Senate Passes Farm Bill and Other Related Thoughts

By a vote of 86 to 11, the U.S. Senate passed its version of the 2018 Farm Bill yesterday. The House passed its version by a vote of 213 to 211 last Thursday. A conference committee of House and Senate members will now meet to reconcile the differences between these two bills and produce one bill that will be considered by both chambers. While there are significant policy differences between the two bills related to food stamps, the dairy title has been remarkably free from the kind of acrimony that Farm Bill dairy policy has attracted in nearly all the Farm Bills passed over the last 40 years.

 

So, what is in this Farm Bill for dairy? First off, a name change for the Margin Protection Program. The House wants to call it the Dairy Risk Management Program and the Senate wants to call it the Dairy Risk Coverage program. Who cares, right?

Next comes tweaks to the premium structure for the program. The House wants to make the premiums cheaper for the first five million pounds and raise the buy-up coverage level to a $9 margin of income over feed cost level. The House leaves the premiums for coverage over 5 million pounds of production per year as they are currently. The Senate not only wants to make premiums cheaper for the first 5 million pounds and raise the coverage level to a $9 margin, they also want to raise the premiums for the over 5-million-pound coverage levels.

 

Then to underscore that this program is really only viable for the smaller producers, they want to discount by 50% the premiums due from producers with less than 2 million pounds of annual production with a 25% discount for producers with 2 -10 million pounds of annual production. The one bone that is tossed to larger producers is that the catastrophic coverage level is raised in the Senate bill to a $5 margin from the current $4.

What this means is that if the income over feed margin gets under $5 the program begins to pay, but to make it fit in the budget box, the catastrophic coverage payment will only cover 40% of your production instead of 90% of your production which is what it is now with the $4 kick-in level. It is still an improvement; 40% of a $5 margin is better coverage than 90% of a $4 margin. But the bottom line is, in both the Senate and the House bills, the government’s dairy safety net program is being blatantly re-designed as a small dairy only safety net program with mid-sized and large dairies left to fend for themselves.

There is one other thing in the farm bill worth noting. The Class I price formula is being changed in both bills. Currently the Class I formula uses the higher of either the Class III cheese/whey value or the Class IV butter/powder value to determine the base price every month for determining Class I price levels. The processors have complained for years that this “higher of” feature makes hedging Class I milk prices very difficult. Some time ago they approached the producers with the suggestion that instead of using the “higher of,” the Class I formula would use the average of those two values. The producers expressed a willingness to consider this if the processors would support raising the Class I price level to offset the loss of the “higher of” feature. It was determined that since the implementation of the “higher of” formula in 2000 this feature added an average of $0.74 to the Class I price. The processors are willing to support raising the Class I price by $0.74 in exchange for changing the “higher of” to the average and both the Senate and the House Farm Bills order USDA to make this change in the Federal Order Milk Pricing formulas.

My thoughts: The dairy industry has changed a lot in the past 5 years. When the 2014 Farm Bill was passed, the big fight was over the supply management feature of National Milk Producers Federation’s (NMPF) Foundation for the Future program. While modest, the Margin Protection Program that was ultimately adopted originally included a supply management feature that would kick-in when margin payments were being paid. House Speaker John Boehner hated this concept and personally saw to it that it was removed from the final bill. Well that was then and this is now. In retrospect, the supply management component would not have worked. Because premiums were required and not many payments were made, people are complaining that the Margin Protection Program is not valuable. So, Congress is in the process of making the program really valuable, but only to small farmers. Now there is a very logical reason for this. Politicians respond to their constituents and in dairy policy the politicians who have the most influence over the dairy title in the Farm Bill come from regions of the country that have seen the biggest change in the economic condition of their local dairymen. The surge in milk production in the Northeast and the Upper Midwest over the past 5 years has dramatically cut the premiums these folks were enjoying, resulting in a significant drop in mailbox prices and a corresponding cost/price squeeze on the local dairy industry, which translates into pressure on their elected officials.

But what else is going on that makes me say that supply management would not have worked? It’s the market. When you are dependent on exports to move 18% of your production, then world prices for dairy products play a huge role in what we get paid for our milk. Canada only maintains their supply management program by spending massive amounts of political capital maintaining very high tariffs to keep out competing dairy products from the rest of the world. That won’t work in the U.S. Modest national supply management programs like what was proposed in Foundation for the Future would not be enough to alter the supply/demand situation in the world, which is what you would have to do to have the supply management program have any effect on milk prices. So, like it or not, I don’t think a national supply management program is viable.

Which leads me to another observation: We have witnessed for some time a huge gap between block and barrel cheese prices. The question that raises in my mind is how can barrel cheese manufacturers afford to sell their barrel cheese at that kind of a discount. My conclusion is that the only way they afford to do that is because those barrels were made with surplus milk they bought at a big discount. Having a lot of surplus milk sloshing around the upper Midwest and Northeast is not a good thing for those producers, but it’s not good for the rest of us either because that milk gets turned into something, maybe barrel cheese and gets dumped on the CME where it is sold cheap and then undermines the price for all the other cheese and consequently undermines the milk prices producers everywhere get paid. While it is dairy farmers who are making the milk in these areas, there is a severe shortage of manufacturing capacity in those areas and building more is difficult economically because the make allowance for the cheese and to some extent powder has not been updated in many years and is now significantly lower than the actual cost to make bulk cheese and powder in this country.

Let me readily admit that I spent most of my career opposing generous make allowances in California, but that was because California operated a State Order and increases in the California make allowance lowered California producer prices, but not the milk prices of our competition in the rest of the country who were in the Federal Milk Marketing Order (FMMO) system. With California joining the FMMO system, changes to the FMMO make allowances will not disadvantage us relative to the rest of the country. And within reason, increased make allowances should incentivize the expansion of plant capacity in places where there is extra milk. This should, in time, alleviate some of the massive surpluses that are undermining our milk price now. As producers we really do need a healthy processing sector and some modest changes to the FMMO make allowances are part of the answer to shoring them up.

In the meantime, we are in a pretty volatile situation. We have a trade war brewing that we are powerless to control, which is creating havoc on both our milk pricing side and our feed cost side. We literally are pawns in a chess game being played by others. The Farm Bill will be of limited value to most of the larger dairy producers in the country. It could have been a big negative if payment limits on crop insurance subsidies were passed as some Senators were proposing. USDA’s Risk Management Agency will be coming out soon with the Dairy Revenue – Insurance program that shows real promise as a risk management tool for all producers. But the bottom line is what it has always been for dairy farmers; you don’t solve problems so much as you outlast them. You keep plugging away every day and eventually good things happen.

EDITOR’S NOTE:  The author operated a dairy in Southern California for many years holding leadership  with the Milk Producers Council.  Having sold his dairy, he accepted the staff position at MPC.  This article appeared in the June 29 edition of the MPC newsletter and is reproduced with permission.