Tuesday, May 15, 2012

How will the 2012 Farm Bill Impact Dairy Farmers?

Dairy producers have their eye on Congress to see what dairy policy will be included in the 2012 Farm Bill. The Farm Bill sets agriculture policy for five years and involves a variety of programs from food and nutrition funding to crop insurance to commodity programs.

The 2008 Farm Bill included the Milk Income Loss Contract (MILC) Program which was established in the 2003 Farm Bill. The MILC program is designed to compensate dairy farmers when the milk price drops too low or feed prices get too high or a combination of both. High feed costs have triggered MILC payments in February, March and April 2012. Dairy farmers can receive this supplement for up to 2.985 million pounds of milk per fiscal year which is about the quantity a 170 cow herd would produce in one year.

The policy on the table for the 2012 Farm Bill is the Dairy Security Act which has two parts:
  1. Dairy Production Margin Protection Program – an insurance program which offers dairy farmers a basic level of coverage against low margins (difference between milk price and feed price) and a supplemental insurance option that can be purchased for an additional cost.

  1. Market Stabilization Program that requires dairy farmers to reduce milk production when there is too much milk supply in the U.S. causing a decrease in the price paid to farmers. This works by substantially decreasing the price farmers get paid for a portion of their milk creating an economic incentive to cut milk production.

If farmers want to participate in the Margin Protection insurance program, they must also enroll in the Market Stabilization program. The current MILC program would be eliminated. No other commodity group is asked to participate in a supply management program in order to have access to an insurance program.

Like the MILC program, the Margin Protection insurance program is aimed to benefit farms milking 200 or fewer cows. The insurance rates for the first 4 million pounds of annual milk production is set at a lower rate and production above 4 million pounds requires a higher premium.  

Market Stabilization or supply management might sound good in theory, but this policy creates a number of challenges. For example;
  • Over 13% of U.S. milk is exported. How will limiting U.S. milk production impact our ability to consistently supply other countries with dairy products? The world population is growing and so is the demand for dairy. If the U.S. doesn’t supply dairy products then other countries will step in and take our market share.
  • There are regions in the U.S. that don’t have enough milk supply to meet demand and other regions that have too much milk supply. Does forcing producers to cut production in a milk deficit region make sense?
  • If the price of U.S. milk products becomes too costly, food processors will purchase dairy ingredients from other countries and consumers will purchase fewer dairy products in the grocery store.
  • Dairy cows can’t just be turned on and off as milk supply/demand changes.
Economists have run hundreds of scenarios through economic models examining the Dairy Security Act. The results show this policy will cause a decrease in the overall milk price paid to dairy farmers.

The bottom line is no government program is going to make it more profitable to be a dairy farmer. The outcome of government controlling the supply or demand of any product has consequences. As dairy producers and consumers, we’ve seen the negative impact of corn ethanol policy in this country. The U.S. government has mandated a demand for corn ethanol which in turn has pushed the price of cattle feed so high that it’s driving livestock and dairy producers out of business.

I would rather see a change in the federal milk pricing system which would allow dairy farmers to receive a consistently fair price for milk and spread the risk in the milk market between producers, milk processors and retail stores.  

Nationwide, dairy farmers saw their net worth drop by $20 billion between 2007 and 2009. There are hundreds of dairy farmers exiting the business annually.  Why? Because dairy farmers shoulder the majority of the risk in the milk market. Dairy farmers don’t have the option of passing on increased input costs by charging more for milk. They get the price that is determined by the Federal Order system which does not consider the cost of production. If the price a farmer is paid for milk does not cover their expenses, they go out of business. Milk processors and retail stores have the ability to cover their costs because they set the price for the products they produce and sell.

I realize there are no easy solutions. However there must be a way to develop a fair milk pricing system that allows dairy farmers to sustain their business long-term. The system in place is not working. That is evident by the number of dairy farmers going out of business every year and the number of dairy farmers who are struggling to be profitable.

I would appreciate hearing what other dairy producers think of the Dairy Security Act.

