Boehner on Dairy Supply Management Proposal Pushed Last Fall: 'Zero Chance' Becoming Law

March 27, 2012 10:23 AM

If the dairy policy shifts being worked on by House Ag Committee Ranking Democrat Collin Peterson (D-Minn.) are included in the farm bill or some other effort that makes it to the House floor, a key lawmaker has signaled his opposition -- House Speaker John Boehner (R-Ohio). At his Farm Forum in Ohio recently, Boehner labeled US dairy policy as being very "convoluted," but warned that in his judgement, the approach Peterson has put together is "even more convoluted" and Boehner pledged he will fight against any such package.

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Boehner on US dairy policy: During the Farm Forum held in in Troy, Ohio on Saturday, March 24, Boehner said, "Now for those of you who don't know much about dairy, the USDA sets the price of milk every month … and if you look at the formula they use to calculate the price of milk it will take you about 25 minutes to read it. I read it on the House floor one time to try to help people understand how milk is priced. And then if you've got milk, you can't just sell it any place you want to sell it because we have a milk marketing order system that tells farmers that they can only ship milk into this market. And then if milk is consumed in a bottle it gets one price, but if you use it for cheese it's not worth as much."

Boehner continued, "So when I say we have a convoluted dairy policy, let me tell you we have the most convoluted program you've ever seen. God bless Collin Peterson, he's the ranking member on the Ag Committee, a long-time friend of mine-- we got elected together, we served on the Ag Committee together - but he has taken this convoluted program and tried to convolute it even more. And I know that Chairman [Frank] Lucas (R-Okla.) needed to work with Collin Peterson to see if they could come to an agreement between the House and Senate ag committees, if in fact the Super Committee were going to have a product. But having said that, the chances of Mr. Peterson's new supply management program becoming law, in my mind, were zero.

"Now, I am a big believer in allowing the House to work its will - I don't get involved in many debates on the House floor, but I can tell you if this provision comes in the Farm Bill to the floor of the House my sorry ass will be down there to say something about it," Boehner concluded.

Perspective: Speaker Boehner has a long history of recognizing the Byzantine, outdated dairy policy of the United States. He has previously pushed dairy policy reform himself – with the support of Rep. Dave Obey (D-Wis.), arguably the most liberal member of the House Democratic Caucus and former Appropriations Committee Chairman, the two pushed an amendment that sought to terminate all existing Federal milk marketing orders on January 1, 2001.

Dairy reform legislation is beset with a lot of differences of opinion - heart felt and debated vigorously by all sides of the issue. But one topic stands out: support for and opposition to any supply management program.

The last time dairy reform was pushed via the farm bill debate was last fall, as Boehner mentioned, via the ill-fated attempt by House and Senate Ag panel leaders to attach a draft farm bill to the so-called Super Committee's failed attempt to come up with $1.2 trillion in budget reduction over ten years. While the draft farm bill language was never officially released, it was said to contain controversial language pushed by Rep. Collin Peterson (D-Minn.) and modeled on a plan first proposed by the National Milk Producers Federation (NMPF).

Federal dairy policy components are complex, but have primarily included (at various times):

- Price supports have been used to create market price floors
- Direct payments have partially moderated the effect of low milk prices on producers
- Assessments have tried to serve has an economic incentive to curb production growth but with limited impact
- Supply reduction (whole herd buyout/Dairy Termination Program, etc.) has included different approaches to curb production growth, but again with limited success
- Orders allow milk uses to be valued differently for orderly marketing

Rep. Peterson revised his dairy policy reform plan several times, including changes relative to the Dairy Producer Margin Protection Program (DPMPP) so it would continue to be voluntary, but if a producer opts to participate in the DPMPP, his or her participation in the Dairy Market Stabilization Program (DMSP) would then be mandatory. If a producer chose not to participate in the insurance program, then participation in the DMSP would not be government-mandated. Last July, Peterson released draft legislation incorporating the key elements of the National Milk Producer Federation's (NMPF's) Foundation for the Future plan. This draft was modified to reflect NMPF's revisions and was formally introduced on Sept. 23, 20122, as the "Dairy Security Act of 2011" by Peterson and senior House Republican Mike Simpson (R-Idaho).

