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Sunday, March 28, 2010

Previewing Dairy Policy Options for the Next Farm Bill

Dennis A. Shields
Specialist in Agricultural Policy

Financial stress in the dairy industry in 2009, brought on largely by sharply lower milk prices,
activated standing federal programs to support dairy farmers. In calendar year 2009, the federal
government spent more than $1 billion to support the industry through the Milk Income Loss
Contract (MILC) Program, the Dairy Product Price Support Program (DPPSP), and the Dairy
Export Incentive Program (DEIP). Following appeals from dairy farmers for more financial
assistance, Congress granted another $350 million in October 2009 in the form of supplemental
payments to dairy farmers and government purchases of dairy products.

While farm milk prices have increased since summer 2009, the financial stress seen throughout
the year and similar previous episodes have led the industry and Congress to reconsider how to
deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members
have voiced interest in developing alternatives to current polices and incorporating them as part
of the next omnibus farm bill in 2011-2012.

The dairy industry is currently developing or advocating a variety of policy changes in response
to the difficult financial situation affecting dairy farmers beginning in late 2008. All of the
proposals discussed in this report—loosely categorized as either supply management, marketbased,
or tiered-pricing—have implications for U.S. dairy farmers, competitiveness of the U.S.
dairy industry, and international trade.

Under supply management, the Holstein Association's proposed Dairy Price Stabilization
Program (DPSP) attempts to prevent depressed farm milk prices while reducing price volatility
through supply control. Supporters of price stabilization and supply control say that inherent
incentives to overproduce need to be offset by a program to control supplies in a more measured
way. Critics of supply management, including dairy processors, contend that supply control could
reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, and raise
consumer prices because, they argue, a pricing system based on supply control and/or cost of
production potentially rewards inefficiency.

Under the market-based approach, a (still developing) proposal by the National Milk Producers
Federation (NMPF) represents an opposing view on how the federal government should address
the problem of farm milk price volatility and periodic financial stress for dairy farmers. The
NMPF plan contends that, because milk prices and supplies cannot be successfully managed
administratively, the best approach is to provide a government program that helps farmers
manage risk associated with volatile prices of milk and feed. Specifically, a new "safety net"
would be established to protect a dairy farmer's "margin"—that is, the farm price of milk minus
production costs—regardless of current price levels. Critics of a policy such as the NMPF
proposal expect that incentives to overproduce will aggravate the financial woes of the dairy
industry indefinitely, so controlling potential price variability and combating depressed farm
prices with supply management is necessary for the long-term financial health of producers.

The third area of potential policy change is to alter the current pricing approach used in federal
milk marketing orders (FMMOs). For example, one proposed change to base milk pricing in
FMMOs on the cost of milk production (S. 1645) would imply higher prices received by dairy
farmers. However, some are concerned that the long-run competitiveness and stability of the U.S.
dairy industry could be at risk because of the unknown effectiveness of provisions to discourage

Date of Report: March 25, 2010
Number of Pages: 18
Order Number: R41141
Price: $29.95

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