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Monday, September 24, 2012

Dairy Policy Proposals in the 2012 Farm Bill

Randy Schnepf
Specialist in Agricultural Policy

Current U.S. federal dairy policy is based on five major programs—the Dairy Product Price Support Program (DPPSP), the Milk Income Loss Contract (MILC) Program, Federal Milk Marketing Orders, Dairy Import Tariff Rate Quotas, and the Dairy Export Incentive Program— which together are designed to provide price and income support and market stability for dairy producers. In addition, several smaller programs aid the U.S. dairy sector with market promotion, research, price reporting, risk management, and disaster assistance.

In recent years, dairy producers have argued that a simple price-based system fails to reflect the sharp increases in milk production costs, especially feed costs, that have occurred since the mid- 2000s. In response to producer concerns and to the volatile dairy price and margin developments of the past decade, both the House Agriculture Committee-reported (H.R. 6083) and the Senatepassed (S. 3240) 2012 farm bills propose replacing the current U.S. dairy programs that rely on a simple price trigger (DPPSP and MILC) with the Dairy Production Margin Protection Program (DPMPP), a new income support program based on the monthly difference (i.e., the margin) between the national average farm all-milk price and a formula-derived estimate of feed costs. According to the Congressional Budget Office (CBO), eliminating DPPSP and MILC generates enough savings to more than offset the cost of implementing the new margin-based dairy proposal.

DPMPP offers two margin protection plans: Basic Margin Protection (BMP) and Supplemental Margin Protection (SMP). BMP is a fully subsidized program, subject to an annual fee which insures at a single $4.00/hundredweight (cwt.) margin. In contrast, SMP is a partially subsidized program, subject to annual premiums, that provides higher margin protection coverage in $0.50/cwt. increments from $4.50/cwt. to $8.00/cwt. Each of the margin protection programs— BMP and SMP—has different costs, makes payments based on different milk production histories, and has different limits on how much of a producer’s milk production is covered by the margin protection program (80% for BMP, and 25% to 90% for SMP).

In general, all U.S. dairy producers are eligible to participate in the margin protection program. However, when producers elect to participate in DPMPP, their operations become subject to a milk supply stabilization program—referred to as the Dairy Market Stabilization Program (DMSP)—that reduces milk market returns when the margin falls below proposed statutory thresholds starting first at $6.00/cwt., then at $5.00/cwt., and finally at $4.00/cwt. The DMSP market stabilization proposal has generated considerable interest as a dairy supply management program and is being debated by dairy producer groups, which generally support it, and dairy processors, who oppose it.

Although the DMSP is referred to as a supply management program, it is perhaps more accurately described as a production disincentive program, since there are no production limits or quotas, and the dairy operator may continue to run his operation at any production level. Once triggered, DMSP payment reductions stay in place until one of a set of possible market conditions (referred to as suspension thresholds) is met—either the margins rise above $6.00/cwt., or U.S. prices for two basic dairy commodities (cheddar cheese or nonfat dry milk) exceed world prices by certain relative amounts, or a combination of higher margins and certain U.S.-to-international price relationships occur simultaneously.

Date of Report: September 18, 2012
Number of Pages: 30
Order Number: R42736
Price: $29.95

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