). This legislation was in response to the inability of prior legislation to reverse the continual surplus milk conditions plaguing the dairy industry; i.e., milk production had increased to record levels while commercial consumption lagged far behind. This resulted in excessive CCC price support purchases of surplus da iry products and taxpayer cost s rose to a leve 1 in excess of $2.5 billion annually. Commodity Credit Corporation (CCC) price support purchases of dairy products reached a record of about 12% of total U.S. milk production in FY 1983--over 16.6 billion pounds milk equivalent.

The 1983 Act represented a compromise among all concerned parties--the Congress, the industry, and the Administration--as the most feas ible means of addressing the surplus problem in the short term. The legislation basically provided for an immediate 50¢ per hundredweigh t (cwt.) drop in the support price to $12.60 per cwt., a 50¢ per hundredweight deduction from all milk sold, and a IS-month diversion program. CCC would pay $10.00 per cwt. for a reduct ion in marketings from 5 to 30% of a base period of marketings. In addition, at the end of the diversion program, if CCC purchases for the following 12 months were projected to exceed 6 billion pounds milk equivalent, the support price could be lowered .50¢ per cwt. on April I, 1985; and if CCC purchases on July I, 1985, were estimated to exceed 5 billion pounds for the following 12 months, the support price could be lowered another 50¢ per cwt. The 1983 Act also provided for a l5¢ deduction per hundredweight from all milk marketed. This check-off was designated for promotion of milk and dairy products. Thus, 1983 Act was designed to provide dairy fanners a IS-month period in which to adjust milk production in line with commercial demand; and if the adjustment was not sufficient, the support price could be lowered in two 50¢ increments.

10ffice of the Assistant Secretary for Economics, Uni ted States Department of Agriculture, Washington, DC 20250 •

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Effects of the Milk Diversion Program

As you are aware, the milk diversion program has ended, and some general observations can be made. A more detailed analysis will be made by the Department with the termination of the diversion program. However, the following points provide some insight into the effectiveness of the milk diversion program:

o A relatively small number of farmers signed up for the divers'ion program, about 20% of the commercial dairy operations.

o Marketings of milk were 2% lower 10 1983-84 than 10 the re~ord 1982-83 year.

o The small participation 1n the program made it possible for the 50¢ deduction from the price of all milk marketed to nearly equal the diversion payments over the IS-month life of the program. As of the end of February, a bout $ 71 7 mi 11 ion had been pa id out under the milk diversion program, while about $757 million had been collected from the 50¢ deduction, under the 1983 Act.

o An additional $594 million was collected from the deduction on market ings from April 16, 1983-November 30, 1983. Thus, while collections total $1.35 billion, the $594 million collected under authority of the earlier legislation should not be' used when comparing payments and collections during the milk diversion program.

o The cost of purchasing dairy products under the p,r1ce support program was about $1 billion less in 1983-84 than 10 .i982-83. Nonetheless, net budget outlays of the dairy price support program were still in excess of $1.5 billion.

o There was no fundamental struct,ural change in milk produc,tion'. In the last few weeks of the diversion program, CCC purchases of dairy products have rebounded to above year earlier levels and milk produc tion is expected to increase sharply in' the coming mon'ths.

o Less than half of the reduction in the surplus has been due. to reduced milk production--most of the reduction has occurred because of increased commercia 1 sa les and increased "on farm" us~. The follpwing factors in addition to the diversion program impacted on production: ' 1) the 50¢/cwt. reduction 10 the support pr1ce on December 1,

1983; 2) the 50¢/cwt. on milk sold to finance the dairy divers,ion

program; 3) higher feed costs that occurred early in 1984; and 4) certainty with regard to dairy policy through September 1985.

o The diversion program has provided a brief respite from rapidly escalating milk production and CCC purchases. However, very few farmers have made any real adjustment. More important.ly, no substantive adjustment has been made 1n the milk processing/manufacturing capacity, which is also in surplus.

