Here's what the real focus should be, say two young and very smart dairy economists.

The debate over dairy policy has boiled down to whether or not to have supply management. But that may well be the wrong question, say two young (and very smart) dairy economists who spoke at the National Workshop for Dairy Economists and Policy Analysts in Boston last week.

Marin Bozic, a dairy economist at the University of Minnesota, and John Newton, a Ph. D. candidate in agricultural economics at Ohio State, say the real questions should center on the margin insurance program and the timing of the annual decisions. They are part of a team of economists from Michigan, Minnesota, Ohio and Wisconsin who have been analyzing dairy policy options contained in the farm bill.

As currently proposed in both the Dairy Security Act and the Dairy Freedom Act (a.k.a. the Goodlatte/Scott amendment that strips out supply management), margin insurance is designed in such way that "that the benefits of participation in either program very likely highly exceed the cost of compliance [even with supply management]," says Bozic.

The consequence of that could be a return of milk over-supply similar to the 1980s, all again financed by government. Here’s why:

• Lenders say the "big hurt" on producer bottom lines come when income-over-feed-cost margins fall below $6.50. Either proposal offers reasonably priced insurance (23¢ to 29¢/cwt.). And taking out that level of insurance removes 70% of catastrophic losses, says Bozic. The problem is that both programs try to do more, and offer high subsidies at even higher margin levels. For example, a study by the University of Missouri Scott Brown shows that a representative large dairy farm of 2,000 cows would benefit the most from insuring at $7/cwt. under the Dairy Freedom Act and $7.50/cwt. under the Dairy Security Act.

• The Dairy Market Stabilization Program (DMSP), or supply management, only delays expansion and does not cap it. Furthermore, DMSP only kicks in at $6.00, whereas average IOFC margins over the past decade were over $8.00. That means that DMSP would do little to prevent average milk prices from declining up to $2/cwt. in case of chronic milk oversupply.

• Insurance premiums are locked in for the five-year life of the program. "The dairy margin insurance program was originally intended to lock in a producer to a coverage level for five years," says Newton. "The premiums reflected the five-year commitment and were likely close to actuarially fair (given some level of subsidization)."

But now, farmers can change supplemental coverage annually while the premiums remain fixed. While 12-month price forecasts are far from perfect, they are much better than 60-month forecasts. So farmers have a much better chance of guessing margins—and thus how much supplement coverage to purchase.

The result is like taking out flood insurance only in years when the river is rising. Newton suggests the annual signup for the program be in March (like crop insurance), with coverage starting with the new fiscal year on Oct. 1.

The danger of the current farm bill debate is that DSA and DFA proponents are so locked into their positions and the rhetoric of defending those positions that the subtleties of the options are getting lost in the hyperbole.

If Bozic and Newton are right, farmers who sign up for margin insurance could be living off of insurance indemnities in the new policy regime. Those who don’t sign up could be in for a world of hurt. And the government could be funding far more than it bargained for.

Bozic and Newton’s presentations can be downloaded here.

In the two embattled proposals for federal dairy legislation, what’s left out can be as important as what’s still there in black and white.

When it comes to loan documents, warranties, insurance policies and just about any other legally binding piece of paper, ignoring the fine print is done so at your peril.

In the case of re-introduced federal dairy legislation, reading the fine print is the easy part. You actually have to go back and compare what was in the original proposal to what is being proposed currently. What’s left out can be as important as what’s still in front of you in black and white.

Such is the case with the Goodlatte-Scott amendment, known as the Dairy Freedom Act, re-introduced to the House of Representatives April 25. In the original version, dairy farmers could sign up for margin insurance only at the beginning of program. Once they did, their production base was fixed for the life of the program. The new version simply eliminates Section (e) (1), thus allowing farmers to change coverage and update production history each year.

In the past, opponents of Goodlatte-Scott, most notably the National Milk Producers Federation, pointed out that Goodlatte-Scott provides less coverage (80% of a farmer’s production history) than the Dairy Security Act (which provides 90% coverage). Opponents also pointed out that the Goodlatte-Scott coverage would "decline" annually if a farm expanded through the five-year farm bill. What was 80% coverage could become 70% or 60% or less, depending on the amount of the expansion.

Personally, I never saw that as a huge impediment. What farm now has 60% or 70% or 80% risk management/margin coverage? But it was a talking point—and a negative one at that.

The cost of Goodlatte-Scott has also increased with the ability to increase a farm’s annual production history. Prior to the change, the Congressional Budget Office (CBO) estimated Goodlatte-Scott would cost taxpayers $334 million over 10 years. The new number is $434 million. Most of us would say $100 million is a pretty significant budget hit, even if it’s over 10 years.

