How will the 2012 Farm Bill Impact Dairy Farmers?

Dairy producers have their eye on Congress to see what dairy policy will be included in the 2012 Farm Bill. The Farm Bill sets agriculture policy for five years and involves a variety of programs from food and nutrition funding to crop insurance to commodity programs.

The 2008 Farm Bill included the Milk Income Loss Contract (MILC) Program which was established in the 2003 Farm Bill. The MILC program is designed to compensate dairy farmers when the milk price drops too low or feed prices get too high or a combination of both. High feed costs have triggered MILC payments in February, March and April 2012. Dairy farmers can receive this supplement for up to 2.985 million pounds of milk per fiscal year which is about the quantity a 170 cow herd would produce in one year.

The policy on the table for the 2012 Farm Bill is the Dairy Security Act which has two parts:
  1. Dairy Production Margin Protection Program – an insurance program which offers dairy farmers a basic level of coverage against low margins (difference between milk price and feed price) and a supplemental insurance option that can be purchased for an additional cost.

  1. Market Stabilization Program that requires dairy farmers to reduce milk production when there is too much milk supply in the U.S. causing a decrease in the price paid to farmers. This works by substantially decreasing the price farmers get paid for a portion of their milk creating an economic incentive to cut milk production.

If farmers want to participate in the Margin Protection insurance program, they must also enroll in the Market Stabilization program. The current MILC program would be eliminated. No other commodity group is asked to participate in a supply management program in order to have access to an insurance program.

Like the MILC program, the Margin Protection insurance program is aimed to benefit farms milking 200 or fewer cows. The insurance rates for the first 4 million pounds of annual milk production is set at a lower rate and production above 4 million pounds requires a higher premium.  

Market Stabilization or supply management might sound good in theory, but this policy creates a number of challenges. For example;
  • Over 13% of U.S. milk is exported. How will limiting U.S. milk production impact our ability to consistently supply other countries with dairy products? The world population is growing and so is the demand for dairy. If the U.S. doesn’t supply dairy products then other countries will step in and take our market share.
  • There are regions in the U.S. that don’t have enough milk supply to meet demand and other regions that have too much milk supply. Does forcing producers to cut production in a milk deficit region make sense?
  • If the price of U.S. milk products becomes too costly, food processors will purchase dairy ingredients from other countries and consumers will purchase fewer dairy products in the grocery store.
  • Dairy cows can’t just be turned on and off as milk supply/demand changes.
Economists have run hundreds of scenarios through economic models examining the Dairy Security Act. The results show this policy will cause a decrease in the overall milk price paid to dairy farmers.

The bottom line is no government program is going to make it more profitable to be a dairy farmer. The outcome of government controlling the supply or demand of any product has consequences. As dairy producers and consumers, we’ve seen the negative impact of corn ethanol policy in this country. The U.S. government has mandated a demand for corn ethanol which in turn has pushed the price of cattle feed so high that it’s driving livestock and dairy producers out of business.

I would rather see a change in the federal milk pricing system which would allow dairy farmers to receive a consistently fair price for milk and spread the risk in the milk market between producers, milk processors and retail stores.  

Nationwide, dairy farmers saw their net worth drop by $20 billion between 2007 and 2009. There are hundreds of dairy farmers exiting the business annually.  Why? Because dairy farmers shoulder the majority of the risk in the milk market. Dairy farmers don’t have the option of passing on increased input costs by charging more for milk. They get the price that is determined by the Federal Order system which does not consider the cost of production. If the price a farmer is paid for milk does not cover their expenses, they go out of business. Milk processors and retail stores have the ability to cover their costs because they set the price for the products they produce and sell.

I realize there are no easy solutions. However there must be a way to develop a fair milk pricing system that allows dairy farmers to sustain their business long-term. The system in place is not working. That is evident by the number of dairy farmers going out of business every year and the number of dairy farmers who are struggling to be profitable.

I would appreciate hearing what other dairy producers think of the Dairy Security Act.

Blogs I’ve written related to this topic:

The Majority of the U.S. Farm Bill Funds Food & Nutrition Programs

Government Subsidized Ethanol Leads to Government Subsidized Milk

Milk Price – How Dairy Farmers Are Paid For Milk

Ending the Ethanol Debacle