I was recently on a dairy discussing the dairy’s plan to make a new major investment. I was questioning whether it would be wise based on how cash-strapped the dairy had been in 1996 – a year of historically high milk prices. The proposed investment wouldn’t increase revenues.

The managers pointed out that the November Basic Formula Price (BFP) was above where it was a year ago. A look at the graph of the BFP on this page will show that, in fact, this is true. The BFP for November, 1997 is above the BFP for November, 1996. But the dairy took this as meaning that the outlook for milk prices was favorable. Favorable is relative, depending on where you are at the time. The BFP will likely finish the year averaging $1.35 – 1.40 below the 1996 average. Rather than concentrating on how it could reduce costs, the dairy chose to focus on something it basically can’t control - milk prices.

Price forecasting is a favorite activity, especially at this time of year. Supply and demand affects prices, but, in an industry that is as regulated as ours, institutional changes can affect prices as well.

The Minnesota judge’s decision about Class I differentials (see page 2), Federal Order reform, and marketing organizations outside of Florida that want our market can all affect our milk prices as well as supply and demand changes. There is little an individual dairyman, by himself, can do about them.

Additionally, institutional changes like environmental regulations increase production costs. We need to confront these issues the best we can in order to make the outcomes as favorable for us as possible.

In the long run, though, the costs under the dairy farmers’ control will determine which dairies are profitable. This is the first place to look for answers.

Everyone has heard something about it. As reported by the USDA, on November 3, 1997, Minnesota U.S. District Court Judge Doty issued a decision in Minnesota Milk Producers, et al. v. Dan Glickman, Secretary, USDA. The Judge found that the Secretary failed to consider certain factors, mandated by the authorizing legislation, in setting Class I differentials in 28 federal orders. He declared that the differentials are unlawful, and instructed the Secretary to stop enforcing them.

Regarding the Basic Formula Price (BFP), however, the Judge found that the Secretary did adequately justify the BFP on the basis of the legislatively mandated factors.

At this time, a stay has been granted until February 15^th, 1998, so no action (eliminating Class I differentials) will be taken. The judge says the purpose of the stay is to avoid "chaos and disarray" in milk marketing nationally. It should not be interpretted as meaning that the original decision will not be enforced. The current stay allows current Federal Order pricing mechanisms to operate for November, December, and January.

Hal Harris, Extension Ag, Economist, Clemson University, pointed out that Judge Doty’s surprise ruling that current Class I price differentials are unlawful presents the industry with a great deal of uncertainty in the months ahead. The ruling characterized the differentials, which increase with distance from the Upper Midwest, as "arbitrary and capricious." If the differentials are arbitrary and capricious in legal terms, they are hardly arbitrary and capricious from the standpoint of how the present system of Federal order pricing has evolved and has been refined over the years.

Harris points out that the Federal Order System initially adopted Class I differentials in the 1930’s, because they reflected the pricing policy of cooperatives selling producer milk to processors since the early 1900’s. The concept of the distance differentials was adopted formally by the order system in the 1960’s on the basis that it reflected actual fluid milk prices across the country east of the Rocky Mountains. The current differentials themselves were promulgated by Congress in the 1985 Farm Bill. This action sparked the regional squabble that prompted the Minnesota lawsuit.

Present differentials were confirmed in a 1993 final decision by the USDA based upon a 1990 national hearing that produced over 10,000 pages of testimony. Lack of consensus in the 1996 Farm Bill debate prompted Congress to punt a complex problem to the Secretary (federal order reform), and this has pretty well placed him in a lose-lose situation politically.

There has been much confusion about exactly what would happen if this ruling stands. Ag. economists say there is no developed country in the world with minimal government involvement that can be used as a model of what would happen. The one thing everybody agrees on is that the price for everyone would be lower, but the effects will differ in different locations.

Based on details of the Judge’s decision, not all federal orders would lose their Class I differentials, but nobody has really known which ones would not. The reality is that as always, prices in deficit orders will have to reflect those in surrounding markets.