Thus, while the diversion program and other provisions of the 1983 Act did reduce CCC purchase costs by about $1 billion, the surplus In FY 1984

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still was 10.4 billion pounds milk equivalent. When the diversion program ends, farm use is expected to revert to normal levels and marketings will be increased by that amount. In addition, many producers are expected to expand their milk production sharply. Producers appear to be holding heifers for increased production as the number of milk replacement heifers per 100 cows on January 1 was 44, a record level.

As a result, the April 1 trigger level provided for the 1983 Act was exceeded, allowing the Secretary the authori ty to lower the support price 50¢ to $12.l0/cwt.; and it is anticipated that the July 1 trigger level will also be exceeded, potentially lowering the price support level to $11 • 60/ cwt •

Economic Environment for Future Dairy Policy

The recent history of the dairy industry I s reaction to frequent milk price support legiSlation in terms of milk production and sales indicates that a new, more stable, and responsive approach should be provided for in future dairy programs.

Efficiency in terms of milk production can be measured in two ways: 1) by achieving increased amounts of milk from a cow; or 2) producing milk at the least cost. United States I dairy producers seem to excel by ei ther measure. Average annual production per cow increased from 11.9 thousand pounds in 1980 to 12.6 thousand pounds in 1983, an increase of 6%. During that time, the support price was unchanged from October 1980 through November 1983. As an additional example, consider the most recent production data available. Milk production in February 1985, on a daily average basis, was 0.8% or 85 mi 11 ion pounds above February 1984 leve ls--and this was attained from 99,000 fewer cows, with the same support price.

During this period 1980-83, when the support pr ice was unchanged and produc tion was increasing rapidly, commercia 1 disappearance increased less than 3%--about 1% per year. This combination led to the increasing surplus of dairy product s. Commercia 1 disappearance rose sharply during the first two quarters of 1984 just as the provisions of the 1983 Act were beginning to have an effect. However, the increase in commercial disappearance was not sustained; and by the last quarter of 1984, it was less than 1% over the year earlier figure.

An economically viable dairy industry will require a long-term policy that will provide farmers a sounder basis to plan and make important investment and production decisions. That pol icy must accommodate continued productivity gains and at the same time guide structural adjustment in both the production and processing/manufacturing sectors. If price supports are to be the dominant factor in future dairy programs, they must be effective in that they reflect the economic conditions in the dairy industry and the roa rketplace and must be allowed to fluct uate in response to changes in those conditions.

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trade, we are literally out of the market in almost every single There is nothing new happening. I told someone the other day were limp, sales were down, and we're not going anyplace.

commodity. that sales

Let's take a look at some of the reasons why. We ran through the decade of the '70' s with a real growth rate involving countries roughly 6%, the developed countries always running at only about 4t-5%. It was adding to the demand for farm products but look what happened in the late '70's when it began to tumble. It went down to practica lly no growth in both the developed and the developing worlds as late as 1982. There is a glimmer of hope but I would suggest to you that they're still a ways from any kind of substantial growth in the demand for u.s. farm products because it's just now beginning to turn around.

The other thing is the r~se m the value of the dollar. If there was one single thing that you can say ~s the cUlprit in U. S. agricultural exports today, it is the value of the dollar. I can put any chart up there, it really wouldn't matter. You can see back m the 1980's, the green line is the price received by farmers in this country for corn and you can see that we received a price above what it was selling for in equivalent basis overseas beca use the dollar was weak during those periods of time. Actually, we were able to get a price to our farmers on the green line but in eSsence sell to our customers on the gold line of that period.

Look what happened when the value of the dollar took off in 1982. You can see today that the farm prices are rough ly what they were back in 1979, as far as corn goes. But look at what our customers were paying overseas, roughly 300% or 2t times what the farmers in this country received. You can't price yourself out of the market with those magni tudes and expect to do very much in terms of dealing with your competitors.

