Last week’s release of draft legislation on the National Milk Producers Federation’s (NMPF) “Foundation for the Future” (FFTF) already shows that compromise will be required to pass this program—or likely any dairy reforms.
In the original FFTF plan, the hope was to provide 90% coverage of catastrophic income-over-feed-cost margin protection (pegged at $4/cwt) of a producer’s base level of milk production. The draft legislation, released by Cong. Collin Peterson (Dem., Minn.) last week, would provide catastrophic loss protection on only 75% of a producer's base. The reason: Congressional Budget Office scorers found that a lower level of protection is needed to keep the proposal within the current budget baseline.
Many smaller producers scoff at margin insurance, and this reduced level of coverage won’t help matters. These producers much prefer Milk Income Loss Contract (MILC) payments.
Keep in mind, however, that on Sept. 1, 2012, the Milk Income Loss Contract program is scheduled to revert to covering just 34% of the difference between the Class I base price and $16.94, (down from the current 45%) and the maximum production covered will decrease from 2.9 million pounds to 2.4 million pounds annually. And if you’ve been paying any attention to what’s been happening in Washington lately on debt ceiling talks, it’s not at all certain that even a scaled back MILC program will escape the budget machete.
The other highly controversial part of FFTF is the market stabilization portion of the program. Processors hate it. As long ago as last November, at Dairy Today’s Elite Producer Business Conference, Jerry Slominski with the International Dairy Foods Association (IDFA) called it a deal breaker.
Many producers here in the Midwest also oppose market stabilization, saying it smacks too much of supply management and interferes with a producer’s ability to manage his/her business without government interference. One Midwest dairy leader told me he and his organization would oppose FFTF if there’s even a hint of a suggestion of a requirement that would impede expansion.
Without market stabilization in FFTF, two things could (will?) happen:
• First, the cost of the margin protection part of the plan will skyrocket out of control. There will be nothing to put the brakes on falling prices except for falling prices. As a result, the government-paid portion of catastrophic margin protection would have to be reduced to even less of producer’s production. Or the level of margin protection itself would have to be reduced to something less than $4/cwt.
• Second, there is a real possibility milk prices would dive below the depths of 2009 if there is another melt down in global markets. Remember, FFTF does away with dairy price supports and minimum prices for Class III and IV products. So you could see real prices dip below $9 or $8 or whatever level it took to clear surpluses.
Some producers who oppose FFTF say the status quo is just fine. There’s only one problem: The status quo will soon no longer exist. Pressure on Congress to reduce expenditures, driven by my own Congresswoman Michelle Bachmann and her buddies in the Tea Party, is becoming overwhelming.
If dairy producers and processors want viable, sustainable dairy policy, they will have to compromise. It’s just that simple. It’s also just that critical.