A similar bill was also introduced in the Senate by Sen. Dick Lugar (R-Ind.).

Sen. Kristen Gillibrand (D-N.Y.) followed with an amendment that would prohibit dairy producers who receive government milk margin support from participating in mandatory supply management. Gillibrand, noting that her state of New York may be facing a milk shortage to supply its growing yogurt industry, has proposed unlinking supply management from income insurance eligibility.

Sen. Bob Casey Jr. (D-Pa.) proposed two separate dairy policy bills last fall. The Dairy Advancement Act (S.1682) would allow dairy producers to continue to participate in the Milk Income Loss Contract (MILC) program or to receive subsidized Livestock Gross Margin-Dairy (LGM-Dairy) revenue margin insurance. The bill would repeal the Dairy Product Price Support program and make available low-interest loans to manufacturers. The Federal Milk Marketing Improvement Act of 2011 (S 1640) reduces the number of milk classes under the federal milk marketing order system from the current four to two, and includes a supply management component. The first class would be for fluid milk; the second for manufactured products. (The current system includes four classes: Fluid, soft dairy products, cheese and milk powder.) The bill would also enhance market transparency by increasing the frequency of dairy price reporting.

As previously noted, the Peterson-pushed dairy policy reform measure includes a supply management system that would pay farmers on less than their full production of milk if the market is signaling overproduction. But unlike Peterson's proposal in the House, Gillibrand's approach would exempt certain marketing orders if demand appears to exceed supply - a situation she says has existed in New York because plants have been buying milk from out of state.

A review of US dairy policy history shows that prior attempts at supply management have not met with much success.

There has never been a mandatory supply restriction system at the national level in the US, but the federal and state governments have been deeply involved in the pricing of milk. The US government has generally influenced milk production by changing the government support price for milk. The first nationwide foray into milk pricing was in the Agricultural Adjustments Act (AAA) of 1933. The AAA setup a classified pricing structure and the pooling of milk receipts by a handler or marketwide.

The end of WWII brought to an end a number of the temporary supports to the market, but parity pricing (with adjustments to the actual formulas) and authorization to purchase dairy products to support the market were included in the Agricultural Act of 1949.

There were a few revisions and changes to the system during the 1950s and 1960s, but for the most part the system worked well. In 1972, demand began to outstrip supply, and prices were rising quickly. Market prices were well above government support. The government was fighting inflation at the time, and decided to temporarily suspend import quotas for a number of dairy products to help lower consumer prices.To make the imports politically palatable, support prices were raised, though they were still below the current market price level.

The Food and Agriculture Act of 1977 set the minimum price paid to farmers at 80% of parity, and required it to be adjusted semi-annually. Prior to the 1977 Act, the minimum price had been 75% of parity and it was only adjusted annually. Milk production was growing and was well above commercial demand, leading to ever increasing government purchases of surplus dairy products in the early 1980s. In 1979 government purchases of dairy products removed 4.2 billion pounds of milk equivalents, representing about 1.2% of national milk production. By 1983 the surplus had quadrupled to 17.4 billion pounds of milk equivalents, representing 12.2% of production. The cost of the purchases ballooned from $247 million in 1979 to $2.7 billion in 1983.23 Adjusted for inflation; the $247 million spent in 1979 would represent $730 million in 2009 dollars. The $2.7 billion spent in 1983 would be $5.8 billion in 2010 dollars.

To deal with the burgeoning surplus, the link between the support price and parity was cut in the 1981 Agriculture and Food Act, but the act set incrementally higher support prices for 1982-1985. "By the end of 1981, milk production was still increasing and net removals remained high. Legislators concerned only with the federal budget and the mounting deficit stepped into the picture with the intent of reducing governmental expenditures on dairy products." The steady to slightly higher support prices were not enough of a disincentive to reduce production, and the government was worried about the ever growing cost of the dairy program. To send a clear message to milk producers without going through the politically difficult processes of lowering the support price, Congress included a nonrefundable farmer paid $0.50 assessment per hundredweight of milk marketed in the 1982 Omnibus Budget Reconciliation Act to help cover the cost of the dairy program. There was also a second $0.50 assessment, which was refundable to milk producers who cut their milk marketings by at least 8.4% below their base.27 "The assessments and deductions proved to be effective instruments for generating revenue to assist in the funding of the dairy price support program; from October 1, 1983 to September 30, 1984 over $800 million was collected from dairy farmers. However, the assessments were extremely unpopular with farmers and did little to curb total milk production, forcing legislators to seek other means of reducing milk production." (1)

