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Friday, July 26, 2013

Dairy Policy Proposals in the Next Farm Bill

Randy Schnepf
Specialist in Agricultural Policy

The 113th Congress has been considering an omnibus farm bill that would establish the direction of U.S. agricultural policy for the next five years. Among the many provisions being considered, both the Senate-passed (S. 954) and House-passed (H.R. 2642) versions of the 2013 farm bill would reshape the structure of U.S. dairy support.

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 (FMMOs), Dairy Import Tariff Rate Quotas (TRQs), and the Dairy Export Incentive Program (DEIP)—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 (particularly for corn used as feed) 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 Senate-passed (S. 954) and the House-passed (H.R. 2642) 2013 farm bills propose restructuring the traditional set of dairy programs by replacing DPPSP, MILC, and DEIP with a new income support program—a dairy margin insurance 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. In addition, the Senate bill (unlike the House bill) includes a second program linked directly to margin insurance—the Dairy Market Stabilization Program (DMSP)—which, under certain conditions, would reduce payments to participating producers for their milk marketings, when the margin falls below proposed statutory thresholds, as an incentive to restrain growth in milk marketings during periods of low margins.

The House bill (unlike the Senate bill) also proposes to repeal permanent farm law (based on 1938 and 1949 legislation) and replace it with many of the farm programs in the current bill including the dairy margin insurance program. The differences between the House and Senate farm bills will have to be worked out in conference before a final farm bill can be voted on by both chambers of Congress.

If Congress is unable to successfully resolve the differences between the House and Senate versions of the farm bill, current programs would remain in effect until their expiration. The dairy product price support program (DPPSP) will expire on December 31, 2013. In the absence of new farm legislation, upon expiration of DPPSP, the dairy price support program would revert to “permanent law,” whereby USDA would be compelled to purchase dairy products so as to support the all-milk price at 75% to 90% of a 1910-1914 parity price index. According to USDA, the all-milk parity price was $51.50 /cwt. in May 2013—75% of parity would set the USDA milkequivalent product purchase price at $38.63/cwt. or nearly double the May average all-milk farm price of $19.70/cwt. A doubling of farm prices would likely lead to a substantial hike in retail prices as well.

Date of Report: July 17, 2013
Number of Pages: 39
Order Number: R42736
Price: $29.95

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