Less Government, More Dairy

Credit Wisconsin Congressmen for turning to the dairy industry in recent weeks for input on dairy policy in the upcoming US Farm Bill. The wonky nuances of plans such as the Senate Agriculture Committee bill passed in April may make dairy policy look impenetrable, but the decision before Dairy State Congressmen is easy:

Do you support more government involvement in dairy pricing and marketing, or less?

Most of the dairy policy ideas in the Senate committee bill reflect the Dairy Security Act (H.R. 3062) developed last summer by US Rep. Collin Peterson. Both bills have one key proposal fueling a hot debate among dairy farmers and processors.

That proposal is a “Dairy Market Stabilization Program,” a supply management plan administered by USDA to curb milk production growth by reducing dairy farmer milk check payments when farm margins are low.

Or as dairy economists Andy Novakovic and Mark Stephenson summarize in a new Information Letter to industry, “The DMSP [Dairy Market Stabilization Program] punishes farmers for increasing 4.25% or more (when margins are low).”

In the Senate Committee’s farm bill, Dairy Market Stabilization is required when dairy farmers sign up for a proposed Dairy Production Margin Protection Program.

There’s widespread support for the concept of margin protection, an insurance-like program that pays out when farm margins drop to certain trigger levels. In the Senate Committee’s bill, a basic level of margin protection is provided without premiums to all dairy farmers. In addition, farmers can voluntarily select supplemental margin protection and choose a margin level and an amount of milk production to cover, based on a schedule of premium payments per hundredweight.

Margin protection effectively replaces three USDA programs, Milk Income Loss Contract, the Dairy Product Price Support Program, and Dairy Export Incentive Program for a net gain in moving dairy toward free market product innovation, farmer control of margins and more equitable treatment of farms of varying sizes.

Unfortunately, margin protection is shackled to Dairy Market Stabilization, or supply management, in the Senate Committee bill.

This supply management proposal places USDA squarely between the milk buyer and dairy farmer, moving a percentage of a farm’s milk check (from 2 percent and 8 percent) to USDA when dairy margins fall to certain trigger levels. Farms that reduce their milk production below percentages of a defined “base” level are exempted from this take-away.

With these dairy farmer dollars, USDA is expected to purchase dairy products for donation to food banks or other programs the secretary deems appropriate, or develop plans to expand consumption and build demand for dairy product, but not to duplicate the efforts of the National Dairy Board.

A carefully-crafted margin protection program doesn’t require supply management. Removing Dairy Market Stabilization from the Senate Committee’s bill would significantly reduce government’s role in the dairy industry and begin dairy’s transition to a market-oriented foodmaker focused on international markets, product innovation and new on-farm and in-plant technology.

As this column has previously noted, US dairy exports have served as a free market improvement over supply management, tightening dairy product demand and strengthening milk prices. In the 1990s, US dairy exports hovered at 4-5% of all US milk solids, but the last decade saw a steady rise to 9.3 percent in 2006, 9.8 percent in 2007, 11 percent in 2008, a retraction to 9.3 percent in 2009 and strong growth to 13 percent of all US milk solids in 2011.

In recent years, US manufacturers have made serious gains in world markets, sending a message that our nation’s safe, abundant milk supply will serve as a consistent, quality resource for international buyers.
Supply management administered by the US government would undercut these gains and chill international confidence in our commitment to markets.

Dairy farms poised for growth are offered mixed signals in the Senate Committee’s farm bill. Margin protection provides new tools to enhance stability and financial management, while “dairy stabilization” punishes management decisions regarding growth. JU

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org