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Texas Agriculture Archive

May 21, 2004

AFBF study analyzes
dairy policy changes

Five university economists, in a report to the American Farm Bureau Federation, recently analyzed several ways the government could try to stabilize dairy prices.

While they did not prescribe one specific solution to the volatility that often wreaks havoc on dairy producers, they did recommend that producers think "outside the box" of old or existing policies and try to imagine how their industry would look with a few specific changes.

"We hope that readers will challenge themselves to imagine their industry in light of these changes and to think about what kind of industry they would like to shape," the report's authors wrote.

The Milk Income Loss Contract (MILC) program currently benefits small dairy producers at the expense of large producers, the report said, because the program encourages excess milk production that depresses market prices, while most larger producers aren't eligible for MILC payments.

The payments make up 45 percent of the difference between market prices and a target price of $16.94 per hundredweight.

However, farmers who produce more than 2.4 million pounds of milk per year are ineligible. The report's authors considered two alterations Congress could make to the MILC program if it is extended beyond its current expiration date of Sept. 30, 2005.

First, raising or getting rid of the production cap while lowering the target price would extend the program's benefits to larger milk producers, the report said. A lower target price—the report suggested $12 or less per hundredweight—would keep the program more in tune with a market-oriented approach and increase political support.

Second, the report said, serious consideration should be given to dropping the long-standing Commodity Credit Corp. (CCC) purchases from the federal dairy price support program.

"The concept of a target price deficiency payment coupled with a CCC purchase program of surplus products is not consistent dairy policy," the report said.

The goal of price deficiency payments is to let the market clear surplus production at low market prices, while making payments to farmers based on the difference between the market price and the target price. However, because the CCC buys surplus production, the markets don't have to.

Eliminating the CCC purchases would lower the cost of the program, even if target prices were increased to as much as $11 per hundredweight, the report said. The current target price under the federal dairy price support program is $9.90 per hundredweight.

The Dairy Export Incentive Program (DEIP) could be enhanced by encouraging exporters to submit bids for products and countries that offer the greatest potential for long-term market development, according to the report. The DEIP pays exporters for selling dairy products at below cost so they can compete better with heavily subsidized products in other countries. The program has played an important role in removing products from the U.S. market and from government surplus stocks; however, it is difficult for the program to achieve its real objective of overseas market development unless it demonstrates a commitment to serving the market over the long term, the report said.

"This is more difficult if a given product is only made available when it is in surplus," it added.

The report also addressed federal milk marketing orders, which set minimum prices for processors to pay for different classes of milk based on the milk's intended use. Prices for milk for butter production and for non-fat dry milk should be based on economic criteria, or the two classes could be combined, to eliminate concern that the prices are based more on political influence, the report said.

The report concluded that the Cooperatives Working Together (CWT) program that the National Milk Producers Federation (NMPF) implemented last year could increase prices for dairy producers in the short run; however, the program isn't sustainable because farmers who don't participate still benefit from improved prices. Producers who participate pay 5 cents per hundredweight to fund payments to producers who reduce their herds and their milk marketings.

The American Farm Bureau Foundation for Agriculture funded the study. Copies can be purchased at www.agfoundation.org/projects.