Search Penny Hill Press

Friday, March 18, 2011

Previewing Dairy Policy Options for the Next Farm Bill

Dennis A. Shields
Specialist in Agricultural Policy

Financial stress encountered by dairy farmers in recent years has led Congress and the industry to reconsider how to deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members have voiced interest in alternatives to current federal programs (which expire in 2012). Alternative policies could either be incorporated into the next omnibus farm bill or enacted separately before expiration.

The dairy industry is currently developing or advocating a variety of policy changes. 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.

Supply management proposals such as H.R. 5288 and S. 3531, introduced in the 111
th Congress, are designed to prevent depressed farm milk prices while reducing price volatility through supply management. The National Milk Producers Federation (NMPF) also has proposed a market stabilization component as part of its comprehensive package of suggested reforms to dairy policy. Supporters of price stabilization and supply management say that inherent incentives to overproduce need to be offset by a program to manage supplies in a measured way. Critics of supply management, including dairy processors, contend that such measures 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.

The market-based approach, including a separate element of the NMPF package, 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. This approach contends that, because it is difficult to manage milk supplies and prices 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 feed costs—regardless of current price levels. Critics expect that incentives to overproduce will aggravate the financial woes of the dairy industry indefinitely, and thus argue that 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) to directly increase dairy farm revenue. For example, one potential change to base milk pricing in FMMOs on the cost of milk production (i.e., S. 1645, introduced in the 111
th Congress) 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 overproduction.

On March 3, 2011, the U.S. Department of Agriculture’s Dairy Industry Advisory Committee approved its final report to the Secretary, who established the committee to make recommendations on how USDA can best address dairy farm profitability and milk price volatility. Many of the group’s 23 recommendations fall into the market-based approach, including a recommendation for margin insurance on quantities of milk that exceed the cap for the Milk Income Loss Contract Program (MILC) and a tax-deferred savings accounts for dairy farmers. The committee narrowly passed a recommendation for a supply management program.

Date of Report: March 04, 2011
Number of Pages: 29
Order Number: R1141
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail
Penny Hill Press  or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.