The USDA’s opinion is that orders with less than 40% Class III milk in 1996 would keep the differentials. These orders are: three Florida orders, Southeast, Carolina, Louisville-Lexington-Evansville, Ohio Valley, E. Ohio - W. Penn., S. Illinois - E Missouri, Central Illinios, Indiana, S. Michigan, and Michigan Upper Peninsula.

Interestingly, the ruling came shortly before the USDA was scheduled to release its plan for reforming the federal order system. It has been widely believed that the plan would be consistent with an economic study which found that something close to the current differentials are economically justifiable and represent the value of milk at different geographical locations.

Current Class I differentials in Florida range from $3.58 to 4.18. Under the proposal expected from the USDA before the Doty ruling, the Florida differentials would have ranged from $3.00 – 4.30. Many believe that an impact of the Doty ruling is that a much more "flat price surface" will be forthcoming in the proposed plan from the USDA. Differentials for Florida may range from 2.75 – 3.50 instead of the $3.00 – 4.30. We will have to wait and see. Expect the proposed plan from the USDA in mid-January.

Regardless of the current details, many feel that we are in a long term process of eliminating the federal milk market orders entirely, and the current reform process, reducing the number from over 30 to 10-13, is only the first step.

I do. This gives me the right to take a paycheck from the Great Gator until I die, get shot, or retire, unless I break some moral or criminal law. You all know that I wouldn’t do that.

To get tenure, promoted, get a raise, or not get a raise every year, I have to turn in my accomplishment report for the year. My chairman then evaluates me. He tells me what I did well, if anything, what could be improved on, and he gives me suggestions on what direction I should go (usually north on I-95). Basically, he tells me how I can improve my program to help the department meet its goals.

This is similar to what you should be doing with your employees to help them meet your dairy’s goals. And who evaluates you? Do you have goals? Do you know how you are doing on your dairy? There is an old saying, "People don’t plan to fail. They fail to plan." An excellent way to find out if you will get tenure or not is to belong to the Florida Dairy Business Analysis Program. It will evaluate your dairy, tell you what your strong and weak points are, and how you can improve (even get a raise). See your county agent or any of the folks listed on the back of this newsletter.

Some items to do for a good evaluation and to get a raise are:

a. Labor management - Have goals for the dairy, for the managers, and for each employee. These goals should be measurable (i.e. pounds of milk sold, cull rate, SCC, etc.). Evaluate your employees, explain how their work contributes to the dairy’s goals, and tell them how they have or have not helped the whole dairy meet its goals. Evaluations should be a way to reinforce the goals and indicate how well the employee is doing in relation to them. Suggest at least one thing the employee can improve on. Don’t tell the employee everything he did wrong during the past year. He should already know this. It should be a positive experience. You should have gotten rid of the sorry help as needed during the year.

I think a common problem on large dairies is that there is a layer of management and the folks on the top don’t know what the help on the bottom is doing.

On most successful dairies, the owner or manager (if the owner is not on the premises) must see the workers on every shift as many days as possible. If not every day, then at least once a week without any pattern to the visits. Successful managers know the name of every employee on their dairy and all employees know who they are. I think this is more important than anything else you can do on a dairy. If your employees know that you can walk into the parlor at 3:00AM and they will be fired if the teats are not dipped, cows have no feed, or they are beating cows, the employees will be more likely to do their jobs correctly. Your employees will respond more to knowing that you are interested in your dairy and them. Christmas parties and RA-RA meetings are fine, but you better know what is happening on your dairy. Don’t depend on the "honor system."

b. Goals and Excuses

I think everyone who reads this knows what to do and how to do it. The hard part is to get it done. We often think that bringing in a bunch of "experts" to add extra sets of eyes is the way to accomplish this. I am often a consultant who does this. Most things that are found wrong, you should have seen yourself, long ago.

Your business should be in your hands. We are here to help you improve, but you have to do it.