The dairy program compromise in the farm bill conference report released yesterday does away with decades of USDA milk price support programs and replaces them with an insurance-like system to protect dairy farmers when the margin between feed costs and milk prices is below profitable levels.

If approved by Congress and signed by the president, the bill hands victories to both major dairy trade groups – the National Milk Producers Federation, which trotted out the insurance idea more than four years ago, and the International Dairy Foods Association, which led vigorous opposition to a “production management” mechanism designed to discourage overproduction.

Beginning in September 2014, USDA would insure the margin between the average cost of feed, based on soy meal, corn and alfalfa hay prices, and the national average all-milk price. Farmers could sign up to cover a margin of $4 per hundredweight at no cost (other than $100 enrollment fee) but elect to pay an increasing premium rate for insurance up to $8. A summary produced by NMPF is available here.

The premium scale was designed to favor farms with fewer than 200 cows without imposing penalties on larger-scale operations that produce most of the milk in the United States. USDA will establish each farm’s production history based on its highest annual milk production in the 2011, 2012 or 2013 calendar years, increased by the U.S. average production growth rate in subsequent years.

“Producers who expand significantly beyond average U.S. growth will not be able to protect the additional milk production under this program,” says Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison. “Beyond that, there is no significant penalty except the potentially lower market price for the additional milk sales.”

NMPF President Jim Mulhern and IDFA Senior Vice President Jerry Slominski both like the dairy provision in the farm bill.

“Despite its limitations, we believe the revised program will help address the volatility in farmers’ milk prices, as well as feed costs, and provide appropriate signals to help address supply and demand,” Mulhern said. “By limiting how much future milk production growth can be insured, the measure creates a disincentive to produce excess milk,” he said. “The mechanism used is not what we would have preferred, but it will be better than just a stand-alone margin insurance program that lacks any means to disincentivize more milk production during periods of over-supply,” he added. NMPF also approves because it “doesn’t discriminate against farms of differing sizes, or preferentially treat those in differing regions.”

Slominski said that rejection of limits on milk supplies is “a major step toward moving our dairy industry away from the failed agriculture policies of the past and toward policies of the future that will enable our entire industry to grow and capture new markets.” He also called it “good news for consumers of dairy products who will not be forced to pay unnecessarily higher prices, and good news for dairy farmers who will receive an effective and efficient safety net to help them through hard times, without our government telling them how much they can produce.” In addition, Slominski said, the new program “will allow dairy companies, particularly those that are now exporting about 15 percent of the milk produced in this country, to continue to grow and create thousands of new jobs.”

The bill also establishes a system for USDA to buy packaged dairy products during low-margin periods. It extends, through 2018, authority for the dairy checkoff, dairy forward pricing and the Dairy Indemnity Program, which pays farmers forced to destroy milk if contaminated with pesticides through no fault of the farmer. The compromise suspends the “permanent law” features of 1938 and 1949 agricultural acts that would, if implemented, increase milk prices sharply. It drops language in the House that would have repealed the permanent provisions.


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