Order Code IB97011
Issue Brief for Congress
Received through the CRS Web
Dairy Policy Issues
Updated April 18, 2003
Ralph M. Chite
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Milk Protein Concentrate Trade Issues
Counter-Cyclical Dairy Farmer Payments
Background
Milk Income Loss Contract (MILC) Payments
USDA Implementation
Retroactive Payments Controversy
Estimated Cost of the New Dairy Program
Dairy Price Support Program Issues
Background
Butter-Powder “Tilt”
Estimated Impact of Butter-Powder Tilt on Dairy Farmers
Livestock Disaster Assistance
Dairy and the 2002 Farm Bill (P.L. 107-171)
LEGISLATION

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Dairy Policy Issues
SUMMARY
Many dairy farmer groups are concerned
In three separate supplementals enacted
that imports of milk protein concentrates
for FY1999-FY2001, Congress authorized
(MPCs) are displacing domestic dairy ingredi-
USDA to make ad-hoc “market loss” pay-
ents and thus depressing farm milk prices. S.
ments to dairy farmers to help mitigate the
560 and H.R. 1160 would impose tariff rate
effects of volatile farm milk prices. Sepa-
quotas on certain MPCs, and S. 40 would
rately, the six New England states had tempo-
prohibit the use of dry MPC in domestic
rary authority for a regional dairy compact
cheese production. Dairy processor groups
from 1997 until its expiration on September
are opposed to these bills. A dairy producer
30, 2001. The enacted 2002 farm bill
group challenged the Customs Service classi-
authorized a new counter-cyclical direct pay-
fication of MPCs, but Customs ruled that
ment program for all dairy farmers, which is
current classifications are correct.
modeled after the compact and the market loss
payments. Under the new program, all dairy
Separately, several major dairy policy
farmers potentially can receive a direct gov-
issues were addressed in the context of the
ernment payment when the farm price of milk
Farm Security and Rural Investment Act of
used for fluid consumption in Boston falls
2002 (P.L. 107-171, the 2002 farm bill),
below $16.94 per cwt. in any month.
which was signed into law on May 13, 2002.
Independent estimates show that the total cost
Included in the enacted 2002 farm bill are a
of this program could exceed $4 billion over
reauthorization of the dairy price support
its 3 ½ year life, much higher than the original
program for an additional 5 ½ years, and new
estimate of $1 billion. The payment program
authorization for direct payments to dairy
has been controversial because of its cost, and
farmers through September 2005, triggered
concerns that an included payment cap bene-
whenever the market price of farm milk falls
fits small farmers at the expense of large
below a target price level.
farmers. Enrollment in the program began on
August 15, 2002, and will continue until the
Under the auspices of the dairy price
program expires on September 30, 2005.
support program, USDA supports farm milk
prices through its purchases of surplus dairy
USDA is in the final stages of making a
products at stated prices. The 2002 farm bill
total of nearly $1 billion in direct payments
extended the program through 2007 at the
under a Livestock Compensation Program,
then-current support price of $9.90 per hun-
designed to compensate livestock producers
dredweight (cwt.). USDA has been purchasing
for severe feed and pasture losses caused by a
large quantities of surplus nonfat dry milk
natural disaster in 2001 or 2002. Dairy farm-
(powder) under the program. Consequently,
ers in disaster-declared regions have received
USDA reduced the powder price from $0.90
a payment of $31.50 per adult dairy cow.
to $0.80 per lb. on Nov. 15, 2002 and raised
Additional livestock disaster assistance of
the butter price by 19.5 cents to $1.05 per lb.
$250 million was included in the enacted
in an effort to reduce government costs. Dairy
FY2003 consolidated appropriations resolu-
producer groups are concerned that this move
tion (P.L. 108-7). Implementation of these
will significantly reduce dairy farmer income,
payments is pending.
while processors support a price reduction.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
In response to a challenge issued by the National Milk Producers Federation, a large
trade association representing dairy farmers, the U.S. Customs Service ruled on April 1,
2003, that milk protein concentrates (MPC) are classified correctly in the tariff schedule.
