Diary farmers: more support for the itulip hypothesis

[mcgurme]

This is a sad story, indeed, about the woes of the dairy industry in CA.

Current prices are about half of what it costs California producers to feed and milk their herds; every carton sold in the supermarket represents a loss on the farm. Farmers are staying afloat by getting loans secured by every cow, tractor and acre they own. But experts say that if milk prices don't rise in the coming months, many farmers will burn through their cash and go out of business.

But amongst the sadness of it, note that it follows exactly the lines that EJ argued before.

Suppliers go out of business.
Excess supply dries up.
Fewer suppliers remain
ensuing shortage with less producers, constant demand
Prices rise.

The logical conclusion of the above article is exactly this scenario.

In fact, it is a logical tautology: note the bolded part. If milk prices don't rise, farmers will go out of business (meaning that milk prices must rise due to less farmers producing it). It seems there is no way in this scenario that prices can't rise, unless the government bails them out...hmm, interesting thought.

[kelton56]

Re: Diary farmers: more support for the itulip hypothesis

Or, if prices rise too much, consumption switches to lower cost alternatives, like soft drinks, water, coffee, tea, gasoline...

That's why our CPI has remained so remarkably low. Savvy consumers know when to switch from steak to hamburger to cardboard...

[raja]

Re: Diary farmers: more support for the itulip hypothesis

This is a sad story, indeed, about the woes of the dairy industry in CA.

But amongst the sadness of it, note that it follows exactly the lines that EJ argued before.

Suppliers go out of business.
Excess supply dries up.
Fewer suppliers remain
ensuing shortage with less producers, constant demand
Prices rise.

The logical conclusion of the above article is exactly this scenario.

In fact, it is a logical tautology: note the bolded part. If milk prices don't rise, farmers will go out of business (meaning that milk prices must rise due to less farmers producing it). It seems there is no way in this scenario that prices can't rise, unless the government bails them out...hmm, interesting thought.

Except that is not "contant demand" . . . and it argues against EJ's inflation thesis.

It said in the article: "Slumping international demand combined with an American public ordering fewer cheese pizzas has turned the milk market sour."

What we have here is not inflation, but deflation . . . .

[don]

Re: Diary farmers: more support for the itulip hypothesis

And I suspect there's a bit more to the milk story than the article suggests. The Diary Council has been a powerful lobby for many years in maintaining price supports.

[WildspitzE]

Re: Diary farmers: more support for the itulip hypothesis

Or, if prices rise too much, consumption switches to lower cost alternatives, like soft drinks, water, coffee, tea, gasoline...

That's why our CPI has remained so remarkably low. Savvy consumers know when to switch from steak to hamburger to cardboard...

...and/or if they absolutely need milk, then they'll have less dollars to spend on other things which negatively affects those prices. IMO, the supply chain destruction has to be seen on a systemic basis to be truly inflationary.

[rogermexico]

Re: Diary farmers: more support for the itulip hypothesis

This is a sad story, indeed, about the woes of the dairy industry in CA.



But amongst the sadness of it, note that it follows exactly the lines that EJ argued before.

Suppliers go out of business.
Excess supply dries up.
Fewer suppliers remain
ensuing shortage with less producers, constant demand
Prices rise.

The logical conclusion of the above article is exactly this scenario.

In fact, it is a logical tautology: note the bolded part. If milk prices don't rise, farmers will go out of business (meaning that milk prices must rise due to less farmers producing it). It seems there is no way in this scenario that prices can't rise, unless the government bails them out...hmm, interesting thought.

Perhaps there are just not enough federal rules and subsidies for milk producers.

Seriously, it's hard to take this as an example because it is not even remotely a free market. Similar "crises" have occured in ag long before the current depression

Were it not for the persistence of central planning in agriculture the past 70 years, there would be few dairy farms in california in the first place.

Pretty soon the auto industry will look just like this, and no one will think its weird that we have a soviet-style auto industry either.

"However, the government continued to set minimum prices for milk, based on the farm's distance from Eau Claire, Wisconsin, which is in the heart of dairy country. Theoretically, the price was based on how much shipping milk from Eau Claire would cost if supplies were not available locally. Milk for drinking was worth between one and two cents more per gallon for every 100 miles from Eau Claire. Under this policy, farmers in Texas were paid more for milk than Wisconsin dairy farmers. And processors had to pay at minimum a regional price set by government guidelines. Milk has been the only commodity for which the agriculture secretary can dictate the minimum price to be paid a farmer.

