The Milk Income Loss Contract (MILC) program, initiated in December 2001, is coming under more scrutiny as Federal budget deficits climb and as dairy herd size continues to grow, making fewer herds eligible for a smaller share of their annual milk production.
The MILC program is a target price/deficiency payment program that makes direct payments to producers when the Class I price in Boston falls below $16.94. This target price is adjusted upward if estimated feed costs are above a $7.35/cwt of milk produced. All dairy producers are eligible to receive 45% of the difference between the Boston Class I and the adjusted target price. However, payments are capped at 2.985 million lb. of annual milk production.
In its third policy briefing in anticipation of the 2012 Farm Bill, dairy economists from the Universities of Missouri and Wisconsin outlined four primary issues surrounding the MILC program:
• Soft floor price. MILC does not create a floor on milk prices or receipts, but only pays for part of the difference between the target price and the Boston Class I price.
• Production caps. With the 2009 average milk per yield of 20,576, only dairy farms with fewer than 145 cows are currently eligible to receive milk on all annual milk sales. Note that the average U.S. dairy farm now has 141 cows. "Targeting of benefits to small dairy producers has made this program unpopular with larger dairy producers and areas of the country dominated by large dairies,” say dairy economists Scott Brown, U of M, and Ed Jesse, UW. And as production per cow and herd size has risen, the amount of milk eligible for full MILC payments has fallen by more than 10% since the program's inception.
• Milk supply impact. "The MILC program tends to lengthen periods of low milk prices, since programs supplement dairy income to keep some producers—especially smaller farmers—in business when they might otherwise have exited dairying,” say the economists. "Raising the production cap would further lengthen periods of low prices.”
• Program costs. USDA estimates the total MILC program costs from inception in December 2001 through February 2010 to be $3.5 billion. More than a fourth of that, roughly $900 million, were disbursed in 2009. "Given the magnitude of the Federal budget deficit and related cost cutting efforts, the MILC program could come under scrutiny if future outlays remain large,” say Brown and Jesse. In addition, MILC payments are considered World Trade Organization amber box payments and count against the U.S. national limit.