Dairy Policy Roulette

June 4, 2013 05:19 AM

No one knows if new dairy policy being debated in the Senate and House this week and next will actually work as intended. "We won’t know unless and until we try it," says Marin Bozic, a dairy economist with the University Minnesota.

He and a team of economists from Michigan State, Ohio State and the University of Wisconsin have been dissecting dairy policy options for the past months. Bozic spoke this week at the Minnesota Dairy Leaders Roundtable in Arden Hills, Minn.

The most contentious part of the Dairy Title within the farm bill is the market stabilization program. He lists the pros of having market stabilization:

1. The Farm Bill will decrease government costs.
2. It will accelerate milk price/feed cost margin recovery.
3. It creates no long-term obstacles to growth.
4. Exports are risky business, and it may be good to have an instrument to quickly correct supply if we suddenly lose foreign markets.

His cons:

1. It could slow down spatial "structural" changes. The Midwest is a better place to dairy when feed costs are volatile. There are other spatial problems too. The Southeast objects to the program because their dairy farmers will be asked to curtail production like everyone else even though they are milk deficient.
2. While the program is currently proposed as voluntary, could this lead to mandatory stabilization program in the 2018 farm bill?
3. A big challenge will be to write implementation rules that prevent strategic behavior of participants. If a lot of producers find a way to legally go around the stabilization program intentions and fail to reduce supply when program is triggered, then stabilization will be ineffective, even if there is a high participation rate.

Also, Bozic points out that the biggest problem may lie in margin insurance, not stabilization program. "If we get the margin insurance that is too generous, we may end up with oversupply, lower milk prices, and faster consolidation, whether we have the stabilization program or not," he says.

"Farmers believe erroneously that the new farm bill, if it contains a market stabilization program, that will be sufficient to prevent further industry consolidation or increasing herd size," he says.

In fact, the current fragile design of margin insurance might speed the pace of consolidation because large farms, with better credit lines, might be able to take better advantage of the margin insurance offered. As it currently stands, producers would be able to insure against market downturns even after they have already started, and could easily underinsure when expected margins are likely to be high.

A simple solution, Bozic says, is to learn from the crop insurance programs, and have the sign up deadline be March 15, with coverage period starting with a new fiscal year, October 1st, instead of a new calendar year.

The U.S. Senate will be debating the farm bill this week, with some 300 amendments in the offing. The House of Representatives is expected to take up the debate next week, with perhaps twice that number of amendments.

You can read more detail on Bozic's take on dairy policy here


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