Embargoes obviously have an impact. The red represents the total Soviet imports, the green represents what the U. S. share of the Soviet imports were. You can see the embargoes that we put on back in the '79-'80 per iod and you can see what happened to the U. S. share. You can see that the Soviets really came into the market, but you can see that our share declined rapidly. The yellow areas are an estimate of what we would have sold as our normal share if things had been normal. We would have sold additional to the Soviets and I think you can see that's a fairly substantial chunk. The Soviet embargo clearly had an impact on the gra~n area.

There is an indication of the subsidies that we're competing with. You can see that ~n 1976 the European Community subsidized a fairly small amount, roughly exporting about $12 billion worth of farm products for about $2t billion worth of subs idies. They kicked those subs idies up to about $6 billion and you can see the rapid expansion to nearly $25 billion exports. You can see very quickly that thei r pol icy is one of continuing to produce and then move any excess into the market. In th is country, when prices are depressed, we try to remove the excess by cutting production.

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There's another th ing that is happening to us and you can take anyone of our commodities and work up that same chart. Basically, the green area is the wheat loan rate to the U. S. farmer. Again, this is the val ue of the dollar. The other bar represents what that support price translates into in terms of our competi tors. In other words, right now our competi tors can sell just under the line and on an equivalent basis beat us out at this price. In other words, they can sell at the higher price and still beat us trying to sell.

So, you find some people now saying "the price has even brough t the loan rate a little higher so the loan is not the problem." They don't understand that the loan rate translated into dollars ~s killing them so that our competitors don't have to sell at our loan rate. They can sell at the much higher equivalent price and it gives the false impression that the loan rate is not a problem when in fact it is a fairly substantial problem ~n the international marketplace.

Okay, there are some po 1 ic ie s. for some 50 years with the top three basically says: provide support for food suppl ies.

We've been operating this country now policies. The CCC Charter Act of 1933

income and prices and maintain adequate

It ~s clear because of what is going on in the international market right now, with substantial loss ~n market shares in almost every single commodity, that we need to add a fourth objective. We need to assure ourselves that we are competitive in international markets, simply because a third of the farm income in this country is derived from export sales. If we cont inue to erode those marke t shares as I indica ted to you that we're doing, we stand to lose much of farm income and you're talking about a retrenchment. You're talking about a real retrenchment if we back ourselves out of those markets. You almost have to add we've got to get pr~ce competitive or cost competitive may be a better way to put it. But you've got to be able to de 1 iver the product to your customer at the same equivalent cost that somebody else can or they're going to buy it somewhere else. It's that simple.

Now, when you add that fourth one, clearly we have to start looking at the structure of farm programs in this country because you can't meet all four of those. You can't meet the bot tom one under the current program depending on the way you're trying to addres s the top one s. So, they're inconsistent wi th each other. So, if you add the fourth one, you've got to go back and start taking a basic fundamental look at the farm policy in this country to see if there are some things that we can do to solve that particular problem.

So, now let's look at the bookends. I've put together two options which I consider to be bookends of the debate this year. On one end will be the government control option and the other end "free market option." Let's talk about the government control option just a moment in terms of the objectives that I just laid out. Clearly, it has an advantage because you

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can effect an adjustment in production by adjusting production at the margin for individual farmers rather than adjusting production by eliminating marginal farms. And that's the real debate that we go through in Washington every year. The debate is, do you reduce supply by farmers dropping off that are at the margin or does everyone take a little bit of share in reduction.

The government contro 1 option allows you to do that for those of you who believe in this approach. It does maintain higher short-term domestic prices and I put a big double tmderl ine under "short term". If you don't believe that it's short term, ask OPEC. They held them for 10-15 years but the thing is reversed now. If you create a market price above the equilibrium because of supply control, somebody will figure out some way to get that supply in there when they are more efficient. They will get it in there and they'll break you 1n the process.

