IDFA’s Deep Dairy Reforms

Group's Reforms Past WCMA Test...For the Most Part

Volume 135, No. 45 Friday, May 6, 2011

Dairy producers that want to eliminate end-product pricing in federal milk marketing orders don’t know the half of it.

While producers gripe about make allowances embedded in these federal milk pricing formulas, another aspect of the formulas is currently punishing many manufacturers.

Producers receive a value for dry whey in the Class 3 milk price formula, even if their cheese processing plant doesn’t make dry whey. That dry whey value is up, way up, to $1.71/cwt. in April, and the average for the first four months of 2011 is $1.46 in milk checks, significantly higher than the 10-year average of $0.83/cwt.

These flaws in milk price formulas — make allowances that take three years and an Act of God to adjust and pay-outs to farmers for products like dry whey that most cheese plants don’t even produce — have placed reform of federal orders squarely in the center of dairy reforms for the upcoming 2012 US farm bill.

Weeks ago, International Dairy Foods Association (IDFA) released policy recommendations for the farm bill on the heels of the recommendations from National Milk Producers Federation (NMPF).

Last month, this column vetted NMPF’s “Foundation for the Future” plan against three reform principles offered by Wisconsin Cheese Makers Association, namely:
• US government involvement in dairy should diminish over time.

• Prescriptive government policies and programs should be replaced with free market tools that place business decisions and business risk in the hands of dairy producers and processors.

• Any remaining government functions for the dairy industry should be less complicated, less opaque and interfere less in the natural evolution of the global dairy industry.

The NMPF reforms for federal milk marketing orders didn’t fare well against these WCMA principles. Their complex proposals for milk pricing and pooling did not diminish the role of government over time, did not replace government oversight with a free market system and did not make government intervention in dairy easier to understand and easier to adjust.

...make allowances that take three years and an Act of God to adjust and pay-outs to farmers for products like dry whey that most cheese plants don’t even produce — have placed reform of federal orders squarely in the center of dairy reforms for the upcoming 2012 US farm bill.

IDFA, in its “Dairy Policy Recommendations” document (www.idfa. org) released April 20 has a dim view of federal orders: “This program keeps milk from moving to its highest value use and stifles product innovation; instead it results in the manufacture of dairy products based on regulations rather than market demand, which also results in greater dairy price volatility.”

The dairy processor organization proposes to end all federal milk price formulas, shifting the US dairy industry away from minimum federal order pricing and toward the free market, that is, processors would pay whatever price is necessary to procure milk. IDFA proposes a USDA survey to learn and publish the competitive prices processors pay for milk each month.

The last remaining federal pricing structure in IDFA’s plan would be the price differentials that milk bottlers pay for Class 1 (fluid) milk. This extra money from bottlers would continue to be pooled in existing federal milk marketing orders.

But this differential would be phased out over five years. After one year with today’s differentials, the dollar value of differentials would drop 20 percent a year for four years, then be dropped entirely.

The IDFA plan addresses each WCMA principle proposed above. Government involvement certainly diminishes over time. The free market is offered in place of government programs, and compared to today’s impenetrably dense federal order rules, IDFA’s plan is clean capitalism.

Like NMPF, the dairy processors at IDFA offer additional reform ideas for the 2012 farm bill. These include:
• Farm savings accounts. Dairy farms could make unlimited contributions to tax-deferred savings accounts. IDFA argues that producers today use tax-avoidance strategies in high income years such as prepaying expenses, purchasing equipment or funding expansion, and these strategies enhance milk price volatility. A tax-deferred savings account offers an alternative to milk production-enhancing strategies.

• Margin Insurance. Without noting a specific level where insurance may kick in, IDFA supports “risk insurance coverage to assist dairy producers when margins fall well below acceptable levels.” The US government would subsidize a base or ‘catastrophic’ level of coverage, and producers could purchase higher margin coverage.

• Improve USDA Programs. IDFA proposes more funds for USDA’s Livestock Gross Margin program and adding dairy to the agency’s Livestock Risk Protection program. Milk forward contracting would be continued in the new Farm Bill and opened to all milk (currently Class 1 bottlers cannot forward contract for milk). And USDA would initiate risk management education for dairy producers and a credit program to cover margin deposits required on contracts for risk management between milk buyers and producers.

• IDFA calls for the elimination of the Dairy Price Support Program and DEIP, the Dairy Export Incentive Program.

These additional IDFA reform ideas perform well against the WCMA principles proposed here. Risk management is shifted to dairy farmer control, and market distorting programs like price supports and DEIP end.

The 2012 farm bill is a unique opportunity to unleash the free-market potential of the dairy industry. WCMA offers its three principles to guide the drafting and compromising to come.

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