Blogs I’ve written related to this topic:

The Majority of the U.S. Farm Bill Funds Food & Nutrition Programs

Government Subsidized Ethanol Leads to Government Subsidized Milk

Milk Price – How Dairy Farmers Are Paid For Milk

Ending the Ethanol Debacle

12 comments:

  1. Holstein HamburgerMay 15, 2012 at 11:57 PM

    Finally, you’re correct that cows can’t be quickly turned on and off. The fact is, reproductive efficiency, feeding, and cow comfort have recently improved so greatly, there are just too many dairy cows. Under the right market signals, many can be instantly converted to beef cows. These technologies will still be here to rebuild the herd if or when the need arises. There will still be cycles in the market, and producers will still be able to make their own decisions whether to overproduce and ride things out in order to be situated for price improvements. The only difference is that supply management will hold THEM responsible for these actions, not the entire industry.
    I love your idea about processors and retailers sharing the milk price risk. However, it is fundamentally flawed, as producers can currently sell all the milk they want to produce, while processors do not have a guaranteed market and retailers are limited to sell only what consumers will buy. Competition is intense throughout the supply chain.
    Again, thanks for bringing attention to our common goal of long-term dairy farm sustainability.

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    1. This post was supposed to be below the next one. Sorry!

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  2. Holstein HamburgerMay 16, 2012 at 5:41 AM

    Thanks for sharing your thoughts about proposed dairy policy. I especially appreciate you sharing the fact that it will likely result in an overall lower milk price. Although NMPF would have us believe that the majority of producers support this proposal, most producers I am in contact with have pretty serious reservations about either one part (insurance) or the other (supply management). The margin insurance sounds like a great thing until one starts digging into the cost/benefit numbers. Premium subsidies from taxpayer dollars are the only thing that can make it work affordably. These dollars are gonna be pretty hard to come by, not to mention that “supporters of small government” probably wouldn’t want them anyway. You mention that no other insurance ties supply management with eligibility. However, doesn’t government ethanol policy establish a sort of “demand management” that puts a floor under crop prices? Supply management is also inherently in place, as you can’t make any more land, and Mother Nature controls the weather! And yet our government subsidizes crop insurance premiums to a degree that we can never hope to see with livestock insurance. If we want real help from the government, we need to figure out a way to burn milk in our cars. I guess they’ve figured out it’s not possible, though, since they exempted milk from SPCC requirements!

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  3. Holstein HamburgerMay 16, 2012 at 5:45 AM

    You rightly point out several challenges that can occur with supply management. However, I believe that this is where the true solution lies and would like to address some of your points. First, while I can’t argue the importance of exports when they occur, I don’t think they will enhance our price in the long run . Also, our domestic price for and supply of milk does not have nearly the effect on exports as do world economic conditions and currency valuations. Last year we had our cake and could eat it too--this year, low milk price AND decreased exports. We cannot be a long-term exporter of dairy products without a sustainable dairy industry in this country. In addition, other countries “taking our markets” will not hurt export volume as much as importing countries growing their own dairy industries. Who can blame them? We’re gladly selling them the cattle and feed.
    Regional differences and deficits in milk production do occur in this country. Since milk is perishable, areas with deficits typically produce more Class 1 and 2 milk, while areas with a surplus produce more Class 3 and 4 as it can be more easily stored and transported. The DISSA introduced by the National Dairy Producers Organization addresses this concern by exempting producers of Class 1 and 2 milk from supply management provisions. The DISSA also addresses the concern of processors purchasing milk from other countries due to supply management by turning off supply management if imports exceed exports. Consumers are currently reducing their purchases of dairy products, not because of low supplies and high prices, but because their disposable incomes have been used up at the gas pump. Could this be why the government is supporting ethanol? Farmer share of the retail dollar is also an important issue here.

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  4. Thank you for taking the time to comment on this important topic. I appreciate your point of view. I believe all dairy producers want long-term sustainability, but there are different opinions about how that will happen. Dairy policy is complex and it's difficult to get the majority of dairy producers to agree on what is best.

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    1. You hit the nail on the head. I think "difficult" underestimates the task you describe. Most producers' reaction to proposed policy ranges from apathy to objection. This, along with the relative lack of political dollars and clout, has kept the status quo in place, and keeps the processors and retailers smiling. We agree the system in place is not working. I once heard that if you are on a train and don't want to end up at its final destination, at some point you have to get off. Trying to benefit by being the last one on the train will also likely get you to where you don't want to be. What do you think can gain widespread support and yet be effective?