So there 1S the short term. You enjoy higher short-term prices but not long-term prices with government control. It does provide stability and it does limit the government costs because the government tells you you can't produce. You don't produce and it doesn't cost a great deal so at least the objective of the budget debate is met.

The most damaging argument in terms of the cons clearly is the loss of export markets. If you raise price and do nothing to meet the competi tion overseas, then clearly you price yourself out of the international market. As I said, with a third of farm 1ncome coming out of the export market, I'm not sure that's a very wise thing to do.

Alright, let's just look at some examples. I want to run through some wheat charts. These, I think are very telling charts. That's wheat production 1n the U.S. 1n 1974-75 to 1982-83. In the past, when prices became low and stocks became excessive, we cut production in order to get the price up. Okay. That's exactly what we did. We had too much production so we decided to put in the acreage control program in 1977-78; we got that dip in production. The sharp dip on the other side is the PIK program.

Okay. Now, remember wheat prices haven't improved at all. We had this cut in production but wheat prices still haven't improved. Now, there's a reason why. Our competitors have finally figured us out. We're providing an umbrella over the world price which our competitors are comfortable with. When we cut production, they simply use that opportunity to expand and take our market share. If they need to, they'll subsidize to move their excess. So rather than creating a wheat price on the green line which we'd always done in the past because the total would come down with it, the wheat price was determined up on the orange 1 ine, which is the total supply against total demand. And so all we did was sell less wheat at the same low price. Our income was declining.

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The same thing happened on the PIK program. to get some kind of price response with a fairly Look at what the competi tors did. We simply lost low prices.

We thought we were going substantial drop in wheat. market shares at the same

Now, I know that none of you in th is part of the country have cot ton but I want to show you what's happening to a controlled program in cotton. Fifty years worth of cotton production in th is country. During World War II, my chart shows there's a little blip when they needed cotton for wadding, I guess, and clothes. We've been getting out of cotton production 10 this country. Look at what the rest of the world has been doing in the interim. At one time back in the 1930' s we could cut production and affect the price. But, now we grow only lO% of the world's cotton production. If we cut production 10%, we reduce world production by 1%. If competitors move in and increase by that amount, you haven't done anything to supply and you haven't done anything to help the price; all you've done is put yourself out of business.

Clearly we need to get real smart 1n terms of what we're going to do in this country as far as farm policy goes if we're going to ever turn around the agricultural economy. There's a free market option. Obviously it lOsures competi ti vene ss, it has great flexibil i ty to market condi dons, and clearly it doesn't cost the government any money if they don't provide any price support. But the economy you're dealing in is something less than a free market. The market is not free. You've got government administered prices, you've got subsidies, and you've got other impediments to the rna rket. So, if you kick the props out from under the support to the American farmer, what you're saying is that the American farmers have to be competitive in a world that's not competitive. The farmer is going to have to pick up the full cost. And, I guess for those of us who watch these sort of th ings, we th ink that's not appropriate. Why shou ld .the fanners of th is country have to pay to offset the subsidies for somebody else? It's just not fa i r and what you are going to do is to put fanners of th is coun tryout of business. Then the competitors will have it to themselves. So, clearly it appears that neither end of that distribution is the right way to go. I gue ss the que st ion is what can be done to support or provide protection to the farmers on the one hand but also meet the objective of meeting the competition in the international market.

Dual objec ti ves. How do you meet the need to provide support to farmers while also allowing you to be competitive in the international market which you have to do if you're going to stop this erosion in American agricult ure?

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A LOOK AT DAIRY POLICY FROM THE FARM

by 1

Clyde E. Rutherford

If one looks back at the last 10-15 years, you would wonder how we have any dairy farmers left in the United States. During much of the time since the passage of the 1949 Price Support Act, the economic cond i tions of dairy farming have been re lat ive ly stable. Sure, we always have the influence of weather and its impact on production. And during many of those years, a movement of the price support up or down between 75-90% of parity did a fairly good job of keeping supplies in reasonable alignment with demand. As a result, costs of the dairy economic stabilization program were maintained at tolerable levels.