MPC imports currently are not subject to quotas. U.S. dairy producer groups are concerned
that foreign manufacturers are using nonfat dry milk (NDM) in the production of MPCs,
which they say circumvents current import quotas on NDM. Dairy farmers contend that
MPC imports are depressing farm milk prices and dairy farmer income. Legislation also has
been introduced (S. 560 and H.R. 1160) in the 108th Congress that would impose import
quotas on certain MPCs. Dairy processor groups are strongly opposed to this legislation and
any attempts to restrict imports of MPC. They contend that MPC imports have minimal
impact on farm milk prices and that any restrictions on imports would increase their
production costs and consumer prices.
BACKGROUND AND ANALYSIS
Milk Protein Concentrate Trade Issues

Milk protein concentrate is a product in which certain milk proteins necessary for the
production of cheese and other food products are selectively included and all or most of the
water is removed from the milk, thus making it efficient to ship long distances. Dairy farmer
groups are concerned that imports of MPC are displacing domestic milk used for
cheesemaking and depressing farm milk prices. Certain concentrations are not covered by
tariffs or quotas under the existing World Trade Organization agreement. The importation
of these products was not an issue when the agreement was debated in the 1990s.
On March 5, 2001, the General Accounting Office released a study on the production,
imports, and regulation of milk protein concentrates. The study found that MPC imports
grew rapidly from 1990 to 1999 – from 805 to 44,878 metric tons, including a near doubling
in 1999 over 1998 alone. According to the study, six countries (New Zealand, Ireland,
Germany, Australia, the Netherlands and Canada) accounted for 95% of the 1999 imports.
For the full text of the GAO study, see [http://www.gao.gov/new.items/d01326.pdf]. MPC
imports peaked in 2000 at 52,677 metric tons, and have fallen back to 28,469 metric tons in
2001 and 33,626 metric tons in 2002, according to International Trade Commission data.
Currently, neither wet nor dry MPC is allowed as an ingredient in any U.S. cheese
which has a standard of identity defined by the Food and Drug Administration, which
includes most cheese. Cheese processors had petitioned FDA for a change in standards to
allow MPC in cheese production. Conferees deleted from the FY2001 agriculture
appropriations bill a Senate provision that would have prohibited FDA from issuing any
regulations that would allow MPC as an ingredient in the production of cheese. Companion
bills (S. 117 and H.R. 1016) were introduced in the 107th Congress that would have
prohibited FDA from allowing milk protein concentrates as an ingredient in any cheese with
a standard of identity. Other bills (S. 847 and H.R. 1786) would have imposed a tariff rate
quota on MPC and casein (the major portion of milk protein). No action was taken on any
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of these measures. To date in the 108th Congress, similar bills have been introduced: S. 560
and H.R. 1160 would impose tariff rate quotas on certain MPCs, and S. 40 would prohibit
the use of dry MPC in domestic cheese production. No action has been taken on these bills.
Supporters of these bills, including most milk producer groups, contend that foreign
MPC and casein is being dumped in the United States. Opponents of the legislation include
dairy processor groups, the largest of which is the International Dairy Foods Association,
who contend that MPC imports are not displacing U.S. production of nonfat dry milk. They
had maintained that the domestic support price for nonfat dry milk should be lowered instead
to stimulate the market for domestic powder. (The government purchase price of surplus
nonfat dry milk was reduced on November 15, 2002. For more information, see the section
on “Butter-Powder Tilt” in this brief.)
The National Milk Producers Federation (NMPF), the largest trade association
representing milk producer cooperatives, has urged the federal government to examine
several trade policy options for addressing the milk protein concentrate import issue. These
include provisions in the Trade Act of 1974 that allow the President (following an
International Trade Commission investigation) to provide relief to a U.S. industry adversely
affected by imports; a 1974 Trade Act provision that allows the U.S. Trade Representative
to retaliate against certain foreign trade policies; and the use of antidumping laws and
countervailing measures.
