WASHINGTON, Jan 30, 2014 – Most of the controversy over dairy policy during farm bill consideration surrounded proposals to prevent recurrence of the cost-price squeeze that decimated dairy farmers in 2008 and temper the volatility of dairy markets in recent years.

The farm bill conference report that awaits Senate approval and the president’s signature takes a two-part approach but eliminates a Senate-passed “market stabilization” mechanism that drew the wrath of Speaker of the House John Boehner, R-Ohio, and many milk processors.

The principal feature of the new dairy program, which USDA is directed to have in place by September, is a subsidized insurance-like scheme that makes payments to producers at times of compressed margins between the cost of feed and the price of farmers’ milk. “The question is whether the market incentives built into the system are going to be effective enough to blunt any oversupply situation if we ever get into that kind of a situation,” Rep. Collin C. Peterson, D-Minn., told reporters Wednesday. But it also gives USDA new authority to buy dairy products – presumably cheese and milk powder – in consumer-ready packages to donate to food banks.

“That’s probably the biggest way to deal with the oversupply and we haven’t had it (the authority) before,” Peterson says. “This may work very well, but we’re not going to know until when and if we get into an oversupply situation again.”

USDA has long had, and frequently exercised, authority to buy up surplus cheese, butter and powder to bolster depressed milk prices. But it was based on acquiring commodities in bulk quantities and storing them, often for long periods of time. The new farm bill language specifies that products will be in commercial form. “This is not your father’s price support program,” says Chris Galen of the National Milk Producers Federation (NMPF). “The key is that these are going to consumer-ready products, not 40-lb. blocks of cheese or 50-lb. bags of powder.”

The new Dairy Product Donation Program would be triggered in the event of extremely low operating margins. It would activate only when margins are below $4/cwt. for two consecutive months. USDA would buy products for three consecutive months or until margins rebound above $4. The program would be halted if U.S. dairy prices exceed international prices by more than 5 percent. Food banks or other non-profit groups receiving donated products would be prohibited from selling the products back into commercial markets.

Presumably, USDA would tend to buy and distribute cheddar or American cheese in consumer-size packs (1-lb. or 5-lbs.), possibly ready-to-reconstitute low-fat milk powder in similar sizes. Theoretically but less likely, it might buy yogurt and other dairy foods – depending on the nature of requests from food banks or other recipients and pressure from industry eager to sell products.

Peterson said he brought up the idea of the purchase program while “trying to smooth over the rough edges with National Milk when I had to explain to them that, without something different, we would never get a bill. It became obvious to me, with Boehner out there making all this noise, we were never going to finalize this bill.”

He sees the purchase program as “a kind of backstop” for the insurance program. “It gives the secretary a lot more flexibility to go in and buy commercial products. It gives us more baseline.” The Congressional Budget Office estimated the 10-year cost of the dairy subtitle at $912 million, about triple its prospective cost estimate of $302 million for the Senate version last year. “It made me more comfortable, it made National Milk more comfortable and it was something everybody could live with,” Peterson says.

Whether margin insurance and a backstop product buying program will even out the swings in milk markets will be the real test of the new legislation.

“Dairy farmers need protection against volatility,” says Rep. Ron Kind, D-Wis., whose district is No. 3 in the nation in milk production. “I’m not sure this is going to provide that.” Dairy farmers typically increase production when prices are good, he notes, asking whether the new bill contains “enough incentives to discourage a ramp-up in production when prices do recover. Otherwise, they foster this cyclical nature – a roller coaster ride. Are efforts to ‘disincent’ that ramp-up in production adequate? Whether that’s enough overcome to overcome market forces is yet to be determined. We’ll be able to tell in the coming years,” Kind told reporters Wednesday.


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