(By Marin Bozic, John Newton, Andrew M. Novaković, Mark W. Stephenson, and Cameron S. Thraen.)
COLUMBUS — The dairy subtitle of the new agricultural act offers a total revamping of the safety nets that have been in place for the dairy sector going back to the middle of the 20th Century.
The Margin Protection Program for Dairy Producers (MPP) might be considered a variation of the countercyclical payments (MILC) that began in 2002, but it is notably different in two important ways.
First, it substitutes Milk Income Over Feed Costs for farm price as the measure by which we economically evaluate market conditions and support dairy farms. Second, it does not restrict eligibility for the program by farm size. Larger farms have to pay a higher premium, but they are not categorically limited in participation.
The Dairy Product Donation Program uses the mechanics of the old Dairy Price Support Program to purchase dairy products, but it really does so as an extension of existing programs that allow USDA to purchase dairy products on behalf of a variety of food assistance programs.
Advocates of a new approach argued that the limitations of existing programs were vividly revealed during the economic events of 2009, and repeated in 2012. Hence, they argued, bold new programs are needed. Whether the programs proposed here will prove to be the answer farmers seek is something that will be debated and estimated, but we won’t really know unless and until they are tried.
The Agricultural Act of 2014 was passed by the U.S. House of Representatives Jan. 29 and was passed by the Senate Feb. 4 and signed by the president Feb. 7.
The dairy provisions of the act are primarily a variation of H.R. 2642. Existing safety net programs are repealed and replaced with two new programs:
(Note that the DPPSP, passed in the Food, Conservation and Energy Act of 2008 (i.e. 2008 farm bill) is repealed, but the permanent Dairy Price Support Program that is contained in the 1949 Agricultural Act is not. MILC and DEIP do not have underlying permanent authority and are forever gone.)
Certain other authorities are continued, including extensions of:
The new programs are:
In addition, there is language related to the promulgation of a federal milk marketing order that covers California. The act also repeals the authority for a federal milk marketing order review commission. Originally authorized in the Food, Conservation and Energy of 2008, the commission was never funded and never appointed.
The new MPP contains several basic elements that combine to determine how, when and how much money dairy farmers can receive in periods of financial stress.
The main items are:
While the new dairy title was designed in good faith and with great attention to detail, some unintended consequences may still occur:
A possible adverse side effect is the crowding out of private risk markets by subsidized government-provided margin insurance. In other words, if dairy farmers use the MPP heavily and stop participating in CME futures markets, those markets will lose valuable participants and liquidity that could threaten their viability.
As described earlier, insurable production at any single location is determined by a combination of the historical milk production over 2011-2013 and the subsequent growth in national milk per cow.However, producers who choose to grow their business by building a brand new separate dairy operation at a new location would likely be able to enroll that operation in the program under the provisions governing “new entrants.” The act, as is commonly done for crops programs, includes a reconstitution provision.
This purpose of this provision is to allow USDA to prohibit or control farmers who attempt to gain more benefits by reorganizing their business structure. USDA will clearly specify what producers may and may not do with respect to how they expand their milk production and qualify it for the MPP program. Nevertheless, it is likely that some opportunity will exists for new dairy farm businesses started by people already in dairy farming.
First are the basic economics of milking a cow. When a cow’s production no longer justifies the cost of feeding and keeping her, she will be culled. Second, even if the cow is carrying her own economic weight, culling of cows on the margin may still be necessary due to cash flow needs on the farm.Third, cows on the margin may be culled or culled early because of favorable cull cow prices, which is currently the situation due to tight beef supplies. Because indemnities received under MPP should lessen cash flow challenges, culling that might otherwise have occurred is forestalled.
This is consistent with the whole point of the program, but the effect is to maintain milk production and potentially prolong the duration of low margin periods. This is no different than the effect of the MILC program.
The extent to which these kinds of countercyclical subsidy programs impact milk supply is subject to debate. Existing research about this effect is inconclusive. Further research will no doubt examine if this effect will or does materialize and to what degree.
LGM-D is based on actuarially fair premium calculation methods. Observers of that program know that its premiums vary each month, depending on the outlook for milk and feed prices, and they generally have been high enough to give most farmers pause.We cannot say how heavily subsidized the premiums for MPP are, but it is easy to guess that, over a period of several years, the indemnities paid out will exceed the premiums collected. Indeed, it is quite possible that the level of taxpayer subsidy will be very large. If this is true, it implies that the MPP will reduce, and quite possibly very significantly reduce, market risk in dairy farming.
It will not reduce the risks of disease or local weather effects faced more individually or regionally, but it would reduce the risk of price changes that are disadvantageous to all farmers.
To the extent this is true, it could give incentives for investments or production decisions that otherwise would be deemed too risky.
This means more production than would otherwise occur, which in turn means a lower price structure for milk.
These kinds of effects are not unique to MPP. They can and historically did occur with the Dairy Price Support Program. The issue is not the design of the program, per se, but the extent to which a program subsidizes long term risks.
In 2009, the situation could be described as declining milk prices relative to feed prices. In 2012, this situation might more aptly be described as rising feed prices relative to milk prices. The trigger for the use of DPDP does not distinguish the cause of a low MMP margin.
Much of the public discussion of the previous versions of a new dairy program seemed to assume that a low margin necessarily means a low milk price, meaning low relative to historical patterns of milk price.
An incremental government demand presumably will increase the milk price relative to feed prices and thereby raise the margin.
However, if the margin is low as a result of rising and high feed prices with an already adequate or even high milk price, as was the 2012 drought experience, it is not clear how effective these purchases will be in boosting the milk price and in turn the MMP margin.
It is not clear how much an already high milk price can be further accelerated. Clearly, strengthening dairy product demand will not reduce high feed prices in such situations.
(Marin Bozic is assistant professor in the Department of Applied Economics at the University of Minnesota and associate director of Midwest Dairy Foods Research Center. John Newton is assistant professor in the Department of Agricultural and Consumer Economics at the University of Illinois Urbana Champaign. Andrew M. Novaković is the E.V. Baker Professor of Agricultural Economics in in the Charles H. Dyson School of Applied Economics and Management at Cornell University. Mark W. Stephenson is director of dairy policy analysis and director of the Center for Dairy Profitability at the University of Wisconsin. Cameron S. Thraen is associate professor in the Department of Agricultural, Environmental and Development Economics at Ohio State University.)