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Dairy Provision in New Farm Bill May Prove Costly

Dairy Provision in New Farm Bill May Prove Costly

While dairy program reduces farmers' risks, it could create a glut of milk.

After four years of hearings, lots of handwringing and closed-door meetings, a new five-year farm bill has finally been signed into law. 

How does the new farm bill impact dairy farmers?

The farm bill replaces the Milk Income Loss Contract and Dairy Price Support programs with a new Margin Protection Program.

National  Milk  Producers  Federation put  together  a  summary  of  the  farm bill  dairy  provisions. The Margin Protection Program, which is set to begin by Sept. 1, will:

Dairy Provision in New Farm Bill May Prove Costly

• Calculate a national feed cost based on reported prices for corn, alfalfa and soybean meal and compare that cost to the U.S. all-milk price, resulting in a monthly announced milk-price-over-feed-cost margin.

• Provide an opportunity for a dairy to protect a portion of its production at a certain margin level. Dairies can choose to protect from 25% to 90% of their milk production history, which is determined by the highest of a farm's 2011, 2012 or 2013 production.

• Allow farmers to choose to protect as little as $4 in milk-price-over-feed-cost margin or as much as $8. The higher the margin, the higher the premiums a dairy must pay.

• Provide a reduced premium on the first 4 million pounds of milk that every dairy produces per year.

So how will it work? Rob Vandenhueval with the Milk Producers Council offers some perspective.

When you look at the last five years — especially the disastrous years in 2009 and 2012 — U.S. dairymen bore all of the financial risk. If you look at the impact low milk prices have on producers, processors and taxpayers, you see that when the milk prices plummeted in 2009:

• Processors continued to get the milk they needed courtesy of end-product-pricing and make allowances, and they got their milk whether the dairy farmers selling them the milk were making money or losing it.

• Taxpayers had some financial liability due to low milk prices, as the MILC program made some payments. But given the limited milk volume on which the program pays out, that liability was nothing compared to the huge losses in equity on the farm.

• Producers felt the brunt of the down-turns, producing milk at a loss, forfeiting billions of dollars in equity with thousands of dairies across the country exiting the industry.

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Under the new farm bill, most of that changes. Processors continue to be protected, but taxpayers are now on the hook for a much, much larger liability if dairy farmer margins drop, according to Vandenhuevel.

Every dairy in the U.S., regardless of its size, has the opportunity to get government-subsidized margin protection on up to 90% of its production. So when dairy margins drop, the government payments won't be limited to just the 2.985 million pounds that the MILC program paid out on. Their exposure will be much greater than that.

Unlike the Margin Protection Program, the Dairy Market Stabilization Program that was backed by thousands of NMPF members would have created incentives to temporarily cut milk production when dairy producers' margins dropped below certain levels. The DMSP was designed to help spread some of the price risk to processors as well, and in doing so, reduce the exposure to taxpayers.

Under the DMSP proposal, when margins dropped and the government started making margin protection payments, the DMSP would have given each participating dairy a direct financial incentive to temporarily cut back milk production — a processor's worst fear — thereby helping to quickly realign supply and demand. This would've been good for producers, who would be able to get back to a market balance that provided a profitable price, as well as for taxpayers since a return to supply/demand balance would shorten the periods they were making margin protection payments.

Largely due to the demands of House Speaker John Boehner, the decision was made that the government was comfortable assuming the additional financial liability that comes with a Margin Protection Program that has no provisions aimed at restoring supply/demand balance, Vandenhuevel concludes.

Processors and groups like Wisconsin-based Dairy Business Association, whose members are primarily owners of large dairies, got what they wanted — the ability to produce unlimited amounts of milk and insure a profit on up to 90% of their milk for the next five years. Who will end up paying for this? Taxpayers and ultimately dairy farmers themselves (who will likely be swimming in a sea of surplus milk) will be on the hook for the next five years for this giant debacle.
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