Wild New Agricultural Markets Curdle Some Dairy Farmers
Bob Prosi is about to become the most popular man in Wisconsin.
He's standing on the floor of the Chicago Mercantile Exchange with a pencil jabbed behind one ear, a telephone pressed to the other, and a handful of purchase slips.
In the next hour Mr. Prosi, a commodities trader, will buy $1 million worth of cheddar cheese for an anonymous corporation. In doing so, he will raise the market price of cheese by 10 cents a pound - making every dairy farmer in Wisconsin and across the nation a bit richer.
This remarkable rally, which took place last week, is wonderful news for dairy farmers who've watched prices plummet in recent months. But it also underscores an enormous challenge that's changing the face of American agriculture - market instability.
As the federal government begins to dismantle decades-old subsidy programs, commodities markets of all kinds have endured some of the wildest price fluctuations in history. To survive in the new free market, many farmers will have to embrace a level of economic sophistication unimaginable to their forebears.
"It's a whole new ballgame out there," says Michael Downes, a dairy analyst at Fox Investments in Chicago. "Farmers are used to uncertainty, but the market these days has a lot of them scratching their heads in disbelief."
The changes in agricultural markets stem from the 1996 Freedom to Farm bill, which took effect this year. Although the bill allows farmers to plant whatever crops they choose on however many acres, it also changes the way subsidies are allotted.
Previous federal payments to farmers kicked in only when the market price of their product dipped below a certain level. Under the new legislation, farmers will receive standard payments unconnected to prices, but they will decline each year and eventually expire in 1999. Dairy price supports have also been replaced with standard payments that expire in two years.
Unbound from the federal purse, commodity prices at the Chicago Board of Trade and the Mercantile Exchange have fluctuated dramatically. And because dairy farmersare continually harvesting, they are more sensitive to daily price fluctuations than many other farmers - as are consumers who buy milk, cheese, and butter.
For the most part, farmers have been insulated from this volatility by good weather and a strong export market - which have kept prices high. Last year, corn growers benefited from a dual windfall: high prices coupled with federal payments they would not have received under the old system.
After last year's bounty, farmers have planted more of some crops than they have since the 1980s. Yet the dairy industry has found itself largely unprepared for the free market. Long known as one of the most conservative agricultural groups, dairy producers have never embraced the types of economic tools other farmers use as a hedge against low prices.
"Every other agricultural commodity has reached a point of maturity with sophisticated risk-management tools," says Michael Mudd, spokesman for Kraft Foods. "Dairy has always been an anachronism."
For years, farmers who grow field crops, like wheat and soybeans, have entered into options and futures contracts at the Board of Trade that guarantee them a specific price at harvest time before they've even planted their crops. In recent months, farm organizations have been promoting new price-protection devices, including "revenue insurance" that would guarantee farmers a certain level of profit.
The only such programs in place for dairy products are relatively small milk and butter futures markets at the Coffee, Sugar, and Cocoa Exchange in New York. While traders like Prosi have long bought and sold cheese on a cash market, America's first futures market for cheese is still in the planning stages here.
IN coming years, analysts say, some of the price volatility in dairy and other sectors will be tempered by these mechanisms. In addition, they say, many private companies will begin to amass the kinds of stockpiles the federal government once maintained to stabilize prices.
"Eventually, I think private companies will find that storing grain can protect them from shortages," says Dermot Hayes, an Iowa State University economist. "They'll realize that they can make a lot of money in leaner years."
But until these changes take hold, agriculture in general, and the $40-billion dairy industry in particular, will be buffeted by wild price swings.
"There's been more change in the last five years in the dairy industry than in any time in history," says Brad Legreid, executive director of the Wisconsin Dairy Products Association. "There are a number of small dairy producers that are just barely hanging on."
Indeed, Mr. Legreid says, the number of Wisconsin dairy farmers has declined from 40,000 to about 25,000 in that time. Although much of the drop can be attributed to increased efficiency, he says, some of it can be traced to the difficulties of managing the risks in an unbridled market.
But across America's breadbasket, many farmers are warming to the concept of free-market agriculture, despite its pitfalls. If current export conditions continue, and the weather holds up, some experts say the transition might even be pleasant.
"There may be farmers out there who aren't concerned about these changes, but I haven't met them," Professor Hayes says. "At the same time, 90 percent of them seem to view the future in a positive light. Farmers are a pretty resilient bunch."