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    2. I wish I had the answer. I think the pricing system that determines the pay price to dairymen must be updated. It doesn't seem right that dairy processing companies and retail stores are profitable while dairymen struggle. Producers must receive a larger share of the retail dollar.

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  5. This is not brain surgery we finance are own demise our co-op s sold us down the river along with national milk

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  6. Dairy Dad says it all!
    The entire Farm Bill process is a cruel joke on dairy farmers, consumers, and taxpayers alike. It is also an insult to the democratic principles this country is supposed to stand for. A bunch of moneyed, special interest lobbyists at NMPF and IDFA and all the other groups with their same despicable agenda---which is blatant ANTI-dairy FARMER--(using money taken from farmers' milk checks, no less!!)scandalously walk the halls of Congress, buying the inside track from the politicians with the 12% "approval" ratings, to get the policies THEY want put into this "Farm" Bill, which is a joke of a name, too, because it is really the "Food Industry" Bill. It is not geared to solve our problems which all trace to dairy farmers desperately needing a fair and realistic price for their raw milk.
    You posted the latest stats on another page of your blog showing the miserable loss of dairy FARMERS and the escalation of milk per cow and increased size of dairy farms. That is not good news because we lose FARMERS! Bigger herds and more milk output per cow do not necessarily correlate with a healthier dairy economy, and it has not gotten healthier. Even the big, showcase farms that followed all the "industry" rules on how to "expand," feed the perfect rations, get more "efficient," "double your herd every 10 years to maintain your quality of life" mentality (HA!! What "quality of life"!!??) are on their knees, battered by devalued milk checks and feed bills run up on them by the government's "green" (what a scam!!) ethanol debacle!!! Who is benefiting from a dairy economy that leaves the dairyman, his family, and all those dependent on that milk check living in fear and dread of the latest BS at the CME??? How have these rotten milk checks and the accompanying loss of the traditional, family-run small dairy farm milking fewer than 100 cows helped maintain local feed mills, large animal veterinarians, repair shops, local dealers and mills, fabricators and foundries,etc---and local food? Well, the loss of money in the milk checks has not helped maintain the vibrant, creative, independent support business system we once had in rural America or the fresh, local food that consumers want! We are now a rural wasteland, for the most part following the insolvent "industry" model of milk production, dependent on bank loans and government "handouts" like taxpayer funded "MILC" payments and soon taxpayer financed "insurance" premiums geared to spread the money around the INSURANCE "industry" now!We are all racing on the sped-up treadmill we allowed the dairy "industry" to put us on! They win! We lose! Good-bye, dairy farmers, until we take control of those co-ops and set our raw milk price! If the "buyers" don't want to pay the fair price, then they don't get the milk! That is the simple "free market" business model that every other business follows except dairy farmers. If setting a realistic and fair milk price doesn't land us a milk sale from the processors, then, at least, we can all go out of business HONESTLY, for a change!!

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    1. Holstein HamburgerJune 29, 2012 at 11:45 PM

      What a great comment! I just saw where Jerry Kozak is asking for comments to post in his monthly column. It would be great if we could see some of these good common-sense comments from yourself, dairy dad, and Dairy Mom posted on the NMPF website. Maybe then politicians and others might realize that NMPF is not speaking for farmers.

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  7. Thank you for your honest comment. I agree with much of what you say. Dairy cooperatives that fund NMPF are supposed to be run by dairy producers who sit on the board of directors (elected by fellow dairymen). It doesn't seem like coops are looking out for the best interest of their producer members.

    I agree with you that high feed costs (driven up by the government-mandated ethanol industry) are forcing dairy farmers out of business. While we struggle, milk processors, retailers and everyone in the food chain profits except farmers. Unfortunately, nobody seems to care.

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Thank you for reading my blog and taking the time to comment! I’m opening the doors of our farm to share with you and enjoy engaging in discussion. Please be respectful in your comments. I reserve the right to remove posts that include name calling, slander, and vulgar language or contain links to websites that assault animal agriculture.

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