On April 17, 2002, the NMPF filed a formal challenge concerning the U.S. Customs
Service classification of various dairy product imports, including MPC. Under Section 516
of the Tariff Act of 1930, interested parties are permitted to challenge the tariff classification
of imported items. The NMPF claims that imported MPC is not a true concentrated milk
protein, but is instead a blend of other dairy products (such as nonfat dry milk, whey powder
and casein). These blends, they say, “take unfair advantage of U.S. trade policies that allow
the unrestricted entry of MPC, but not the individual components found in the blended
products.” On April 1, 2003, the Customs Service ruled that milk protein concentrates are
classified correctly. It stated that the current definition of milk protein concentrate only
requires that MPC’s consist of at least 40% milk proteins, but does not specify whether the
product is manufactured through the filtration of skim milk or the blending with nonfat dry
milk or other components. The NMPF has announced that they will appeal the Customs
ruling, a process which could take more than one year.
Counter-Cyclical Dairy Farmer Payments
Background
In FY1999-FY2001, Congress provided just over $32.5 billion in emergency spending
for USDA programs, primarily to help farmers recover from low farm commodity prices and
natural disasters. The majority of these funds were for supplemental direct farm payments
made to producers of certain commodities, primarily grains and cotton, but also including
soybeans, peanuts, tobacco and milk. Of this amount, dairy farmers received supplemental
“market loss” payments of $200 million in FY1999 under the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999 (P.L. 105-277), $125 million under the
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FY2000 agriculture appropriations act (P.L. 106-78), and $675 million under the emergency
provisions in the FY2001 agriculture appropriations act (P.L. 106-387).
Some dairy farmer groups sought a permanent direct payment program for dairy farmers
to be included in the 2002 farm bill as a means of supplementing dairy farm income when
farm milk prices are low. Prior to the emergency payments made each year on an ad-hoc
basis in FY1999 through FY2001, dairy farmers generally were not recipients of direct
government payments. However, some groups contended that farm milk prices had been
volatile in recent years and that dairy farmers needed more income stability.
Separately, the Northeast Dairy Compact, which provided price premiums to New
England dairy farmers when market prices fell below a certain level, expired on September
30, 2001. These premiums were funded by assessments on fluid milk processors, whenever
fluid farm milk prices in the region fell below $16.94 per hundredweight (cwt.). Supporters
of the Northeast compact had sought for an extension of the compact; the Southeastern states
were seeking new authority to create a separate compact. However, processors and Upper
Midwest producers are strongly opposed to regional compacts.
Milk Income Loss Contract (MILC) Payments
Section 1502 of the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, the
2002 farm bill) authorized a new counter-cyclical national dairy market loss payment
program. (Upon implementation, USDA dubbed the program the “Milk Income Loss
Contract (MILC) Payments” program.) This program does not replace the dairy price
support program or federal milk marketing orders, the current federal milk pricing policy
tools. Instead, it serves as an alternative to regional dairy compacts and ad-hoc emergency
payments to farmers, by authorizing additional federal payments when farm milk prices fall
below an established target price.
Under the provision, dairy farmers nationwide are eligible for a federal payment
whenever the minimum monthly market price for farm milk used for fluid consumption in
Boston falls below $16.94 per hundredweight (cwt.). In order to receive a payment, a dairy
farmer must enter into a contract with the Secretary of Agriculture. While under contract,
a producer potentially can receive a payment equal to 45% of the difference between the
$16.94 per cwt. target price and the market price, in any month that the Boston market price
falls below $16.94. A producer can receive a payment on all milk production during that
month, but no payments will be made on any annual production in excess of 2.4 million
pounds per dairy operation. All contracts expire on September 30, 2005, and payments are
being made retroactively to December 1, 2001.
This new dairy program is modeled after the Northeast dairy compact which was in
effect in the six New England states from 1997 until its expiration on September 30, 2001.
However, under the expired dairy compact, dairy processors were required to pay the
difference between the $16.94 per cwt. fluid milk target price and any market price shortfall
for fluid use milk in the compact region. The new program shifts the responsibility of the
payment from the processor (and ultimately the consumer) to the federal government.
