Dairy reforms reduce volatility and farm incomes

02:04PM Oct 28, 2011
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In what well could be a springboard for increased opposition to proposed dairy reforms, a new study suggests the reforms could lower the U.S. all-milk price by 92¢/cwt, trigger supply management programs 40% to 45% of the time and lower cumulative net farm operating income 32% to 48%.

The study was done by dairy economists Charles Nicholson with Cal Poly San Luis Obispo and Mark Stephenson with the University of Wisconsin.
The study shows that milk price volatility would be substantially reduced with the proposed dairy reform. But that reduced volatility comes at a price: Lower highs which reduce milk prices and the value of U.S. dairy export (though volumes increase a little due to the lower prices).
The models used by the economists compared proposed dairy policy changes in both House and Senate versions, which in turn mirror the National Milk Producer Federation’s (NMPF) “Foundation for the Future” program. The plans would eliminate dairy price supports and the Milk Income Loss Contract program. They would replace these with a margin insurance program and a market stabilization program.
The model looks at four farm size groups. The net farm operating income loss projections are stunning: 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.
Non-participating farms would fare slightly better because they would not be required to participate in the market stabilization (supply management) component of the programs.
The plans would save taxpayers considerable sums, nearly $1.5 billion if only 5% of producers participated  and $690 million if 50% of producers participated.
Nicholson and Stephenson 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.”
NMPF officials question the validity of the study. “Economic models are not reality,” says Jim Tillison, NMPF senior vice president for marketing and research. “We don’t think this study reflects what will happen in the real world.”
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, not the 40% to 45% predicted by the economic model.
In addition, he says the Congressional Budget Office (CBO) projected the proposed dairy reforms would generate 20% government budget savings and leave producers better off. In addition, CBO 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. For more on the Nicholson/Stephenson study, click here and here.