Then came the 1970's, and it appears that everything went haywire. It included bad weather and poor grain crops for dairy feed which made high feed prices, along with double-digit inflation. Exports of wheat and feed grains to Russia and China made for higher feed prices and reduced milk production. Presidential proclamations for large imports of butter, nonfat dry milk, and cheese suddenly reduced milk prices from the imports at the same time as continued high inflation. Price supports pushed to 80% of parity by the Congress urged on by dairy farmers and their lobby organizat ions. Embargoes on exports of wheat and feed grains suddenly made lower prices for dairy feed. Support prices continued at 80% of parity with semi-annual adjustments to reflect changes in prices paid by farmers. Price supports increased every 6 months. Dairy farms expanded with increases in cow numbers. The build-up of stocks 10 CCC warehouses and skyrocketing costs of the dairy price support program were the result. Since 1980, we've been struggling with the problem.

One cannot blame the da iry farmers. In mid-1980, they saw the problem developing and, through National Milk Producers Federation, wanted to USe the level of purchases by CCC as a trigger mechanism to move the level of price supports up or down to keep supplies in line with demand. Unfor­tunately, the message they got from the Administration was that it was too close to election to do anything that year and this was supported by some dairy groups.

there on, it I s kind of been downhill. Prices at least stopped but production had a lot of momentum going. Organiza tions

From going up, disagreed, providing purchases.

and it wasn 't unti 1 1982 that the legislation was passed for the 50¢ and $1.00 deducts to defray the cost of CCC Then, ~n late 1983, Congress passed everybody's bill:

1. Diversion payments of $10 per cwt. 2. 50¢ deducts to pay for the diversion costs. 3. A price support decrease of 50¢ per cwt. 4. And, the advert ising and promotion program.

1 . d . PreSl ent, Da~rylea Cooperative, Inc., Syracuse, NY 13202.

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A second price decrease of 50(: per cwt. was made on Apri 1 1, 1985 with the end of the diversion program and the 50(:, and A third 50(: decrease in the support price on July 1.

There is not much doubt in my mind that the price decrease wi 11 be made. USDA is now forecast ing CCC purchases for the current marketing year at 9 billion pounds of milk equivalent. And, in the Administration's proposed farm bill, they start October 1, 1985 at $11.60 which would reflect the July price decrease.

The Administration bill really scares us. It scares us mainly from the standpoint of instability in pricing. The phaseout of the price support-purchase type program, we believe, will result 1n highly volatile prices with wide swings from top to bottom. The interaction of -supply and demand does work. We saw that in the early 1970' s. It also happened last fall as supplies tightened and pay prices rose above supports. But roller coaster pricing is more than the average dairy farmer can cope with. Today's large capital investments in dairy farming, and therefore large borrowings, need a degree of stability in pricing on which to base those investments. It is difficult enough to manage and operate an agricultural enterprise without adding a totally unknown quantity in the form of price. Dairy farmers, for the most part, recognize that they are in a business of producing a product in almost pure competition with their fellow dairy farmers. They are willing to be involved in a struggle of survival of the fittest. But they do object to substantial price instability. It was such instability in the early and mid-1970's which led to raising the floor price and resulted in the eventual oversupply si tuation. In hindsight, perhaps the Congress was too kind in 1977. But chaotic supply-demand pricing of the so-ca lled free marke t is not the answer ei ther • We be 1 ieve tha t pr ice stabilization, with flexibility 10 the price, can best serve the interests of dairy farmers.

Here in the Northeast, we have attempted to establish a consensus among farm organizations on things we can agree on. For the most part it includes:

1. Cont inuation of the Federal Milk Order Program-- Federal Milk Marketing Orders have operated effectively for more than 45 years to assure consumers of an adequate supply of fresh, regionally produced milk at reasonable prices. They have stabilized a volatile industry, while not guaranteeing any specific level of prices. They have provided for equitable payment to producers and

2.

relatively equal cost to handlers for raw milk. It is critical to the viability of the national dairy industry and to the availability of a supply of regionally produced fluid milk to consumers that the market order system continue and that no drastic changes be allowed to undermine its effective operation •

An updated "dairy" parity calculation which includes adjustments for changes in: a. The cost of producing milk. b. The consumer's price index.

