A Common Sense Dairy Compromise?
Oct 07, 2013
Ohio State University dairy economists have come up with a hybridized dairy policy/farm bill alternative that protects large and small dairy farmers almost equally and costs the government less than the Dairy Freedom Act.
Ohio State University (OSU) dairy economists John Newton and Cam Thraen have come up with a hybridized dairy policy/farm bill alternative that protects large and small dairy farmers almost equally and costs the government less than the Dairy Freedom Act.
The main debate with current dairy policy proposals is the market stabilization component, aka. supply management, of the Dairy Security Act. The National Milk Producers Federation says that without market stabilization, dairy prices will plummet because the margin insurance farmers receive won’t force anyone to cut back production. But processors argue market stabilization (even if it is now voluntary only for those who sign up for insurance) will raise milk prices too high for consumers, jeopardize export sales, and could ultimately lead to mandatory quotas for everyone.
That controversy has led to the Dairy Freedom Act, a construct of milk processors, which strips out the market stabilization program. The market stabilization program was taken out of the farm bill by more than a 2:1 margin in June by the House of Representatives, and it will be difficult to re-insert in the Senate-House Conference Committee’s final farm bill.
The OSU proposal, dubbed "MILC-Insurance," combines the current Milk Income Loss Contract (MILC) program with margin insurance without any market stabilization requirement. Under the proposal, dairy farmers would have a choice. They could either take MILC coverage, with eligible annual production expanded to 4 million pounds (up from 2.985 million pounds) or purchase margin insurance on all of their production. The insurance would be capped at $6.50 income over feed cost margin (rather than an $8 margin in both the Dairy Security Act and Dairy Freedom Act).
"This new alternative would provide greater support to small farmers compared to the existing MILC program by expanding eligible pounds," write Newton and Thraen. "For larger dairy farms (and farms who purchase feed) the income over feed cost program provides the ability to mitigate both milk and feed price variability."
Because the MILC payments are relatively modest (less than $1.30 per cwt. even during catastrophic periods) and income over feed cost margin insurance is capped at $6.50, farms will still feel market effects during periods of low milk prices or high feed prices. So, farms will still likely cut back production and not experience extended milk price troughs, say the economists.
The program will also cost the government less. In catastrophic times, MILC-Insurance would be nearly 25% less costly than the Dairy Freedom Act. The savings would be even greater if the margin insurance is capped at $6 of income over feed costs.
There are some in-the-weeds inconsistencies with merging two types of programs as the MILC-Insurance proposal does. For example, MILC payments are based on one type of feed cost formula and insurance program uses another. MILC calculates its milk price based on the Boston Class I price (an artifact of the now-defunct 1996 Northeast Dairy Compact) while the insurance program uses national average prices.
But in one sense, that’s all policy minutiae. One only had to listen to the farm bill dairy debate to know Congress could care less about the details.
For the vast majority of dairy farmers, those with less than 200 cows, the MILC-insurance proposal would allow them to stay with their now-familiar MILC program. Larger farms would have to make a choice—and spend some insurance premium dollars for full coverage. But they’d have to do that anyway under either the Dairy Security or the Dairy Freedom Acts.