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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy Reform Wake-up Call

Nov 07, 2011

The new analysis of the Dairy Security Act of 2011 (DSA) by the University of Wisconsin and Cal Poly San Luis Obispo should serve as a wake-up call for everyone involved in the dairy policy debate.

Opponents of DSA, which embodies the reforms of the National Milk Producers Federation (NMPF) Foundation for the Future plan, point to the analysis as proof positive enacting the plan will be an unmitigated disaster. Conversely, National Milk dismisses the study, saying it’s driven by assumptions that do not reflect the real world.
I come down in the middle. Rational minds need to take a hard look at the study, because it offers some chilling outcomes:
• The U.S. all-milk price could be reduced by 92¢/cwt.
• The supply management program could be triggered 40% to 45% of the time.
• Cumulative net farm operating income could be lowered 32% to 48%.
• By farm size, the analysis projects stunning losses: 24% for participating farms with less than 250 cows; 61% for farms with 250 to 499 cows; 44% for farms with 500 to 1,999 cows, and 34% for farms with more than 2,000.
NMPF dismisses the study. “We don’t think it reflects what will happen in the real world,” says Jim Tillison, NMPF senior vice president for marketing and research.
He says if you apply the proposed dairy reform to the previous five years, the market stabilization program would have been in place just 9% of the time. In addition, Tillison says the Congressional Budget Office (CBO) projected the proposed dairy reforms would generate 20% government budget savings and leave producers better off. CBO also projected 60% of dairy farmers would participate in the margin protection and market stabilization programs, far higher than the 5% and even 50% levels Nicholson and Stephenson assumed.
To their credit, the authors of the analysis, Chuck Nicholson, Cal Poly, and Mark Stephenson, Wisconsin, acknowledge the study does not account for costs associated with current high levels of price volatility.
“It is important to note that the current volatility [of markets] imposes costs on farms and can result in substantial equity loss and a higher probability of business failure,” they say. “These costs and risks are not directly included in our analysis, so it is not possible to conclude on the basis of reduced average net farm operating income that dairy farmers would be worse off under the proposed legislation.”
Stephenson adds the model cannot be used to forecast future milk prices. “But if you look at the past four or five years, the model has correctly predicted the downturns in time if not the magnitude,” he says.
Consequently, I don’t think it would be wise or prudent to simply dismiss this analysis. NMPF’s contention that the supply management/market stabilization would have been in play just five or six months between 2006 and 2010 also is suspect. Once you intervene in a market, you change the dynamics of that market moving forward in time.
At the same time, having just 50% producer participation in the margin protection/market stabilization, as the Cal Poly/Wisconsin model assumes, is also suspect. In reality, I think Rep. Collin Peterson (D-Minn.) who authored DSA, has it right. Lenders will require their highly leveraged dairy borrowers to participate in order to get the “free” margin protection.
Large farms are more highly leveraged than small farms. As a result, I think it is fair to assume more than 50% of the country’s milk production will enroll in the program. And that alone will change the dynamics of the model.
Producers and dairy economists have to take a very hard, critical look at this dairy reform package. But they also must realize that Oct. 1, 2012, which ends the current Farm Bill, starts a whole new era as well. The status quo will no longer be the status quo.
Many have argued that dairy policy should not be written simply to avoid the debacle of 2009. But no producer I know wants to relive 2009 ever again. To me, that’s a pretty good place to start.
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