Farm Progress

University of Missouri economist offers his insight into the dairy industry during his farm bill testimony.

February 20, 2017

4 Min Read
FARM BILL TALK: The U.S. House Agriculture Committee has already heard testimony regarding milk prices during early discussions for the 2018 Farm Bill.Toa55/iStock/Thinkstock

The U.S. dairy industry faced difficult economics in 2016 with dropping milk prices. However, many producers felt the government safety net in the 2014 Farm Bill did little to help.

As work starts on the 2018 Farm Bill, the U.S. House Agriculture Committee heard about the shortcomings of the present act and the challenges of a farmer-friendly version.

Scott Brown, University of Missouri Extension dairy economist, testified Feb. 15 in Washington, D.C., before the committee.


DAIRY AID: University of Missouri livestock economist Scott Brown told ag committee members that the farm bill needs to address risk management for the nation's dairy farmers, who are struggling with pricing. He is a common speaker at MU field days, like the one shown here at Thompson Research Center last year. (Photo by Logan Jackson)

Dairy policy is not easy, Brown testified. Estimates when forming the 2014 Dairy Margin Protection Program (MPP) did not work as planned.

MPP made a big shift in dairy policy. It went from the long-used price support to selling risk management on dairy farm margins between feed costs and milk income.

Dairy farmers familiar with milk prices didn't accept margin protection as expected. In 2016, they needed help, and MPP paid very little.

Milk prices fell from $24 per hundredweight in 2014 to $16 in 2016.

Changes to the dairy industry
Changes in global milk economy affected U.S. producers. Global milk supply grew, while a strong U.S. dollar cut U.S. exports.

"Domestic milk supply and the strong dollar still face U.S. producers in 2017," Brown said.

Despite tough times, the U.S. dairy herd continues to grow. The recent cow count shows 48,000 cows were added in 2016.

The dairy business has changed from a time with mostly smaller herds. Small farms dropped out and re-entered more easily. Large, modern dairies with high investments don't quit easily. If they do, someone buys them and takes the risk.

"It's increasingly difficult to cut U.S. milk supplies," Brown testified.

Looking for help
Current dairy farmers look for an alternative safety net. They disregard the current margin protection program.

Offering real help in a time of tight federal budgets will be difficult. Brown used stronger words: "Extremely difficult."

Meaningful federal protection plans can be expensive, he added.

Dairy farm cash receipts can be volatile. Changes pop up unpredictably. U.S. dairy receipts dropped from $49.3 billion in 2014 to $34.2 billion in 2016.

Working safety nets in the past took large public spending. In more recent years, the government spent only $79 million. "Offsetting billion-dollar losses with $79 million will be a challenge," Brown said.

He added that government programs rarely offset low-market returns.

MPP offered ranked levels of protection. The problem hit when few farmers bought protection above the lowest $4 margin level, known as the catastrophic level.

Few bought higher levels, not knowing the probability of any payment, Brown said. "Enrollment has been much lower than many estimated when the program became law in early 2014."

With involvement low, government outlays have been low.

Of great help to dairy farmers has been a sharp drop in feed costs since 2014. That eased the cost side of margins as much as the enacted MPP.

In an aside, Brown noted that dairy farmers who bought their feed, as in California, came out ahead of producers who grew their own feed, as in Wisconsin. Costs of growing corn remain high.

Need for safety net
An adequate safety net for dairy farmers must remain part of federal dairy policy, Brown said. The government remains the largest source of risk management. In such a volatile business, the cost can go from zero to billions quickly.

"This makes scoring policy options difficult," Brown said. "Spreading risks across federal policy and market-based risk tools may be the answer."

Also, dairy farmers' focus should change from price support to risk management. "Producers need help thinking through risk management," Brown said. Farms may be better served by high participation in margin protection.

Economic studies show that premium payments, even in times of no payoffs, are more than offset by the 20% of the time when payoffs occur.

"Modification is needed in future farm bills as debate continues toward passage," Brown said. "A better safety net for dairy farmers that can be embraced by all participants is needed in the dairy market."

Source: University of Missouri Extension


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