Should Dairy Price Supports Be Raised?

Published on: 08:45AM Jul 21, 2009

By Jim Dickrell


In last week’s congressional hearing on the dairy crisis, Rep. Michael Conaway (R-Tex.) asked Undersecretary of Agriculture James Miller what was the shortfall between milk prices and the average cost of production. After consulting with the USDA economists seated behind him, Miller turned back to the committee and flatly responded: “$7 billion.”

The gasp from committee members, even as I watched the hearing via the Internet, was clearly audible. Miller pointed out USDA has already mailed $450 million in Milk Income Loss Contract (MILC) payments through April. He further testified the agency expects to send out another $450 million in MILC payments through the end of 2009. Given current futures prices, that could be an under-estimate.

Earlier in the hearing, Rep. Dennis Cardoza (D-Calif.), who represents the 18th Congressional district that includes the San Joaquin valley and many of California’s 1.8 million cows, already expressed budgetary concerns. When the 2008 Farm Bill was written, Congress certainly didn’t anticipate milk prices at support levels, he says. “But we also have to weigh budgetary costs of altering prices now…remember, we have 27 Blue Dogs on this committee,” he told Miller, referring to the budget conscious, pay-as-you-go Blue Dog Democratic coalition.

In late June, the National Milk Producers Federation (NMPF) called on USDA to raise dairy price supports. Then late last week, 20 Democratic Senators from 14 states—including eight of the top 10 dairy states—called on USDA to raise support prices “a significant level to restore a meaningful safety for American dairy farmers.” 

For struggling dairy producers everywhere, the reaction to raising support prices from the current $9.90 is immediate and visceral: Hell, yes.

The NMPF proposal is actually pretty modest: Raise the support price for cheddar blocks from $1.13/lb to $1.19; barrels from $1.10 to $1.16, and nonfat dry milk, from 80¢ to 84¢/lb. These increases would raise the Class III price about 57¢/cwt and Class IV about 35¢/cwt., estimates Roger Cryan, an NMPF economist. He adds NMPF has not done an analysis of what the proposal would cost USDA and taxpayers.

But raising the support price comes with other costs as well. Commercial disappearance is starting to pick up. Increases in basic commodity prices will be reflected on grocery store shelves. With national unemployment at levels not seen since the early 1980s and possibly the 1930s,  higher dairy prices will undoubtedly mean softer sales. That will only add to surpluses--and prolong the agony.

Keep in mind, too, that we’re beginning to see some hope on cow numbers. USDA projects cow numbers will decline to 9.035 million head by the fourth quarter this year, and to 8.870 million head by the first quarter of 2010 (follow this link to access USDA charts). Those numbers are right in the range where we’ll balance supply with falling export demand.

Remember, too, that herds going out of business are really business as usual in the dairy industry. In 2007, the U.S. lost 2,935 herds—in a banner milk price year. Last year, 2,003 herds called it quits.

To take 295,000 cows out of production, the U.S. will need to lose about 1,800 herds this year (at the U.S. average herd size of 163 cows). The seventh round of the Cooperatives Working Together (CWT) program has already idled 367 farms—and these herds averaged 275 cows each, or 1.7 times the average U.S. herd size. In other words, those 367 CWT herds equate to 625 average dairy farms. And with bids for the 8th round of CWT due this Friday, it’s quite likely the program will idle the equivalent of at least another 500 farms.

In other words, industry programs are starting to work and will continue to whittle away at excess milk supply. NMPF’s proposal to raise support levels a few cents probably won’t throw a huge monkey wrench into the recovery. But increasing support prices to a significant level to restore a meaningful safety net for American dairy farmers,” as the 20 Senators put it in their letter to Secretary Vilsack last week, could be too much of a good thing.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at [email protected].

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