Milk Diversion Program (MDP). Since the assessments were having little direct impact on milk production, Congress passed the Dairy Production and Stabilization Act of 1983 in November of that year. The Act (1) established a 15-month milk diversion program (MDP), (2) eliminated previous milk assessments and authorized a new, 50-cent assessment, (3) established a program to promote the sale of dairy products, funded by a 15-cent assessment, (4) reduced the price support level from $13.10 to $12.60, and (5) authorized further price support level reductions in 1985 if estimated CCC (government) purchases exceeded specific levels. (2) The MDP was the core of the Act. Milk producers had until January 31st of 1984 to sign contracts to reduce their milk marketings by 5 to 30% from a base period. The producer could choose the base period, either average marketings in 1981 and 1982, or marketings from just 1982. Producers had to withhold the milk for 15 months, from January 1984 through March 1985, and would be paid $10.00 per hundredweight of reduced production from their base. About 38,000 milk producers signed up for the program, contracting to reduce marketings by 6.9% from the 1982 base production.11,23 While the MDP did reduce milk production over the 15 month period that it was in effect, milk production surged as soon as the program ended in April of 1985.

The results from the program were mixed. It did reduce milk production, although only temporarily. The $0.50 assessment to cover the cost of the program covered 92% of its total cost of $955 million dollars. (2, 3) The reduction in milk production slowed government purchases of dairy products under the price support program, saving an estimated $614.3 to $664 million.25 But, it's estimated that about half of the reduction in milk production would have taken place even without the payments from the MDP. In a survey done by the General Accounting Office, 72% of the MDP participants indicated that they planned to increase marketings again after the program ended.25 The program was also susceptible to fraud; one farmer was caught crediting his marketings to a producer who was not part of the program. If the fraud had not been detected, the farmer would have received about $69,000 in MDP payments. (5)

From a long-term perspective, the MDP did little to slow milk production growth. "The milk diversion program was a short-term program in an industry that operates in a longer time frame." "The ... experience suggests that schemes to compensate farmers for not marketing milk are best avoided." (3)

Dairy Termination Program (DTP). Recognition that the effects of the MDP were only temporary and the rebound in milk production and government purchases led to further attempts to slow milk production growth in the 1985 Food Security Act. The Act authorized reductions in the government support price, and the Dairy Termination Program (DTP), sometimes referred to as the whole herd buyout program.

"Under DTP, the U.S. Department of Agriculture (USDA) paid participating farmers to dispose of their entire dairy herds, either by slaughter or by export, during 1986 and 1987. Participants also agreed not to involve themselves or their facilities in dairy production for 5 years. Although DTP reduced dairy production capacity for a time, it was not designed to permanently do so." (4)

Milk producers submitted competitive bids per hundredweight (cwt) to the government for the right to participate. "Bids ranging from $3.40 to over $1,000 per cwt of base production were submitted by about 39,500 producers. All bids up to $22.50 per cwt (averaging $14.88 per cwt) were accepted, a total of 13,988." (6) The 13,988 farms that participated accounted for about 5% of all dairy farms at the time. Total cost for the program was about $1.83 billion, adjusted for inflation it would be $3.58 billion in 2009 dollars. The program removed about 1.55 million cows from the herd, about 14% of the herd in 1985. The program ran from April 1986 to August 1987.

As with the MDP, results from the program were mixed, although there seems to be consensus that the DTP was more effective in the short and long-run than the MDP was. The average size of the dairy herd was down 1.9% during 1986 compared to 1985, but milk production was actually up 0.1%. Gains in production per cow more than offset the decline in the herd. Farmers who participated were locked out of using their dairy facilities or starting another dairy farm for five years. A survey by the General Accounting Office done in 1991 found that 3.4% of the participants planned to "definitely" return to dairy farming, and 4.6% "probably" would. (4) The GAO estimates that returning farmers would add about 0.6% to milk production by 1992. While the DTP was taking place, government support prices were also being lowered, which makes it difficult to disentangle the impacts of the two programs on milk production and government expenditure. The GAO estimates that the impact from the DTP was felt quickly, while the impact of lower support prices would have a larger impact on government purchases in the future.