The complicated system, which requires 500 Department of Agriculture employees to administer and takes up three volumes of the Code of Federal Regulations, was instituted in the 1930s, before refrigerated transportation was widely available. The South had often faced milk shortages because milk was perishable in the heat, and raising cows in that climate was very expensive. Southern farmers were paid a bonus as an incentive to expand. However, technology today reduces the cost of shipping milk from surplus states, such as Wisconsin, to distant destinations. Technology has also developed new options for shipping milk. For example, in the 1970s scientists devised a way to remove water from milk to make it less expensive to ship. But the federal rules made reconstituted milk more expensive than local milk, so this technology has not been pursued.

The Eau Claire rule led to an increase of dairy farming in warm regions, even though they were not efficient places to run dairy farms. While many Midwestern farmers claim they are hurt by the regulations, farmers from many other regions support the Eau Claire rule, since they fear that revocation of that rule would result in the shipment of Wisconsin milk across the country, driving thousands of dairy farmers out of business. Southern farmers especially oppose deregulation, claiming they could not afford to remain in business without price supports."



http://www.referenceforbusiness.com/...iry-Farms.html

http://www.cato.org/pubs/tbb/tbb_0707_47.pdf

[metalman]

Re: Diary farmers: more support for the itulip hypothesis

Except that is not "contant demand" . . . and it argues against EJ's inflation thesis.

It said in the article: "Slumping international demand combined with an American public ordering fewer cheese pizzas has turned the milk market sour."

What we have here is not inflation, but deflation . . . .

reference to this forecast... Fed cuts dollar, Fire sales vs FIRE sales, Duh-flation, and Bezzle shrinks again

US consumer swan song: Cheap now, cheaper later, then expensive -- it’s all about supply

Early next year expect a Great American Consumer Fire Sale to follow on the heels of the Great American FIRE Economy fire sale of financial assets that began in 2006. While the FIRE Economy fire sale was in houses, stocks, and all bonds but US Treasury bonds, with particularly heavy depreciation in securitized debt, The Consumer Economy Fire Sale starting in Q1 2009 will be familiar to anyone who lived through the 1980 to 1983 recessions when the Volcker Fed slammed the economy in a three years of contraction with rate hikes that created double digit unemployment and brought inflation down from over 12% to under 0% -- yes, resulting in a brief episode of actual deflation. Ask any old-timer coin dealer that survived it. Armageddon for them, nirvana for the FIRE Economy.

The major difference between the 1980 to 1983 recessions and the one that started in Q4 2007 as iTulip alone forecast in Oct. 2006: the Fed created the 1980 to 1983 recessions on purpose. This one is running on its own, out of control, with no apparent obstructions – fresh sources of credit, cash, or income -- to brake the fall.

Many retailers, especially discount chains, have already cut prices to cost. Shopping with the wife at a nearby Mall this past weekend we spotted tumbleweeds rolling down the isles of full price, brand name retailers while discounters offered goods Made in China, Indonesia and other lands at absurdly low prices.

The shoppers marveled. They felt rich, no doubt, as they snapped up the well crafted goods using cash and credit earned at an exchange rate value they may not see again for many years, unaware of the ephemeral quality of the precious purchasing power they wield this holiday shopping season in the final act of a 35 year consumption fantasy financed by other peoples' savings.

The spectacle evoked images of ill fated vacationers picking fish up off the exposed sea floor at Bali resort beaches before the tsunami waters rolled back in to drown them, and the story of the young girl who happened to learn about tsunamis in school the week before and, recognizing the danger, talked her family into running for higher ground. I could not help thinking that a year from now many shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.

The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day. Then the first half of 2009 goes like this.

1. After Christmas sale 20% to 50% off
2. Liquidation sale 50% to 80% off
3. 30% to 40% of retailers go out of business

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.

milk the best example? as rogermex says... much gummit in it.

and... too early, isn't it? not q1 2010 yet.

track the thanksgiving dinner index this fall...

[GRG55]

Re: Diary farmers: more support for the itulip hypothesis

Except that is not "contant demand" . . . and it argues against EJ's inflation thesis.

It said in the article: "Slumping international demand combined with an American public ordering fewer cheese pizzas has turned the milk market sour."

What we have here is not inflation, but deflation . . . .

Really? One of our resident deflationistas, Starving Steve, has come over to the dark side and now regularly complains about rising milk prices.

The problem with California dairy farmers is they have an uncompetitive cost structure, in no small part because there's just no damn natural grass in much of central California. The feed has to be grown with irrigation...alfalfa in particular requires a lot of water, and water in California is getting scarce and more expensive. Like many other things in California, it's a mess.

Milk is as fungible as any other commodity. That means the first gallon [or barrel, or tonne, or gigajoule, as applicable] of real or perceived surplus depresses the price for all the gallons [or barrels, etc.]. This is the time honoured behaviour of commodity pricing and has absolutely nothing to do with "deflation".