During the farm bill debate, the dairy payment program was generally supported by milk
producer groups in the Northeast and the Upper Midwest. Producer groups in the Northeast
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region viewed it as an alternative to the Northeast dairy compact. Upper Midwest producers
preferred the new program to state compacts since the new program shares the price
premiums nationally. Large dairy farmers expressed concern that the new program will
cause excess milk production that will in turn decrease farm milk market prices. They
contend that this would negatively affect their income, since their annual production is well
in excess of the 2.4 million lb. payment limit, and any production in excess of 2.4 million
pounds would receive the market price and no federal payments. (Annual production of 2.4
million pounds is roughly equal to the annual production of a herd of approximately 120 to
130 dairy cows.) The International Dairy Foods Association, a trade association representing
dairy processors, was opposed to the program in its earlier version, when processors would
have been required to continue paying the price premiums. However, its opposition was
lifted, when the funding responsibility was shifted to the federal government as in the final
version of the program.
USDA Implementation. USDA began accepting applications for the “Milk Income
Loss Contract (MILC) Program” on August 15, 2002 and will continue to do so until the
program expires on September 30, 2005.
To date, the monthly market price has been below the target price of $16.94 in every
eligible month. The program payment rates for each month are displayed in Table 1.
Table 1. Monthly Milk Income Loss Contract Payment Rates
Month
Payment Rate
Month
Payment Rate
(per hundredweight)
(per hundredweight)
December 2001
$0.77
October 2002
$1.59
January 2002
$0.78
November 2002
$1.39
February 2002
$0.78
December 2002
$1.43
March 2002
$0.93
January 2003
$1.41
April 2002
$1.00
February 2003
$1.56
May 2002
$1.09
March 2003
$1.75
June 2002
$1.20
April 2003
$1.82
July 2002
$1.38
May 2003
$1.79
August 2002
$1.45
September 2002
$1.45
FY2002 Average
$1.08
FY2003 Average
$1.59
(to date)

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USDA also determined how to handle certain implementation issues that were not
addressed in the authorizing legislation. For example, the legislation limits individual
payments to the first 2.4 million lbs. of annual production, but does not address whether a
producer with annual production in excess of the limit can choose which month’s production
would receive a payment. Larger producers wanted this flexibility so that they could waive
payments in a month when the payment rate is relatively low, if they thought the payment
rate might be higher in later months of the year. USDA announced that beginning in
FY2003, an individual producer can designate which month to receive the first payment for
the fiscal year. The producer must designate the starting month by the 15th of the preceding
month. Once the selected month arrives, producers will continue to receive payments from
that month forward, until payments are received on 2.4 million lbs. of production, or the end
of the fiscal year, whichever comes first.
Retroactive Payments Controversy. USDA handled the timing of the retroactive
payments (covering milk production from December 2001 through August 2002) differently
than the FY2003 and subsequent year payments. One option that was given to producers
by USDA was to receive retroactive payments beginning with December 2001 milk
production and then for each consecutive subsequent month until the producer’s annual
production payment limit of 2.4 million lbs. of annual production was exhausted. If the
participating dairy farmer waived this option, the farmer instead could have opted to receive
just one payment for the fiscal year limited to milk production in September 2002.
Some dairy groups contend that this methodology favored the largest dairy farms. For
example, a large producer who produces more than 2.4 million lbs. of milk per month would
have opted for receiving only the September payment that was $1.45 per cwt., the highest
monthly payment in the fiscal year (see Table 1 above). Farmers who produce less than 2.4
million lbs. of milk per month likely would opt for receiving multi-month payments
beginning in December 2001, when the payment rate was at its lowest point of the year.
In summary, large producers with monthly production above 2.4 million lbs. received
a retroactive payment of $1.45 per cwt.; the smallest producers with annual production
below 2.4 million lbs. received an average payment of $1.08 per cwt. (the average payment
for all 10 eligible months of FY2002); medium to large sized producers with production
between approximately 300,000 and 2 million lbs. per month received an average retroactive
payment of about $0.80 per cwt.