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c. The price of meat animals. d. Productivity. e. Supply-demand as expressed by levels of eee purchases.

3. A continuation of the National Advertising and Promotion Program. 4. The support price should not be a market price. It should be a

floor price to stabil ize the market and have authorization for the Secretary of Agriculture to move the pr1ce up or down.

While some organizations would support a stand-by diversion-type program, financed by farmer deductions, for use on an emergency basis if needed, the support is not unanimous in this particular group.

Our basic aim in the end is a program wh ich will return a degree of stability to the industry so that dairy farmers can better make decisions as businessmen rather than as someone who just likes to milk cows.

This program has enough flexibility to work. no quotas or base; and 1S a long-term program business decisions.

It will cut costs; it has for farmers to make good

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THE PROCESS AND POLITICS OF THE 1985 FARM BILL

by

Kenneth Robinson1

Farmers in general! and dairymen in particular! are likely to be disappointed with whatever legislation finally emerges from Washington this year. This rather pessimistic view! which I believe is now widely shared by close observers of the Washington scene! is based on an assessment of the current political and economic climate. Dairymen were remarkably successful in 1983 in getting Congress to accept the dairy diversion program. It will be difficult to duplicate that performance in 1985. Current and prospective surpluses combined with budgetary pressures and the threat of a Presidential veto will compel Congress to be less generous to farmers than they were in 1981 or 1983.

My objective this morning! however! is not to attempt to forecast the outcome of the 1985 debate over farm policy! but to provide you with a general assessment of the political climate. This may help you in developing your own legislature strategy or at least should enable you to interpret events in Washington that may have a bearing on what finally emerges from Congress. I will begin by commenting on some of the broader forces that are likely to influence what Congress does this year before turning more directly to the politics of agriculture.

It is clear that the dominant issues in Congress will be the budget deficit! military spending and tax reform. Agricultural legislation is a subordinate issue and conceivably could become a casualty of residual conflicts that will inevitably arise over budget cuts and military spending. Deals made by the White House in order to gain support for its proposed budget cuts could have a bearing on subsequent farm legislation. The administration demonstrated that it was prepared to make deals to salvage the MX missile program! and might do the same thing for other legis­lative items on which it places a high priority.

The willingness to make deals could! of course! work for as well as against agriculture. You may recall that sugar supports were added to the 1981 Farm Bill because of commitments made earlier to Southern Democrats (the Boll Weavil Bloc) who sup­ported the President's budget cuts.

A second major issue revolves around the U.S. trade deficit. Congressional sentiment for protectionist measures or

Iprofessor, Agricultural Economics, 40 Warren Hall, Cornell University. Ithaca, NY 14853.

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for taking retaliatory action against what they view as unfair trade practices by Japan and the European Economic community is very strong. The President, while supporting the principle of free trade, ultimately may be forced to compromise with those seeking to retaliate against Japan and Western Europe. Among the proposals being considered are to offer more liberal credit for agricultural exports and various forms of disguised export subsidies. Some have suggested the equivalent of a PIK program for exports (i.e. to offer exporters a bonus in the form of surplus commodities if they succeed in expanding commercial exports). The danger in this is that we could end up fighting a subsidy war in which no one would be winners. Soybean producers are especially vulnerable to possible retaliation by the European community and Japan.

