WASHINGTON, May 2, 2012 -The most ambitious effort to restructure dairy programs in a generation overcame its first hurdle last week when the Senate Agriculture Committee approved a farm bill that incorporates the key features of a National Milk Producers Federation (NMPF) proposal.

But the relative ease of passage disguises a continuing dispute over the “market stabilization” mechanism designed to deter farmers from increasing milk production when supplies are excessive and margins low.

Sen. Michael Bennet, D-Colo., whose dairy farmers would like to increase production for a big new Leprino Foods cheese plant, proposed –but withdrew ‑ an amendment that would have scrapped the penalty for increased production when farm margins are seriously depressed. However, the amendment would have retained a stand-alone milk margin insurance plan.

Bennet’s measure is likely to be raised again when the full Senate takes up the bill. But the NMPF said that the amendment would cost dairy farmers an additional $429 million in premium costs for margin insurance over the next five years.

Whether it’s called “market stabilization” or “supply management,” the mechanism was at the center of a House Agriculture subcommittee hearing Thursday afternoon, even as the Senate committee was voting on its farm bill. By dampening production at times, the provision would “harm a growing dairy export business and will discourage investment into more domestic processing facilities,” said CEO Jon Davis of Davisco Foods International, LeSueur, Minn.

He said his family-owned business has delayed expansion, adding, “Most if not all of the next wave of dairy processing investment is on hold. We simply can't afford to commit capital when we don’t know if we will have the milk supply to operate those potential new investments.”

He argued that margin insurance “without imposing a supply management program on the dairy industry . . . could easily be offered within the limits of the dairy [budget] baseline.”

But Rep. Collin C. Peterson, D-Minn., who proposed the NMPF-backed plan in a bill last year, argued that the mechanism was essential to meet budgetary constraints.

“I think it would cost us $250 million if we didn’t have market stabilization,” he said. “If you take stabilization out, you’re not going to have a bill.”

The Congressional Budget Office has estimated that the Senate version would be $153 million less costly over the next five years, compared with existing dairy programs, or $71 million in 10 years.

Peterson also challenged assertions that the bill would harm exports.

“What mystifies me about IDFA,” he said of the International Dairy Foods Association, the principal opponent of his proposal, “is that we have made this more market-oriented, more export-oriented; 75 to 80 percent of what they have been asking for is in this bill.”

Scott Brown, a University of Missouri agricultural economist who regularly advises Congress from his post at the Food and Agricultural Policy Research Institute, gave the subcommittee an analysis that seemed to back up Peterson.

The stabilization plan “helps from a government outlay standpoint,” he said. “That's the important feature that’s brought market stabilization.” Without it, he said, “you can imagine very low margin outcomes creating very large outlays. We don’t expect margin protection to trigger very often, so the effect on prices would be very small.”

NMPF President Jerry Kozak used the hearing to challenge the term “supply management” as “a total misnomer.” He insisted, “This is not a Canadian-style quota system. It does not insulate our farmers from the world.”

The proposal was defended by several Democrats, but IDFA’s opposition found sympathy from Republicans in the House hearing, especially those from the Southeast, and Rep. David Scott, D-Ga., who once chaired the dairy subcommittee. “I am particularly concerned that the processors, who are operating on very thin margins,” would increase prices if the “market stabilization” feature were to boost farm prices, he said.

Dairy farmer Patrick “Joe” Wright of Avon Park, Fla., may have captured the sentiment of many skeptics. “I’m really surprised there is that much support for this, but there genuinely, really is,” he said. He proposed an exemption for milk-deficit areas but added, “I believe enough producers out west will sign up that it will moderate the volatility and the entire industry would benefit.”

In the Senate, Bennet’s skepticism about “supply management” was echoed by Sen. Kirsten Gillibrand, D-N.Y.

“Now, many of us share this concern about capping production because we want to export our dairy, so we don’t love capping production,” she said. Gillibrand also objected to the cost of margin insurance, especially for small-scale farms. “I’m very worried about more small farms going out of business,” she said. “Once you consolidate an industry, the next step is outsourcing. I don’t ever want to have to buy my milk from China.”

The Senate committee bill includes an amendment by Sens. Mike Johanns, R-Neb., and Robert Casey, D-Pa., calling on USDA’s chief economist to report by December 2016 on how the stabilization feature affected producers, processors and customers; the impact it had on farm structure and regional distribution of dairy farms, and whether it affected the competitive position of the U.S. dairy industry in international markets.


Original story printed in May 2nd, 2012 Agri-Pulse Newsletter.

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