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Tuesday, November 1, 2011

Dairy Farm Support: Legislative Proposals in the 112th Congress

Dennis A. Shields
Specialist in Agricultural Policy

The question of how federal policies deal with financial stress encountered by dairy farmers has led many in Congress to reconsider federal policy for supporting them. In the 112th Congress, several Members have introduced legislation for alternatives to current federal programs, which expire in 2012. Proposed dairy legislation has the potential to eliminate some dairy programs, modify others, or replace them with a new approach to dairy farm support.

The Dairy Security Act of 2011 (H.R. 3062, Peterson et al.) would replace the current dairy product price supports and the income support program (Milk Income Loss Contract or MILC) with a new program that delivers farm payments triggered by low margins (milk price minus feed costs). To discourage excess milk production during times of low margins, producers participating in the margin program would be subject to the Dairy Market Stabilization Program. When the stabilization program is activated (only during times of low margins), producers would not receive the market revenue for milk produced in excess of a portion of the farm’s base production amount. Instead, that revenue would be sent to the federal government to be used for purchasing dairy products to increase demand. A variation of the plan, the Dairy Pricing Reform and Farmer Protection Act of 2011 (S. 1715, Gillibrand) would make margin payments available, but the penalty for overproduction would not apply in areas where dairy product production is expanding faster than milk output. For both bills, farmers who elect not to participate in the margin program could manage their own income and price risk with strategies of their choosing.

Reauthorizing and enhancing the MILC program is also under consideration. MILC payments are made to producers when the farm milk price drops below a target price of $16.94 per hundredweight. The Dairy Producer Income Protection Act of 2011 (S. 1714, Gillibrand) would boost the target price using the Consumer Price Index. The MILC program has been criticized for offering only limited protection against low milk prices for large farms because payments are limited up to a certain level of production.

The Dairy Advancement Act of 2011 (S. 1682, Casey) would also maintain the MILC program but offer a subsidy for the purchase of an existing dairy margin insurance policy (Livestock Gross Margin for Dairy) as an alternative for producers. The bill would also increase product price reporting and provide loan guarantees for processors to acquire new equipment and technologies.

Proposed legislation would also affect federal milk marketing orders (FMMOs), which regulate minimum farm prices of milk in many regions. The Federal Milk Marketing Improvement Act of 2011 (S. 1640, Casey) would require use of milk costs of production to determine minimum milk prices under the FMMOs in order to increase milk prices and dairy farm returns. The remaining bills take a different approach, focusing instead on changing how order minimum prices are determined, moving from the current end-product pricing method to one that uses competitive pay prices (actual market transaction data for farm milk).

Many in the industry, including both producers and processors, have concluded that some change is needed in FMMOs, although the degree of desired change varies substantially. Several proposals would require USDA to carefully study any proposed change before implementation due to the complexity of the system and potential impacts. The industry is not unified on how to address income support policy. Cost considerations, familiarity with existing and proposed programs, and expectations on how producers might benefit by size of farm are likely factors in how dairy policy is developed in the 112th Congress.

Date of Report: October 28, 2011
Number of Pages: 13
Order Number: R42065
Price: $29.95

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