“Dairy Price Stabilization Act of 2010” introduced in the House of Representatives
By Rob Vandenheuvel, General Manager, Milk Producers Council
This past week, Representative Jim Costa (Fresno) and four of his colleagues in the House of Representatives introduced H.R. 5288, the Dairy Price Stabilization Act of 2010. In short, the legislation would create a tangible financial incentive for all U.S. dairy farmers to better manage their growth in milk production. Also co-sponsoring the bill are Reps. Peter Welch (Vermont), Rick Larsen (Washington), Joe Courtney (Connecticut) and John Larson (Connecticut). The text of the bill and summaries can be found at www.stabledairies.com.
H.R. 5288 is the product of several years of work in developing a production management program that allows our nation’s producers to continue growing to meet our increasing demand for dairy products, while at the same time creating a financial incentive that will help ensure that not all 65,000 producers expand their production at the same time, collapsing the value of milk and dairy products every few years, as our producers have become painfully familiar with.
The bill utilizes industry analysis that’s been done over the past three years regarding the root causes of milk price (and farmer profit margin) volatility, which has continued to grow and become more violent with each “boom” and “bust.” Multiple economic forums have been held over the past couple years to look at milk price volatility, and additional work has been done by Dr. Mark Stephenson (Cornell University) and Dr. Chuck Nicholson (Cal Poly University, San Luis Obispo) on the specific issue of finding the driver for this increased volatility. Those efforts have revealed that much of the volatility in the value of raw milk can be attributed to cyclical patterns, some of which result from government policies that mute direct market signals to individual dairy farmers. The goal of the H.R. 5288 is to create a direct economic signal to the dairies that will help individual farmers make more informed decisions when deciding on future growth of their individual milk production.
As a recap for anyone who isn’t familiar with the details of the Dairy Price Stabilization Act, here are the top five things you need to know about H.R. 5288:
- Each individual dairy is treated as its own entity, just as the MILC program treats dairy farms today.
- Prior to each quarter, USDA will determine – based on a set of triggers clearly outlined in the bill – an “allowable year-over-year growth” in milk production that each dairy can produce without being considered an expansion. In most cases, this will be 3 percent annual year-over-year growth, allowing for every dairy to find efficiencies in their operation without be considered an “expansion.” The set of triggers that would determine the allowable growth percentage utilizes the milk/feed ratio as an indication of the general economic condition of the dairy industry. Under the bill, as producer margins get tighter (indicating a supply of milk that is exceeding demand), the allowable year-over-year growth is adjusted downward to zero, and can even be adjusted to negative three percent under extreme situations of low producer margins.
- For dairies that choose to exceed this allowable growth (i.e., plan an expansion in milk production or start a dairy as a new entry), a market access fee is determined prior to each quarter by USDA. This fee is also based on a set of triggers outlined clearly in H.R. 5288. These triggers also utilize the milk/feed ratio as a general indication of the economic condition of the dairy industry. For example, as producer margins widen, demonstrating a higher level of demand and a need for additional milk, the market access fee is reduced to minimal levels.
There are two ways that expanding producers can pay these fees:
* Producers can choose to pay a fee only on the milk produced in excess of the dairy’s “allowable year-over-year growth,” which will range from $0.15 – $2.50 per hundredweight, depending on the economic conditions of the dairy industry, as determined by the milk/feed ratio; or
* Producers can also choose a separate option, which allows producers to pay a much lower fee, but pay that fee on all the milk produced by the dairy facility. This fee would range from $0.03 – $0.50 per hundredweight, depending on the economic conditions of the dairy industry, as determined by the milk/feed ratio.
Note: The authors of the H.R. 5288 continue to explore the structure of these triggers, and while the best information available today indicates that the milk/feed ratio will be sufficient to adjust the program’s parameters up and down to reflect general conditions in the dairy industry, the authors are open to alternative economic indicators, such as the income-over-feed-cost figure being developed by the National Milk Producers Federation.
- 100 percent of the funds collected as market access fees will be distributed to the dairies that did not exceed their allowable year-over-year growth in milk production. This is a key piece of the Dairy Price Stabilization Act, as these funds create the tangible financial incentive for dairies that are not in “expansion mode” to maintain their production within their allowable year-over-year growth.
- A Producer Board would be established to oversee operation of the program. The Board would not be authorized to make any changes to the prescribed triggers in the bill unless a 2/3 majority of the Board approved such a recommendation. The composition of the Board would largely mirror the composition of the National Dairy Promotion and Research Board, with each dairy region of the country getting a base level of representation, and additional representation distributed based on milk volume.
So as you can see, H.R. 5288 is straight-forward and simple. It creates a tangible incentive that dairies would consider when planning their expansions in milk production. The bill, as structured, would not serve as a significant barrier for any dairy wishing to start operation or expand production. Rather, the bill is aimed at giving the remaining dairies – those that are not in “expansion mode” – a tangible incentive to maintain their year-over-year production within the three percent annual growth outlined in the bill.
Contrary to what is being said and written by some critics about the Dairy Price Stabilization Act, the program actually puts our industry in a much better position to grow in the long-term and meet an increasing demand for our products. Not only is the industry in a position to be a strong competitor in the world market, but this industry is also primed to delve into additional domestic markets. Dairy product processors are constantly finding additional ways to fractionalize milk and find additional domestic and international markets outside the traditional bottled, butter, powder and cheese markets. However, the violent boom/bust nature of the milk price makes it difficult-to-impossible to maximize these markets. H.R. 5288 can reduce those extreme booms and busts and allow our industry to maximize the domestic and international demand for American dairy products.
One of the most common questions that comes up when discussing the DPSA is how the bill would impact our ability to continue exporting dairy products, as well as minimize the products that are imported into the U.S. While the authors of the DPSA believe the program would not prevent us from participating in global markets and competing with products that other nations want to import into the U.S, they felt it was important to include a “safety valve” that gave producers an opportunity to review the success of the DPSA after three years of operation before continuing the program further. If the data clearly shows that the program is not working as intended, either because volatility has not be reduced or because our import/export balance has been greatly impacted, producers will be able to eliminate the program, and the industry can re-evaluate the best long-term policy. This is an important distinction between the Dairy Price Stabilization Act and some of the other alternatives being floated around the industry. Some are proposing that the industry eliminate basic producer safety nets as part of their long-term plan. The authors of H.R. 5288 chose not to include that drastic measure, as a step like that truly takes the U.S. dairy industry down a path of no return.
More explanation on the “triggers” in the DPSA
In the bullets above, a set of triggers are mentioned as the drivers used to determine the allowable year-over-year growth and market access fees. The table below outlines those triggers. Existing dairies that are planning to expand would choose either the “new-milk” or “all-milk” market access fee, whichever is cheaper for their specific planned expansion. New dairies facilities would pay the “all-milk” market access fee, as this would be the cheapest option for them.
|Milk/Feed Ratio||Allowable Year-Over-Year Growth||“New Milk” Market Access Fee||“All-Milk” Market Access Fee|
|> 3.00||3%||$0.15 per cwt||$0.03 per cwt|
|2.50 – 2.99||3%||$0.65 per cwt||$0.13 per cwt|
|2.00 – 2.49||3%||$1.25 per cwt||$0.25 per cwt|
|1.75 – 1.99||0%||$2.50 per cwt||$0.50 per cwt|
|< 1.75||-3%||$2.50 per cwt||$0.50 per cwt|