The Dairy Digest - HighGround Dairy

USDA, Time to Sunset the Farmers to Families Food Box Program

Written by Lucas Fuess | Jan 25, 2021 4:28:00 PM

A new year has arrived, and with it, justified celebration for the end of what was a difficult 2020 for many. From the stark disruption and fear at the beginning of the pandemic to Zoom becoming one of the most used programs at work, and to unprecedented volatility as various forces disrupted normal market behavior, it was certainly a year for the history books. Some additional joy was added to the year-end holidays as COVID-19 vaccines gained approval and began distribution in December, the beginning of the end of what is hopefully a once-in-a-lifetime pandemic. However, there is one more thing on my personal wish list that I hope can materialize in 2021…

While the USDA Farmers to Families Food Box Program has assisted tens of millions of families in need, the program has wreaked havoc in cheese markets throughout the past nine months. The massive spot block Cheddar correction from close to $1.00 per pound to a record $3.00 per pound was an extraordinary move that will struggle to be replicated in the future. Farmers who are compensated largely on a Class III basis saw projected milk prices move from hugely unprofitable to higher than imaginable. Anyone with exposure in the cheese or Class III markets struggled to deal with physical and financial positions as the market moved wildly.

Each new announcement of a Food Box round saw industry participants brace for the worst. The unbearable volatility made price forecasting impossible.

USDA understood that the volatility created by this quickly perceived and enacted program was not sustainable and moved to implement measures to reduce the quick dairy product draw and its impacts on price. In later rounds of the program, all boxes became “combination boxes” that included produce, meat and dairy products instead of the solely “dairy product” boxes allowed in initial rounds. Rules were defined to create transparency and help manage exactly what went into the boxes; the regulations around dairy product contents were ultimately expanded to allow for a wide variety of cheeses, manufactured products and fluid milk to reduce the pull on the Cheddar market. While well intentioned, the measures themselves could not eliminate the price impact that round announcements caused.

On Jan. 4, the agency announced a fifth round of the program, funded by the COVID-19 stimulus bill passed in late December that provided billions of dollars for food, agriculture and nutrition programs. Sure enough, Chicago Mercantile Exchange (CME) spot and futures markets raced higher in the first and second weeks of the month to remind the industry that the 2020 volatility did not end with the holidays and the drop of the Times Square Ball on New Year’s Eve. The market ultimately ran out of steam when the industry realized that milk production has soared in recent months, cheese production was sharply higher and vendors indicated they would procure cheaper Class II products containing fewer milk solids and more moisture than natural cheese for the bulk of the dairy share of the box. But it was a reminder that government intervention remained a key wildcard to watch for in 2021.

USDA surprised the market earlier this week when it announced the approved contractors for this round. While $1.5 billion was budgeted, only $354.5 million will be spent in the initial weeks. Thirty-six vendors received approval to distribute 11.1 million boxes. CME spot Cheddar along with Class III milk and cheese futures markets posted two consecutive extremely bearish sessions on the news that only a quarter of the expected funding would be used in the first few weeks of the round. It is likely that USDA will announce additional contract awards via subsequent announcements in February and March, keeping the market on edge throughout Q1.

So, my personal desire for this year? The elimination of government intervention of this magnitude would be beneficial to the industry and reduce historic market volatility. There are other tried and true ways that USDA can fund food assistance programs without the ensuing impact on prices, including the SNAP and WIC programs that have existed in some form for decades. While farmers benefited from higher Class III prices in 2020, negative producer price differentials have created the need to re-examine the Class I (fluid) calculation yet again. Higher margins caused rapid herd size, milk yield and component growth, which could crash prices later this year and hurt overall farmer profitability throughout 2021, especially when combined with the highest feed costs in several years. There are, of course, some who have benefited from the volatile markets, but the extreme sentiment and price shifts on a seemingly weekly basis have created more whiplash than has been worth.

It is possible that President Biden and Secretary-elect Vilsack shift funding away from food boxes and into the traditional nutritional support programs. If not, and if USDA decides to fund the food boxes indefinitely, it makes sense to determine how the market can adjust to deal with government intervention and its ensuing untenable volatility. Perhaps it is time that the CME create a barrel Cheddar futures contract to allow for market participants to hedge the specific price index their exposure is in, or to manage the volatile block/barrel spread risk that has made risk management more difficult in recent years. Alternatively, the elimination of the spot barrel Cheddar market altogether and the creation of a single cheese price index for the industry to create basis contracts around is an option. These are, of course, ideas that could happen even if the Food Box program was suspended, and ones that could better allow market participants to manage cheese price risk regardless of where the volatility is stemming from.

Market volatility is not inherently bad — but when it is driven by government intervention creating risk that cannot be planned or accounted for, it becomes too disruptive to the overall market, and participants shy away from using the tools altogether. USDA should fund nutrition assistance programs via the traditional methods to reduce unnecessary intervention and volatility.

 

Reprinted with permission from the Jan. 22, 2021, edition of CHEESE MARKET NEWS®; © Copyright 2021 Quarne Publishing LLC; (608) 288-9090; www.cheesemarketnews.com’