March 19, 2014
US revises dairy policy for farmers'' benefit
US dairy producers are experiencing cost-price squeeze due to increasingly volatile farm-level milk prices, coupled with rising feed costs, pushing policy stakeholders to develop provisions for the Agricultural Act of 2014 to help dairy farmers manage risk during economically challenging periods.
According to USDA, dairy producers under-utilise risk management tools such as forward pricing, options, and futures. In this environment, existing federal dairy policy designed to only support product prices fails to provide an adequate safety net for producers. The Agricultural Act of 2014 repeals dairy programmes that focus solely on price support, and replaces them with two new margin insurance programmes. The Act also continues several other dairy provisions.
The Dairy Product Price Support Programme (DPPSP), the Dairy Export Incentive Programme (DEIP), and the Federal Milk Marketing Order Review Commission are repealed in the Agricultural Act of 2014. Although also repealed in the new farm bill, the Milk Income Loss Contract Programme (MILC) is available until the new Margin Protection Programme for Dairy Producers (MPP) becomes operational. According to the farm bill, the MPP will be implemented no later than September 1, 2014.
Authorised by the 2008 Farm Bill, the DPPSP was a dairyprice support programme that was generally ineffective because of a relatively low support price. The DEIP provided bonuses to dairy exporters allowing them to sell certain dairy products at prices below cost, helping the exporters remain competitive in international markets. The Federal Milk Marketing Order Review Commission had responsibilities that included the review and evaluation of federal milk marketing orders. MILC, another price support programme, compensates domestic milk producers should milk prices fall below a certain level.
The Dairy Forward Pricing Programme, the Dairy Indemnity Payment Programme, and the Dairy Promotion and Research Programme are re-authorised through 2018. The Dairy Forward Pricing Programme allows dairy producers to participate in forward pricing contracts with handlers of pooled milk. The Dairy Indemnity Payment Programme provides payments to producers should their milk become unfit for consumption because of contamination by pesticides or other toxic substances. The Dairy Promotion and Research Programme, administered by the National Dairy Research and Promotion Board, works to increase milk and dairy product demand through promotion, research, and education initiatives. Another programme that continues is the Milk Price Support Programme (MPSP).
The Agricultural Act of 1949 created the MPSP. This permanent piece of legislation was designed to set a price floor under all milk and dairy products. Should the market price for milk fall below the farm-level support price, MPSP directs USDA to purchase from vendors butter, cheese, and non-fat dry milk at levels that would raise the milk market price to a level no less than the support price. A USDA offer to buy dairy products at levels that exceed current market prices would provide an incentive for dairy manufacturers to sell products to the government, reducing commercial supply and raising price.
By law, the 1949 Act required that milk be supported at 75-90% of parity. Since 1981 however, the support price has been established by Congress either at a specific level or by formula related to expected surplus. The 2002 Farm Bill required the Secretary of Agriculture to support the price of milk at US$9.90 per hundredweight (cwt) through the purchase of cheese, butter, and non-fat dry milk. The 2008 Farm Bill re-authorised MPSP as DPPSP, beginning January 1, 2008 and ending December 31, 2012. Subsequent congressional legislation extended DPPSP until it was repealed by the 2014 Farm Bill.
Rather than support prices, the main feature of dairy policy in the Agricultural Act of 2014 is the protection of producer margins. These gross margins are calculated as the difference between an average national milk price and a representative cost of dairy feed. Should margins fall below a producer-selected level, indemnity payments will be authorised based upon actual milk production history and a coverage level participant''s elect. Participating dairy producers pay premiums for the margin insurance, thereby cost-sharing with the federal government. The two new margin protection programmes are the Margin Protection Programme for Dairy Producers (MPP) and the Dairy Product Donation Programme (DPDP). These programmes are summarised in an iGrow article titled "New Dairy Margin Protection Programmes in the 2014 Farm Bill."