Dairy Talk: No slam dunks in dairy policy

February 26, 2013 07:16 PM
Jim Dickrell

JIM DICKRELL is the Editor of Dairy Today. You can contact him at dairytoday@farmjournal.com.

Sometime between now and Sept. 30, when the current extension of the farm law ends, Congress will decide your future in the dairy industry.

The two major dairy policy proposals before Congress agree that price supports are outdated and less than useful. Both seem to agree that dairy policy needs to move toward margin insurance. Virtually all of the debate has been on the merits and potential dangers of a market stabilization program, aka supply management.

The Dairy Security Act (now part of the farm bill) bundles margin protection with market stabilization. In contrast, the Goodlatte/Scott amendment offers standalone, if more restrictive, margin insurance. It’s more restrictive in that it only covers 80% of annual production, and freezes that level of coverage for the life of the farm bill.

Which works better? According to preliminary analysis presented last month by Marin Bozic, a University of Minnesota dairy economist, it all depends on how producers use it.

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Economists from Michigan, Minnesota, Ohio and Wisconsin have done a retrospective analysis using dairy prices from 2007 through 2012 to compare the Dairy Security Act (DSA) to the Goodlatte/Scott amendment.

When the economists looked at the "sweet spot" at which level of margin insurance was best, DSA and Goodlatte/Scott were nearly identical. When margins were protected at the $6.50 per cwt. margin level, DSA netted about $56 per cow per year. Goodlatte/Scott netted $58 per cow per year for $7 margin level.

But this all has to be taken with a grain of salt because the economists used retrospective prices. Using these prices is a very crude method of analysis, Bozic says, because they do not account for supply responses from production cutbacks, which is included in DSA’s market stabilization component.

And that’s critical. DSA provides some good levels of margin protection at the $6.50 per cwt. margin level. But with market stabilization in play when margins dip to $6 per cwt. for two months, it’s unknown how quickly margins rebound. That will depend on the level of participation in the program and how quickly participating producers cut back production.

The vast majority of cooperatives have signed on to DSA and its market stabilization component. "The program might not be ideal for everybody, but it does suit the needs of the industry," says Jackie Klippenstein, vice-president, industry and legislative affairs for Dairy Farmers of America.

One of those needs, always left unsaid, is that cooperatives must find a home for all members’ milk. And that becomes problematic, and hugely expensive, in times of surplus. Last summer in California, for example, co-ops had to play the bad guys and limit producer shipments because plants were full. DSA’s market stabilization requirement would take much of that burden off of co-ops.

At the same time, Speaker of the House of Representatives John Boehner (R., Ohio) and many in his party call supply management un-American. It’s the key reason we don’t yet have a farm bill.

Given all these unknowns, differences and Congressional paralysis, it’s difficult to see where dairy policy will end up on Sept. 30. There is no slam dunk, easy answer.

jim dickrell, editor

Jim Dickrell, Editor

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