In a commodity producing business the high cost producers are the ones that get knocked out on the cyclical price declines, unless they are the beneficiaries of official barriers to entry for the low cost producers [quotas, marketing boards, tariff and non-tariff barriers, direct government subsidies, and so forth]

[mcgurme]

Re: Diary farmers: more support for the itulip hypothesis

Except that is not "contant demand" . . . and it argues against EJ's inflation thesis.

It said in the article: "Slumping international demand combined with an American public ordering fewer cheese pizzas has turned the milk market sour."

What we have here is not inflation, but deflation . . . .

That's linear thinking. Yes, it is deflation right now, but if we step back and ask, "what does it mean 6-9 months from now?" we get a very different answer.

Metal posted the relevant quote from EJ. And rightly so everyone pointed out the huge amount of government support/manipulation for dairy farmers, so maybe it isn't the best example.

However, if it weren't for the government support, the following would happen:
- A business cannot survive for long with negative cash flow. Not long at all. Especially in a tight credit market. Therefore, many of these people would go out of business, since their cash flow is strongly negative.
- The process would continue with more going out of business (or, consolidating into one bigger business), until milk prices pay for at least the input costs.
- Now, the industry is much smaller and more consolidated. Since people aren't going to substitute cardboard for milk ;), the demand remains fairly constant at its lower level (note: if you've had kids, you'll understand milk demand). But soon, the consolidation reduces supply below that level.
- Prices rise. The remaining dairy producers can charge as much as they want.

Of course the government will probably step in and manipulate things further, so the above scenario is probably not going to happen. However, if it were a free market, how is it that the above scenario would lead to sustained deflation?

[lakedaemonian]

Re: Diary farmers: more support for the itulip hypothesis

Having a substantial interest in the dairy farming industry in low-cost producer New Zealand it is quite a concern seeing signs of protectionism in US and EU.

We are striving not only to produce at the lowest COST but also the lowest ENERGY inputs.

My pasture land costs would be only a fraction of my US competition and far more productive.

My water costs are ZERO and my water availability is almost infinite.

My direct/indirect energy inputs are extremely low, and we are striving to go even lower when the price of energy skies again.

My herd will live 12+ years on average.

My farm is a small cog in a world-leading primary producer "machine" helping to feed the world and make a buck at a fair price.

My US competition has high land costs, high water costs, and insanely high direct and indirect energy input costs....as well as dairy herds with the fruit-fly lifespan of Nitro Fueled Drag Car motors.

Protectionism in the case of the dairy industry reminds me of the adage that the market can remain irrational longer than I can remain solvent.

It will be very interesting(and personally exciting)to see how this all plays out.

I reckon for every penny this impacts on my wallet from Ag industry protectionist measures it will cost at least one life in the third world before this is over.

[doom&gloom]

Re: Diary farmers: more support for the itulip hypothesis

There is no group of people I ever feel for more than the small struggling
family farmer. Too much work, not enough pay, hard life, little reward,
and people up the line always making more than them.

[sutro]

Re: Diary farmers: more support for the itulip hypothesis

Does that mean the cows will get laid off after the dairy farmer gets foreclosed upon?

Or will they be reemployed by a different outfit with less debt looking to expand?

Peak Milk?

[santafe2]

Re: Diary farmers: more support for the itulip hypothesis

But amongst the sadness of it, note that it follows exactly the lines that EJ argued before.

Suppliers go out of business.
Excess supply dries up.
Fewer suppliers remain
ensuing shortage with less producers, constant demand
Prices rise.

The logical conclusion of the above article is exactly this scenario.

In fact, it is a logical tautology: note the bolded part. If milk prices don't rise, farmers will go out of business (meaning that milk prices must rise due to less farmers producing it). It seems there is no way in this scenario that prices can't rise, unless the government bails them out...hmm, interesting thought.

I agree with the thesis and we're seeing the same thing in our business. I think it goes, prices low now, lower later then up. Another iTuliper asked if the cows wouldn't just be moved back into production by another producer when these go under. The answer is, sorry cows, your new job is supplying meat until milk is worth more per gallon.

That said, I'm not sure I'd use California anything as an example of a producer caught between low prices and high costs. California makes it almost impossible for business. After our first year with our new business we moved out of California to avoid a mountain of personal and business taxes. We're happy with Nevada so far.

[ThePythonicCow]

Re: Diary farmers: more support for the itulip hypothesis

Does that mean the cows will get laid off after the dairy farmer gets foreclosed upon?

Hamburger

[BadJuju]

Re: Diary farmers: more support for the itulip hypothesis

PythonicCow, I just want you to know you would be turned into the finest cuts of meat in all of the world. ;)