The farm policy debate in 1985, even more than in other recent years, will focus on the level of support for export crops, mainly wheat, corn, rice and, to a lesser degree, cotton. These are the commodities that are in trouble because of lagging exports. Members of the agricultural committees of Congress are well aware that freezing price-support loan rates or cutting back production will simply provide an opportunity for competing countries to expand their exports at the expense of the u.S. For this reason, there will be substantial pressure both from the Administration and many members of Congress to provide for more flexibility in pricing. This is most likely to be done by linking loan rates to an average of recent market prices. Support prices for soybeans and cotton are now determined in this way. While loan rates probably will be reduced, at least in real terms (i.e. adjusted for inflation), Congress will be reluctant to make corresponding cuts in target prices because of the impact this would have on the cash flow of farmers and on creditors. Thus, one of the consequences of attempting to make u.S. farm products more competitive on world markets may be to widen the spread between target prices and actual market prices, thereby increasing deficiency payments. This will raise treasury costs which, of course the administration opposes. other supported commodities, including milk, may be vulnerable to cuts in support prices if the budget committees of Congress force the agricultur­al committees to comply with budget ceilings. If Congress ignores the budget constraint, there is always the threat of a Presidential veto. In the end, commodity groups may be pitted against each other if the gains for one commodity must be offset by cuts in others. Intercommodity conflicts almost led to the defeat of the 1981 Act and pose a threat to the 1985 Act as well.

Another distinguishing feature of the debate this year is that there is no clear front-runner among the policy proposals. -Normally, the Administration's bill has the inside track and serves as a focus for hearings and debate. This will not be the case in 1985. The bill sent to Congress by the White House has met a hostile reception. Representative de la Garza, chairman of

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the House committee on Agriculture, has made it clear that he will not go along with the Administration's proposals. He favors continuing the 1981 act with minor modifications. Even in the Senate where a more favorable reception might have been expected, there is little support for the Administration's bill. Senator Helms has introduced his own bill which would permit greater flexibility in establishing support prices but would not go as far in lowering supports as proposed in the bill submitted by the Administration. Under the Helms bill, support prices for dairy products would be pegged at $11.60 per hundredweight through the next fiscal year. Thereafter the support level would be adjusted up or down depending on estimated ccc purchases of surplus dairy products. Senator Helms has sought to avoid conflicts by keeping the peanut program in its present form and ignoring tobacco which does not require an immediate change in legislation. As might be expected, the Helms bill contains a strong export title, which among other things would mandate sales abroad of surplus dairy products. This bill undoubtedly will have the inside track in the Senate. Politically, I think it fair to conclude that the Administration's bill is dead and can be ignored, although some of the provisions in the bill may later emerge as part of a compromise package put together by the conference committee.

It is by no means certain that a bill which will be accept­able to the House Agricultural committee can win on the floor of the House. In the past, agricultural support bills have survived floor votes by adding items, such as more liberal food stamp benefits, which appeal to representatives of urban areas. Agriculture cannot afford to antagonize those who represent nonfarm areas if they want to maintain support programs. vote trading is essential to get a farm bill through the House. The Helms bill contains a provision which is likely to be unaccept­able to representatives of urban areas, and therefore the bill in its present form probably would not survive a House vote. Senator Helms proposes to bring back the cash purchase require­ment for food stamp participants, a provision which was dropped in the 1977 bill as a concession to those who wanted to make it possible for more people to participate in the Food Stamp Program. Restoring the cash purchase requirement would make the program more effective as a means of increasing the demand for farm products, but would at the same time make the program less attractive as a disguised income supplement. The cash purchase requirement may, of course, be dropped before the Helms Bill (or some modified version of it) reaches the Senate floor. I mention this only to illustrate the problems that are likely to rise in drafting a bill that is acceptable both to the agricultural committees and to the non-farm majority in the House. A bill that will succeed in the Senate will not likely pass in the House and vice-versa.

Because the House and Senate bills are likely to differ substantially, whatever emerges as legislation will be based on

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compromises worked out in the Senate-House Conference Committee, which as you know, consists of the senior members of the Senate and House Agricultural Committees. It took the conference committee nearly six weeks to work out the compromises that eventually became part of the Food and Agriculture Act of 1981. It may take at least as long in 1985. Thus, we may not have a bill reported out of the conference committee before the 1981 Act is due to expire. If the process drags on too long, Congress may simply vote to extend the current act.

