Foundation for the Future: What It Is

June 5, 2011 08:17 PM
Foundation for the Future: What It Is

Foundation for the Future’s four interlinked components

Foundation for the Future (FFTF) is the most dramatic attempt to reform federal dairy policy since Federal Milk Marketing Orders were enacted after the Great Depression. The Great Recession of 2009 was a rude awakening to the fact that current dairy programs provide neither the safety net nor the market resiliency producers need.


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More details on Foundation for the Future:

"We think FFTF meets the needs of a changing landscape at the farm level and in global markets," says Jerry Kozak, president and CEO of the National Milk Producers Federation. In 2011, global markets could take up to 15% of U.S. milk production. While the U.S. domestic market continues to grow, export markets are growing eight times faster. In order to be a consistent, reliable supplier to the world, Kozak believes, the U.S. must eliminate its price support program, reform Federal Orders and provide a safety net that protects producers’ equity in their operations.

Thus, FFTF was born. Following is a summary of each of the plan’s four provisions:

Revised Federal Dairy Programs.

FFTF would eliminate the dairy price support program and Milk Income Loss Contract (MILC) payments.

Current dairy price supports offer a limited safety net, $9.30 to $9.35 for milk powder and even less for cheese. Because this is well below the cost of production, it provides little protection for U.S. producers. It does, however, provide a price floor for global markets. Producers in countries such as New Zealand and Argentina, where grazing-based production costs are much less than here, can continue to profitably produce milk. At the same time, the current program requires USDA to buy up surplus product during periods of low prices and then release it back onto the market when prices recover. As a result, price recovery is delayed.

More controversial is the elimination of the MILC program. MILC has a payment limitation on the first 2.985 million pounds of annual production, or roughly 150 cows. This provides protection for less than 30% of production. FFTF proponents argue that MILC is generally triggered when prices fall. Though the program has a feed cost adjuster, it is not inclusive enough to reflect today’s high feed costs. As a result, MILC payments are sometimes triggered when they are not needed and provide too few dollars when they are. In 2000, MILC paid out $1 billion when milk/feed margins were more than $7/cwt. In 2009, it paid out $800 million when milk/feed margins fell below $4/cwt.

Dairy Producer Margin Protection Program.

The dairy margin is simply the difference between the U.S. All-Milk price and whole herd feed costs. There are two levels to the program. The basic level would be fully subsidized by the federal government. Participation would be voluntary and producers could sign up for 90% of the highest annual production of the three years prior to implementation.

The basic margin would be $4 and, for the supplemental program, the greater of $8 or USDA projected margin. Producers would pay for supplemental margin protection, with the premium subsidized on a sliding, reducing scale as higher levels of protection are selected.

Dairy Market Stabilization Program.

To provide a line of defense against extreme loss of margin, as happened in 2009, this program would be triggered when margins fall below certain levels. By reining in production, milk prices should rise and lower the budget exposure of the margin protection program. The program would apply to all milk marketed, with no exemptions.

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  • If the margin falls below $6 for two consecutive months, producers would receive payment for 98% of their base milk marketings, subject to a maximum reduction of 6% of current milk marketings. They could avoid this penalty by marketing 98% of their base milk production.
  • If the margin falls below $5 for two consecutive months, producers would receive payment for 97% of base milk marketings, subject to a maximum reduction of 7% of current milk marketings, avoidable by marketing 97% of base milk production.
  • If the margin falls below $4 for one month, producers would receive payment for 96% of base milk marketings, subject to a maximum reduction of 8% of current milk marketings, avoidable by marketing 96% of base milk production.

Once the milk-feed margin exceeds $6 for two consecutive months, the program would be discontinued. Monies collected by USDA would be used to purchase dairy products for food assistance programs as directed by a dairy producer advisory board.

Federal Orders Reform.

To simplify U.S. milk pricing, FFTF would eliminate the price minimums for Classes II, III and IV; make allowances; negative producer price differentials (PPDs); and reliance on the Chicago Mercantile Exchange. Current Class I price differentials would remain, as would the "higher of" Class III and IV prices to set the Class I price mover.

USDA would conduct regional surveys of proprietary (non-coop) cheese plants that process more than 250,000 lb. of milk per day (except in California, where prices are still set by formula rather than competitively). The surveyed prices would be used to determine a cheese price average each month for calculating the Class I mover.

Class IV prices would be calculated with the current formula, which uses National Agricultural Statistics Service butter and nonfat powder prices. The higher of the competitive cheese milk price and Class IV formula price would determine the Class I mover.

Handlers of Class IV milk would still pay into their Federal Orders pool if the Class IV formula price exceeds the cheese milk price. They would draw from the pool if the Class IV formula price was below the region’s competitive cheese milk price. But they could not exceed the available pool balance. Thus, the PPD could never be negative.

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