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Dairy policy in the United States includes both Federal and
State programs. The two major Federal dairy programs are the system
of Federal milk marketing orders and the milk price support
program. Government programs that assist international trade (see
DEIP below) and provide domestic and international food aid also
affect the dairy industry.
Price Support Programs
The current purchase program for supporting farm milk prices
started with the Agricultural Act of 1949 and has been amended
several times since then. The Food, Conservation, and Energy Act of
2008 (2008 Farm Act) fundamentally changes the milk support
purchase program by specifying the support prices of purchased
manufactured products, not the price of milk. The Commodity Credit
Corporation (CCC) will buy butter, cheddar cheese, and nonfat dry
milk that meet specifications. The support purchase prices are:
- not less than $1.05 per pound for butter,
- not less than $1.13 per pound for cheese in blocks,
- not less than $1.10 per pound for cheese in barrels, and
- not less than $0.80 per pound for nonfat dry milk.
The CCC authority to adjust relative purchase prices of butter,
Cheddar cheese, and nonfat dry milk is restricted until purchases
reach quantity levels specified in the 2008 Farm Act. CCC can make
unrestricted inventory sales to the industry at specified prices
(at least 10 percent above the purchase price).
The Dairy Export Incentive Program (DEIP) pays cash
bonuses that allow dairy product exporters to buy at U.S. prices
and sell abroad at prevailing (lower) international prices. DEIP
removes nonfat dry milk, butterfat, and certain cheeses from the
domestic market, helps develop export markets, and has played an
important part in milk price support since the 1990 Farm Act. DEIP
quantities and dollar amounts are subject to World Trade
Organization (WTO) restrictions under the Uruguay Round Agreement on
Agriculture. The 2008 Farm Act emphasizes use of DEIP to its
maximum, subject to U.S. trade obligations.
National Dairy Market Loss
Payments
The 2008 Farm Act authorizes continuation of a national milk
income loss contract (MILC) program to provide income stabilization
for dairy producers. However, program parameters are much more
specific. A monthly direct payment is to be made to dairy
operations if the monthly Class I price in Boston (Federal Order 1)
is less than $16.94 per hundredweight (cwt) (as adjusted to reflect
dairy feed costs). Payments are to be made on up to 2.985 million
pounds of milk per fiscal year per operation during October 1,
2008, to August 31, 2012, using a rate of 45 percent of the
difference noted above. The number of producers per operation does
not affect its limit.
Fluid Milk Marketing
The Agricultural Marketing Agreement Act of 1937 first
authorized Federal milk marketing orders, which have been modified
many times since then, to help establish orderly marketing
conditions for the benefit of both milk producers and dairy product
consumers. A classified pricing system and revenue pooling are the two key elements of
milk marketing orders. Milk marketing orders define the
relationship among prices of fluid and manufactured dairy products
and a geographic price structure, sometimes called the price
surface.
The 1996 Farm Act
called for several changes in milk marketing orders, including
consolidation of the then existing 31 orders. In 2008, there were
10 Federal milk marketing orders. The elements of the 2008 Farm Act
related to Federal milk marketing orders focus on processes under
the system's regulations and on evaluation of effects--not on major
program changes.
Economic Implications
The economic effects of changes in the dairy price support
program and in the MILC program are noteworthy, but in different
ways. The price support program changes are not expected to alter
greatly the effects from those of a program with a specified
support level for milk. However, the purchase prices for butter,
Cheddar cheese, and nonfat dry milk provide a lower level of
support than the milk support level under prior legislation because
of changes in the estimated costs that are used to calculate milk
prices from dairy product prices. On a manufacturing milk price
basis, support is about 55 cents per cwt lower.
Changes to the MILC program increase payment levels. A simple
example illustrates the general effects. The original MILC program
included calculation of payments to eligible producers (farms)
based on a target price of $16.94 per cwt and a reference price
defined as the Class I price in Boston, MA. When the reference
price is less than the target price, a payment rate per cwt of 45
percent of the difference is calculated and paid on milk production
up to 2.4 million pounds per operation per year.
The 2008 Act specifies fiscal year payment rate and quantities
of eligible milk production for three specific periods:
- For October 1, 2007-September 30, 2008, the payment rate was 34
percent of difference between $16.94 per cwt (as adjusted) and the
Class I price in the Boston milk marketing order for the applicable
month on up to 2.4 million pounds of milk marketings.
- For October 1, 2008-August 31, 2012, the payment rate is 45
percent of difference between $16.94 per cwt (as adjusted) and the
Class I price in the Boston milk marketing order for the applicable
month on up to 2.985 million pounds of milk marketings.
- Beginning September 1, 2012, the payment rate is 34 percent of
difference between $16.94 per cwt (as adjusted) and the Class I
price in the Boston milk marketing order for the applicable month
on up to 2.4 million pounds of milk marketings.
In addition, the target price is adjusted for feed cost impacts
so that it is no longer strictly a fixed price. The $16.94 price is
adjusted by the percentage that National Average Dairy Feed Rations
Cost exceeds $7.35 per cwt for any month for period from January 1,
2008, through August 31, 2012. The target cost of feed rations
increases to $9.50 per cwt beginning September 1, 2012.
To show the impacts of these changes, since the payments are
made monthly, would be difficult. The following scenario is
"assumed" to show per-operation effects of the alternative programs
under the following specific conditions.
- First, it is assumed that there will be a payment made and that
the difference between the reference price and target price is
$0.01 (one cent).
- Second, the operation is assumed to produce the full amount of
milk on which payments are made in one month, which in each case is
used to calculate a "one-time" payment.
Under the 2002 Act's program parameters, the payment would be
$108.00 per operation [($0.01 per cwt x 0.45) x 2.4 million
pounds].
Under the 2008 Act's program parameters, the payment would be
$134.33 per operation [($0.01 per cwt x 0.45) x 2.985 million
pounds].
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