It is almost impossible at this stage to predict what kinds of compromises ultimately will be worked out by the Conference Committee. One must keep in mind that the South and Midwest will be over-represented in the Conference Committee relative to other regions. In addition to Senator Helms, the Senate con­ferees are likely to include Dole from Kansas, Lugar from Indiana, Cochran from Mississippi, Boschwitz from Minnesota, Zorinsky from Nebraska and Leahy from Vermont. On the House side, the delegation is likely to include Foley from Washington, the two Jones, one from North Carolina and the other from Tennessee, Brown from California, Madigan from Illinois and Jeffords from Vermont. Senator Dole and Congressman Foley rather than the two committee chairmen were most influential in working out the compromises that eventually became part of the Food and Agriculture Act of 1981. Both are in leadership positions in their respective chambers and consequently what they propose is likely to form the basis for whatever compromises are worked out. In short, anyone who wants to influence the final bill must have access to the Conference Committee, and especially to Dole and Foley and/or members of their staff.

Once the compromises are worked out, the final conference report goes back to the Senate and House for their approval. It cannot be amended. Thus the choice is either yes or no. As you may remember, the 1981 conference report passed in the house by only 2 votes. It very nearly failed and would have done so without the support of Congressman Foley. The 1985 Farm Bill, if it gets this far,also faces the threat of a Presidential veto if it fails to reflect the Administration's preference for a more market-oriented agriculture or if the potential treasury costs appear excessive. The greatest protection agriculture has against a veto is that the permanent legislation (based on acts passed in 1938 and 1949) is even less acceptable to the Adminis­tration because it would compel them to raise support prices for several commodities. Acreage allotments, which they also oppose, would be mandated for wheat, corn and cotton, but only if approved by a two-thirds vote of producers.

Conclusions •

My conclusion, based on a review of the current political ~ and economic climate, is that farmers should not expect to be

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bailed out of their current financial plight by new legislation. The Administration will not accept a costly farm bill and those who are most knowledgeable about agriculture are aware that in the long run, farmers have more to lose than to gain from overpricing. It is unrealistic to expect the government to accept the responsibility for disposing of surpluses that could amount to as much as 6 to 10 per cent of production. On the other hand, one should not be too pessimistic in predicting changes in support prices. congress is not likely to accept a bill that lowers supports as precipitously as the Administra­tion's bill proposes because of the adverse effects this would have on farmers, agribusiness firms and agricultural lenders. My guess is that the support price for manufacturing milk will not drop below $11.60 per hundredweight, at least during the next two years, although it could do so thereafter. support prices for other commodities are likely to come down only modestly from current levels. But prospects for any increase in support prices or for the revival of a dairy diversion program over the next two years are considerably less than 50-50. While the precise details of the 1985 farm bill cannot be predicted, the general direction is clear. Any new legislation, assuming congress passes something the President finds acceptable, will be somewhat more market-oriented and will offer farmers less support than they have had in the recent past. In my view, we would be derelict in our duty to producers if we were to imply otherwise.

One cannot dismiss entirely the prospect of having no new farm bill in 1985. If commodity groups end up fighting one another or the conferees cannot find compromises that are acceptable to their respective chambers, or if the President decides to veto the bill, we could end the year faced with two alternatives, neither of which is very attractive. One alterna­tive is to extend the 1981 Act for another year. The other is to allow the legislation to lapse. Under the latter alternative, the secretary would be compelled to support manufacturing milk in accordance with provisions of the 1949 Act which calls for supports within the range of 75 to 90 per cent of parity. My guess is that Congress and even the Administration would opt for the former alternative rather than the latter, but the net result of this would be to leave the future course of dairy support policies even more uncertain .