"The results ... suggest that both DTP and support price reductions have proven, in this experience, to be a cost-effective means of substantially reducing the quantities of government purchases of excess dairy products. Nonetheless, we project that in the coming years, with no change in current policy, government purchase levels will be similar to the current levels and will remain appreciably above the levels achieved during several decades before the 1980s." (4)

One of the unintended consequences of the program was a drop in beef prices as the surge of dairy cows went to slaughter. During the spring and summer quarters of 1986, cow slaughter jumped 23% and 15% respectively. Supply changes of this magnitude typically have a major negative impact on pricing in the beef complex and that was certainly experienced. The cattle and beef complex was already struggling in an environment of weak demand and the extra supply of beef put on the market by the buy- out program exacerbated the already weak market for cattle. At times, cattle and beef prices traded as much as 5-10% below prices experienced the previous year which were already at depressed levels. As a result of this severe negative impact, the National Cattlemen's Association has lobbied hard against a repeat of the DTP using public funds.

Cooperatives Working Together (CWT) Herd Retirement Program. The Cooperatives Working Together (CWT) was a voluntary association of cooperatives and individual milk producers that carried out activities to support milk prices - the CWT no longer funds any herd retirement rounds and conducted its 10th and final herd retirement in the summer of 2010. The CWT was developed by the National Milk Producers Federation (NMPF), which is a national lobby group for dairy cooperatives. The program was funded by member cooperatives and individual producer members paying an assessment on each hundredweight of milk they produce. The program started in July of 2003, and the assessment at the time was 5 cents/cwt. According to the CWT, they were collecting the assessment on nearly 70% of the milk produced in the country. The assessment was later raised to 10 cents/cwt in July of 2006. The CWT helped to support prices in two ways, the first is subsidizing exports of dairy products, and the second is through their herd retirement program, which operates similarly to the Dairy Termination Program (DTP) run by the US government in the mid-1980s. The CWT Committee, made up of the Board of Directors of NMPF along with representatives from each participating cooperative who is not a member of NMPF and representatives for individual producers who are members. The Committee closely monitored market conditions, and when they anticipated that farm level margins would come under pressure, they announced a herd retirement round was open. Farmers then calculated their bids and submitted them to the CWT. The payment from the CWT was theoretically the difference between what the cows are worth alive as milking cows and what the cows are worth at slaughter. But instead of being done on a per-cow basis, the difference between the slaughter value and the "replacement" value was divided by average production per cow and the bid is submitted as dollars per hundredweight of milk to equalize bids from herds with above or below average production. If the farmer's bid is accepted, he was required to send the entire milking herd to slaughter and he kept the revenue from the slaughter house. On verification that the cows have been slaughtered (done with ear tags), the CWT then paid the farmer his bid price multiplied by his herd's production.

1. Erba, Eric M., and Andrew M. Novakovic. "The Evolution of Milk Pricing and Government Intervention in Dairy Markets." Cornell Program on Dairy Markets and Policy. Cornell Program on Dairy Markets and Policy, Feb 1995. Web. 28 Aug 2010.
2. Yonkers, Robert D., Karen Dvorak, Donald D. Knutson, Charles W. Bausell, and Jay R. Cherlow. "Impact of the Milk Diversion Program on Milk Supplies." North Central Journal of Agricultural Economics. 9.2 (1987): 157-162. Print.
3. Grant, Wyn. The Dairy Industry: An International Comparison. 1st ed. Worcester, GB: Dartmouth Pub Co, 1992. 70. Print.
4. General Accounting Office (1993) Effects of the Dairy Termination Program and Support Price Reductions, United States Accounting Office, Washington D.C.
5. General Accounting Office (1985) Effects and Administration of the 1984 Milk Diversion Program, United States Accounting Office, Washington D.C.
6. Fallert, Richard F., Don P. Blayney, and James J. Miller. "Dairy: Background for 1990 Farm Legislation." Dairy: Background for 1990 Farm Legislation. USDA Economic Research Service, Mar 1990. Web. 29 Aug 2010.

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