Ag economists discuss dairy policy, Farm Bill
Source: Dr. Marin Bozic, University of Minnesota
Do we need the new dairy policy? That was one of the questions discussed during the Agricultural and Applied Economics Association’s annual meeting, held in Washington, D.C. The symposium “Whither Dairy Policy? Economics and Politics of New Dairy Programs,” was organized and moderated by Dr. Marin Bozic, assistant professor of dairy foods marketing economics at the University of Minnesota. Panelists included Dr. Bruce Babcock (Iowa State University), Dr. Scott Brown (University of Missouri), Dr. Andrew Novakovic (Cornell University) and Dr. Daniel Sumner (University of California–Davis).
John Newton, PhD candidate at Ohio State University, opened the symposium by outlining provisions of dairy programs passed in the House and the Senate farm bills.
Newton, who is studying agricultural policy and dairy economics under Dr. Cameron Thraen, also summarized results of his most recent analysis with Thraen and Bozic on the distributional effects of new programs. In the recent paper, the authors reported 70% of expected dairy policy benefits would accrue to just 10% of dairy farms producing the majority of nation’s milk.
If the policy objective was to prevent dairy farmers from going out of business, and they were poor people, Sumner commented, then “means testing” would be appropriate. Sumner said calls for new dairy policy needed to be justified – a step he said has not been made clear.
Commenting on the margin insurance design, as found in both Senate and the House farm bills, Babcock, who helped design the margin insurance in the National Milk Producers Federation’s original Foundation for the Future program, reminded the audience that in the early drafts, the coverage level commitment for insurance was for five years.
Now, with an annual choice of coverage level under the Dairy Producer Margin Protection Program (DPMPP), is no longer a margin insurance, but rather a countercyclical margin payout policy with huge potential for government expenditures to skyrocket, Babcock said.
Brown stated that potentially billions of dollars could be spent on margin insurance in low-margin environments. One such scenario may be if an event shuts down dairy trade, and the domestic price of dairy products drops. The market stabilization program (DMSP), in tandem with margin insurance, is an interesting idea of stepping on the break and the accelerator pedal at the same time to glide the markets to a better outcome, limiting government exposure, Brown said.
Novakovic, speaking on DMSP, remarked that it may impact farms of different sizes in different ways. In his opinion, the small and the very large farms are more resilient, while the “most punished” category would be farms with 250-1,000 cows. “Is our policy objective to get rid of the middle?” he asked.
Alternative risk management tools were also discussed. Commenting on low Livestock Gross Margin-Dairy (LGM-Dairy) indemnities received relative to premiums paid in, Babcock, one of the LGM-Dairy designers, commented that it could be overpriced and that the rating method can be improved.
Newton, who worked on several projects with Thraen and Bozic examining the performance of LGM-Dairy, added that research shows LGM-Dairy can be very effective in managing risk to margins, especially if distant months are insured.
Turning to the effect of government policies on private risk markets, Babcock explained that in the grains sector, crop insurance likely increased the use of futures and forward contracts by removing some of the production risk of having a short crop and not being able to deliver on a forward contract. In contrast, dairy margin insurance may act as a substitute for dairy futures and options and may crowd out private risk markets.
On final question discussed at the symposium, regarding the Farm Bill timeline, Brown said it is hard to see the light at the end of the tunnel.
Newton, who just finished a stint as a Fellow with the Senate Committee on Agriculture, revealed that despite the perceived gridlock, pre-conference negotiations were underway. However, Newton added, once House leaders declared they will pursue the nutrition bill with cuts amounting to $40 billion, the optimism a Farm Bill may be completed soon decreased. Newton remained optimistic that a Farm Bill could be complete by the end of the year, but added that one option considered was to attach some Farm Bill programs to a budget bill, and extend others by two years, because lawmakers would not want to deal with the Farm Bill in the election year.
The Inter-University Program on Dairy Markets and Policy is a group of U.S. agricultural economists dedicated to scientific analysis of dairy markets. Research and extension materials can be found at http://dairy.wisc.edu. Contact Dr. Marin Bozic at firstname.lastname@example.org. Audio recordings and Powerpoint slides from the dairy policy symposium can be found atmarinbozic.info/blog/?p=296.