Dairy’s controversial market stabilization program comes under the spotlight this week.
The U.S. House of Representatives begins its long-anticipated farm bill debate today. For dairy, the debate will center on whether or not to include the Goodlatte-Scott (G/S) amendment, which would strip the market stabilization program from the Dairy Security Act (DSA).
For the dairy industry, this debate has been years in the making—both figuratively and literally. Last year, the House Republican leadership refused to bring the farm bill to the floor. Some say dairy—supply management, in particular—was the reason that the Republicans refused to move the bill. Others say cuts to food stamps—just prior to the 2012 elections—were the real reason Republicans wanted to avoid the debate.
Finally, this week, we will have the debate. Proponents of Goodlatte-Scott say a market stabilization program will impede growth, hurt dairy exports and (according to the Congressional Budget Office) cost the government more. Opponents say that without supply management, there could be prolonged periods of low margins that could ultimately cost the government billions in margin insurance premiums. Such run-away government costs would ultimately doom the program—if not immediately, then in 2018 when it would be up for renewal.
Both sides have a point. But I think the biggest problem with market stabilization will be its implementation. It will be extremely messy to administer. It will be even tougher to implement on the farm, not knowing if you have to cut back for one month, or two, or six. And farmers—being farmers—will find ways to work the system. That is inevitable. Even Collin Peterson (D-Minn.), the ranking minority member of the House Ag Committee, has admitted there is more fraud in crop insurance than there is in food stamps.
The problem lies in the premium subsidies of the margin protection program. Most dairy brokers say it takes at least 50¢ per cwt. using conventional risk management tools such as forward pricing, futures contracts and options to do a proper job of managing risk. But DSA and G/S write into law premiums that don’t approach the 50¢ threshold until $7.50 margins.
At these levels of subsidies, producers will flock to these programs. Like crop insurance, they virtually take the market risk out of farming. But that begs the question: Do we want the farm bill, aka government, to eliminate risk, skewing markets in the process? Exhibit A: Ethanol, corn markets and land prices.
Marin Bozic, a University of Minnesota dairy economist, adds that there is a third option—Livestock Gross Margin Insurance for Dairy. It’s still in the farm bill, but has been under-utilized because it has not been consistently offered. Again, government is subsidizing premiums. When those subsidies run out, LGM-Dairy is not offered.
But the beauty of LGM-Dairy is that it’s not a one-size-fits-all program. Dairy farmers can actually base their insurance coverage on their own rations and how much milk they want covered. So why not take some of the premium subsidies being thrown at DSA and G/S, and put that money toward continual coverage of LGM-Dairy?
Farm bills should provide catastrophic risk protection. But they should not totally insulate anyone from market forces.
You can read more on LGM-Dairy here and here.