Dairy Talk: And the Debate Goes On

11:34AM Oct 31, 2012
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Jim Dickrell**Extended comments highlighted in blue.

Trying to make sense of the dairy farm bill debate is like trying to sort out the numbers in a presidential debate over health care or the federal budget deficit.

Both sides are throwing numbers around so fast and furiously, it’s hard to discern who is right. At the risk of upsetting both sides, I’ll try.

In a press release issued during World Dairy Expo last month, the Wisconsin Dairy Business Association (DBA) produced a chart that showed what monthly milk income would have been in August under the Dairy Security Act in the Senate bill and under the Goodlatte-Scott amendment still floating around the House of Representatives.

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A 500-cow dairy in Wisconsin would have produced about 900,000 lb. of milk and would have received nearly $183,000 in revenue based on a Wisconsin All-Milk price of $20.30. Because the Dairy Security Act would have required the dairy to either curtail milk production by 4.7% in August or forfeit that amount of revenue, DBA says farm revenue would have been $174,000.

So the claim is that the Dairy Security Act, because of the market stabilization program, would lower that dairy’s revenues by some $8,500.

The National Milk Producers Federation begs to differ, of course. Jerry Kozak, the organization’s CEO, points to an analysis done by the University of Wisconsin that shows milk prices would be lower without market stabilization.

That’s because farmers would still receive insurance indemnity payments under the Goodlatte-Scott amendment if income-over-feed-cost margins reach triggering levels. As a result of those payments, they’ll likely produce more milk, leading to overall lower milk prices.

The Wisconsin analysis, done by dairy economist Mark Stephenson, suggests that All-Milk prices would be 10¢ per cwt. less with 30% participation, 18¢ per cwt. less with 50% participation, and 50¢ per cwt. less with 80% participation.

If that’s true, the $8,500 production penalty would have been reduced by $900, $1,500 or $4,500, depending on the level of participation.

But there are other differences as well. For one, the Dairy Security Act covers 90% of a producer’s base milk production. For another, there is no charge for base level coverage. For a third, producers can sign up annually for supplemental insurance. And finally, the base period for the supplemental insurance is based on the previous year’s milk production.

Under Goodlatte-Scott, the coverage level is set at 80% of production, there’s a one-time sign-up, the base is set and only the first 4 million pounds of a producer’s milk base is covered at no charge under the basic program.

All those differences add up, according to Stephenson. The net revenue from the Dairy Security Act for a 500-cow herd covered at 25% of production at $6.50 is about $10,600 per year. Under Goodlatte-Scott, it’s $4,600. That’s $12 per cow, but over the five-year life of a farm bill, it adds up to a $30,000 difference.

Another point of contention is what government costs would be under the two programs. Secretary of Agriculture Tom Vilsack argues that supply management will be required. "Every time we get good prices, farmers increase production and we create greater stocks on the supply side," he says.

But the Wisconsin analysis suggests otherwise. Yes, producers will make more milk under Goodlatte-Scott because they are assured of slightly better prices and indemnity payments during low periods. "But because low prices are not as low, you don’t have as many producers falling out of business during the trough," Stephenson says. "As a result, the following highs are not as high because you have more milk production during recovery."

The Congressional Budget Office (CBO), which scored the programs, pretty much agrees. Under current programs (dairy price supports, Milk Income Loss Contract payments), the CBO budget score is $248 million over five years. CBO scored the Dairy Security Act at $107 million and Goodlatte-Scott at $60 million.

So here’s what it boils down to:

  • The Dairy Security Act offers higher milk prices, higher net returns, greater volatility, higher government costs and lower exports.
  • The Goodlatte-Scott amendment offers lower prices and lower returns, lower government costs, higher exports but no intrusive market stabilization program.

The choice is yours.