But keep in mind the Dairy Security Act’s CBO score is $441 million over 10 years. National Milk scoffs at the CBO scoring process because DSA still costs the government $7 million more than Goodlatte-Scott. That’s despite the fact DSA contains the market stabilization program (which is specifically designed to keep government costs from sky-rocketing).

"I don’t believe the CBO numbers," says Jerry Kozak, NMPF president and CEO. "CBO doesn’t have the intellectual capacity to calculate dairy stabilization program impacts."

That's strong stuff, given NMPF touted CBO-scored budget savings when the DSA was originally introduced. 

In the end, though, the dairy debate won’t be won or lost on CBO scoring minutiae. Keep in mind that the entire farm bill’s price tag comes in at nearly $1 trillion. Dairy’s portion, be it $434 or $441 million, works out to 0.04% or there-about. Pencil dust, as the pundits are fond of saying.

Mark-up in both the House and Senate Agriculture Committees is scheduled this month. You can bet your bottom dollar more changes are on the way.

For more on the Goodlatte-Scott amendment, click here. 

For dairy farmers, the key is to stay positive, informed and engaged.

It would be easy to get caught up in irrational exuberance surrounding the Senate’s "Gang of Eight" immigration reform that was announced last week.

"Immigration reform has entered the promised land, with dairy at the top of the list," says one prominent immigration attorney, who will remain unnamed on the chance that things turn sour. The announcement, despite months and years of debate in Congress and the country, is really just the beginning salvo.

Don’t get me wrong. The Senate package is a huge win for U.S. dairy farmers. "Dairy will be the single biggest winner in agriculture," says Craig Regelbrugge, co-chairman of the Agriculture Coalition for Immigration Reform.

But there’s still a long, hard road to go.

Among the provisions:

• A "blue card" that allows existing, currently undocumented workers to remain at their jobs. To qualify, they will have to demonstrate they have been employed for 100 days between Jan. 1, 2011 and Dec. 31, 2012 on a farm, pass a background check, have a clean criminal record and pay a $100 fine.

• To achieve permanent residency status, employees must work at least 100 days a year for five years or at least 150 days a year for three years. They must show that they have paid all taxes, have not been convicted of any serious crime, and pay a $400 fine.

• The package also provides a provision for "future workers," that allows dairy farmers to legally recruit new foreign-born workers to replace those that return home.

• The program would also lessen the chance, at least in the first five years of implementation, of Immigration and Custom Enforcement raids and document sweeps. Eventually, farmers would have to verify identification documentation through the E-Verify system, but that would likely not come into play for five years.

• The reforms would also establish minimum wages for dairy workers: $11.09/hour in 2015 and $11.37/hour in 2016. These would then be annually indexed, with wages increased between 1.5% and 2.5%. Famers would also have to provide housing or pay a housing allowance —generally in the range of an additional $1/hour.

Dairy farmers might nitpick some of these provisions, but they’ll so do at their peril. The details of the ag package were carefully negotiated among a laundry list of ag organizations all now members of the Agricultural Workforce Coalition.

Members include Farm Bureau, Farmers Union, the National Milk Producers Federation, regional dairy organizations, and—most importantly to the compromise—the United Farm Workers. Keeping this coalition intact is critical.

If the 844-page "Border Security, Economic Opportunity, and Immigration Modernization Act" isn’t shredded in the Senate, it faces a bare-knuckle brawl in the House of Representatives. Will it survive? "Who the hell knows," one Washington lobbyist told me last week. "Nothing in Washington is easy."

For dairy farmers, the key is to stay positive, informed and engaged. When the time comes, dairy farmers must personally contact their legislators to make certain legislators understand dairy farmers support the legislation. Congressmen and women must understand there will be campaign funding and electoral consequences if their votes do not support immigration reform.

That sounds crass, but it is now how the game is played.

More detail on the Senate package can be read here. 

You can read the full bill here. 

Note: Western dairy editor Catherine Merlo also contributed to this report.

CRI’s Doug Wilson is convinced U.S. agriculture—and that includes dairy—is poised for a prosperous future.

There’s no other way to put it: Doug Wilson is bullish on dairy.

Wilson is CEO of Cooperative Resources International (CRI), the holding company/cooperative of Genex and AgSource.

He has a 35-year tenure with the co-op, joining Genex’s predecessor, 21st Century Genetics, in 1978. He became its CEO in 1993, and CRI CEO in 2002. His roots in dairy go back even further, to his home farm in Iowa milking Guernseys. His leadership stripes were earned in Vietnam, where he was awarded the Bronze Star among other commendations for service and valor.

Wilson spoke at CRI’s 20th annual meeting late last month in Bloomington, Minn. In his report to members, Wilson doesn’t ignore the hurdles dairy farmers face with feed prices, globalization and price volatility.

And he readily points out that A.I. and services co-ops such as Genex and AgSource are not immune from these same challenges. Example: The U.S. embargo of products to Iran because of Iran’s nuclear fissionable materials program has meant Genex cannot sell semen there.

