WASHINGTON, March 16, 2016 - With very large farms now producing most of the nation’s milk at dramatically lower cost than smaller, single-family operations, the challenge of designing federal dairy support policy has become more complicated, says a new report from USDA’s Economic Research Service (ERS).

The median size of dairy farms (half above, half below the median) ballooned from 80 cows in 1987 to 900 cows in 2012. Overall, consolidation reduced the average milk production cost by nearly 19 percent between 1998 and 2012, ERS says. The cost of producing milk on farms with 2,000 or more head is 24 percent below that for farms with fewer than 1,000 head, it adds.

Such a sharp reduction in costs has allowed the U.S. to become competitive with the world’s lowest-cost milk exporters, such as New Zealand, in a growing global market. Total U.S. dairy exports were $7.2 billion in 2014, up from $1 billion in 2003. But more reliance on exports also introduces greater potential for price volatility, says the study, written by ERS agricultural economists James M. MacDonald, Jerry Cessna and Roberto Mosheim.

The 2014 farm bill’s Dairy Margin Protection Program (MPP-Dairy) was a response to volatility in milk and feed prices, “particularly in 2009 when falling milk prices combined with still-high feed prices to impose unprecedented financial stress on the dairy industry,” they say. In contrast to prior dairy policy, it targets fluctuations in the margin between milk and feed prices.

The new program appears useful for the larger farms that produce most of the nation’s milk. “Almost 25,000 farms – 55 percent of licensed dairy operations, accounting for about 80 percent of 2014 U.S. milk production – enrolled in the program for 2015 coverage,” the report says. Some 45 percent of enrollees – “representing more than half of the historic milk production of enrolled farms” – chose catastrophic coverage for a $100 administrative fee, while 42 percent elected to pay premiums for coverage of $6 and $6.50 margins, according to the report.

On the other hand, MPP-Dairy is less popular with some farmers. The National Farmers Union (NFU), traditionally an advocate for smaller-scale operations, has called the program a failure, saying in a resolution adopted at its 2016 annual meeting that “USDA should refund the millions that dairy farmers paid into the program since 2014.”

NFU delegates created an “Emergency Dairy Price Committee” to develop a new program. The committee was told to consider asking Agriculture Secretary Tom Vilsack to declare an emergency and suspend the program. MPP-Dairy “trigger levels are ineffective and do not reflect actual on farm margins that are well below production costs nationwide,” it said.

The position is a reversal of NFU’s 2015 platform support for MPP-Dairy. Just over a year ago, NFU President Roger Johnson said that “the warm reception the new program was receiving from family farmers was clear evidence that they need good risk management tools in hand.” He added, “Family-run dairy farms across the country embraced this program in large numbers, because farmers need risk management tools to handle situations beyond their control.”

The National Milk Producers Federation (NMPF), which proposed many of its features, continues to support the program “because it offers farmers a measure of protection against either low milk prices or high feed costs, or the combination,” Senior Vice President Chris Galen told Agri-Pulse in an email. “While conditions in the past year have been poor, they have been nowhere near the catastrophically bad conditions we saw in 2009 and 2012. Hence, the 2015/16 conditions haven’t really put the MPP to the test for the protection it offers.”

He points out that the previous dairy product price support program and the Milk Income Loss Contract (MILC) program would not have been triggered in 2015. “Those programs were replaced in the current farm bill precisely because they were ineffective, and would remain so under current market conditions,” he says.

“All that said, there certainly are ways the MPP program can be improved, and we have been in continual discussions with USDA on a number of items. We will continue to examine other aspects, such as making the cost of various levels of supplemental coverage more affordable,” Galen adds. “Obviously, any significant changes would have to involve Congress reopening the farm bill, and that is not likely to happen this year.”


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