But Wilson is convinced U.S. agriculture—farmers and the businesses that supply them—is poised for a prosperous future. Global food demand, due to growing populations and rising incomes—will increase 70% over the next 40 years.

"The American farmer is no longer dependent on [domestic] per capita consumption of commodities. Your market and your guaranteed demand are global," he says. He ticks off these positives:

• Dairy exports exceeded $5 billion in 2012, with most months exporting 13% to 15% of production.

• Beef cow inventory is at its lowest since the 1950s, yet most predict a 3% increase in beef exports this year. The demand for ground beef continues to rise, with slaughter dairy cow prices expected to average $88 in 2013.

• Dairy replacement heifers are at their lowest levels since 2009, putting a cap on dairy cow numbers and run-away milk production.

• Corn inventory is at its lowest level since 1973, but U.S. farmers plan to plant up to 98 million acres this spring. With adequate rain, we could see $4/bu corn.

• The U.S. dollar value versus other world currencies will remain low, and may even decline slightly over the next decade. That will make U.S. exports more attractive globally.

And that leads Wilson to these conclusions:

1. "It is a great time to be in production agriculture. The next decade will likely be the best any have experienced.

2. "We are on the front end of attracting non-agricultural dollars into production agriculture. . . . This will be positive for us, if we are proactively involved.

3. "Responsible technology use and adoption will be a requirement, not a choice, to feed the world."

And he adds this important note: "The cooperative business model might be even more important today than post-Depression. The original reason cooperatives formed was for collective bidding and affordability of improved products and services. Today, the reason is controlling volatility, adopting technology and assisting with globalization."

Wilson is no starry-eyed optimist. He warns U.S. agriculture must be prepared for continued volatility due to globalization and because current ag commodity inventories are so weather dependent.

But he also says this: "Those who look for the victories in change and volatility will be winners."

I think he’s right.

Click here for more on CRI’s 20 years of accomplishments. 

Previous efforts failed to lower the national SCC limit to 400,000. Will 2013 be different?

Will 2013 be lucky? For the past eight meetings of the National Conference on Interstate Milk Shipments (NCIMS), proponents of quality milk have tried and failed to lower the national limit to 400,000 cells/ml.

In 2011, with the backing of the National Milk Producers Federation (NMPF), delegates came close. The proposal to lower the limit failed by just one anonymous vote, 25 to 26. 

Perhaps this year will be different. Three proposals have been submitted to NCIMS to lower the regulatory limit to 400,000 cells/ml. Proposal #101, from NMPF, would do it in two stages. Stage 1 would lower the limit to 600,000 cells/ml by January 1, 2014. Stage 2 would lower it to 400,000 cells/ml by Jan. 1, 2015.

Farmers who exceed these limits two of the previous four months would receive a warning letter. And those that exceed the limit three out of five months would have their Grade A permit suspended.

Both Proposal #102 and #103 would take the SCC limit directly down to 400,000 cells/ml, though the date of implementation is not specified. Proposal #102 was submitted by the West Virginia Bureau for Public Health. Proposal #103 was submitted by the New Mexico Department of Agriculture.

"I believe we will get this passed in 2013," says Jerry Kozak, President and CEO of the National Milk Producers Federation (NMPF).

Let’s hope so. For years, NMPF opposed proposals—sometimes stridently--to lower the limit. Up until 2011, NMPF argued the Pasteurized Milk Ordinance, which NCIMS governs, is a milk safety document. NMPF argued cell counts are a measure of milk quality, not safety. NMPF further argued that milk quality is a market issue, and should be adjudicated by market competition.

Well, the global dairy market has adjudicated. In order to qualify for export certification to the European Union, U.S. dairy exports must now meet the 400,000 cells/ml standard at the farm level. And since the U.S. standard still stands at 750,000 cells/ml, USDA has had to step into the breach to certify our exports to meet the 400,000 cell/ml standard.

The vast majority of U.S. milk already does. Federal Milk Marketing Order data from 2011 shows the U.S. average is 206,000 cells/ml. And just a small portion of the milk supply, perhaps a few percentage points, exceeds 400,000 cells.

The European Union does allow for exceptions for farms that are making progress toward the 400,000 cell/ml. The vast majority of these so-called derogations are made on an annual basis. USDA, which is the certifying export agency, has granted about 3,000 derogations.

But these derogations have to be renewed each year if these farms want to continue to sell.

All of this is a pain in the backside for farms, dairy co-ops (which have handled the bulk of the derogation applications) and USDA. It would be far simpler if NCIMS would simply set the U.S. national standard to 400,000 cells/ml and be done with it.

This year’s NCIMS meeting is April 19-24 in Indianapolis. You can read more on the meeting here. 

For a history of SCC regulation in the U.S., click here and scroll to page 31.