Estimated Cost of the New Dairy Program. The current estimated total cost of
the MILC program over its 4-year life is significantly higher than estimates last year when
the program was being formulated. Based on market conditions in March 2002, the
Congressional Budget Office (CBO) estimated total direct federal payments of $963 million
over the life of the program. One year later, in its baseline budget estimates in March 2003,
CBO revised its total cost estimate for the MILC program to $4.2 billion. Independent
estimates from the Food and Agricultural Policy Research Institute (FAPRI) at the University
of Missouri and USDA concur that the total cost could be in the $4.0-$4.5 billion range. The
main reason for the disparity between the 2002 estimate and the 2003 revisions is that market
prices for farm milk over the past year have been far below earlier expectations. USDA
announced in its FY2004 budget summary, released in February 2003, that the estimated
outlays of the program will be $2.4 billion alone in FY2003 (consisting of the retroactive
payments and the regular payments), an estimated $1.1 billion in FY2004.
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Dairy Price Support Program Issues
Background
The Agricultural Act of 1949 first established the dairy price support program by
permanently requiring USDA to support the farm price of milk. Since 1949, Congress has
regularly amended the program, usually in the context of multi-year omnibus farm acts and
budget reconciliation acts. (See Table 2, below, for a recent history of spending on the dairy
price support program and related activities.) Most recently, Section 1501 of the Farm
Security and Rural Investment Act of 2002 (P.L. 107-171, the omnibus 2002 farm bill)
authorized a 5 ½-year extension of the program through December 31, 2007 at the then-
current support price of $9.90 per hundredweight (cwt.) of farm milk.
Historically, the supported farm price for milk is intended to protect farmers from price
declines that might force them out of business and to protect consumers from seasonal
imbalances of supply and demand. USDA’s Commodity Credit Corporation (CCC) supports
milk prices by its standing offer to purchase surplus nonfat dry milk, cheese, and butter from
dairy processors. Government purchases of these storable dairy products indirectly support
the market price of milk for all dairy farmers. Prices paid to the processors are set
administratively by USDA at a level that should permit them to pay dairy farmers at least the
federal support price for their milk.
In order to achieve the support price of $9.90 per cwt. of milk, USDA has a standing
offer to processors to purchase surplus manufactured dairy products at the following prices:
$1.05 per lb. for butter, $0.80 for nonfat dry milk, $1.1314 per lb. for block cheddar, and
$1.1014 per lb. for barrel cheese. Whenever market prices fall to the support level,
processors generally make the business decision of selling surplus product to the government
rather than to the marketplace. Consequently, the government purchase prices usually serve
as a floor for the market price, which in turn indirectly support the farm price of milk at
$9.90 per cwt.
The dairy price support program is separate from the Milk Income Loss Contract
(MILC) payments that also were authorized by the 2002 farm bill. (See the section above
in this brief for more on the MILC payment program.) However, the MILC payments are
considered a related activity to the price support program. Hence, MILC outlays are included
in Table 2.)
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Table 2. Commodity Credit Corporation Dairy Price and
Income Support Operations, 1979/80-2001/02
CCC
Net Removals
CCC Support
Purchases as
Marketing
Milk Equivalent
Net Outlays
Price
Percentage of
Yeara
(billion lbs.)b
(million $)
($ per cwt.)
Production
1980-81
12.7
1,975
13.10
9.6
1981-82
13.8
2,239
13.49-13.10
10.2
1982-83
16.6
2,600
13.10
12.0
1983-84
10.4
1,597
13.10-12.60
7.6
1984-85
11.5
2,181
12.60-11.60
8.2
1985-86
12.3
2,420
11.60
8.5
1986-87
5.4
1,238
11.60-11.35
3.8
1987-88
9.7
1,346
11.10-10.60
6.7
1988-89
9.6
712
10.60-11.10
6.7
1989-90
8.4
505
10.60-10.10
5.7
1990-91
10.4
839
10.10
7.0
1991-92
10.1
232
10.10
6.7
1992-93
7.6
253
10.10
5.0
1993-94
4.2
158
10.10
2.8
1994-95
2.9
4
10.10
1.8
1995-96
0.1
-98
10.10-10.35
0.1
1996-97
0.7
67
10.20
0.4
1997-98
0.7
291
10.20-10.05
0.4
1998-99
0.3
480 (c)
10.05-9.90
0.2
1999-2000
0.8
684 (d)
9.90
0.5
2000-01
0.3
1,140 (e)
9.90
0.2
2001-02
0.2
614
9.90
0.1
2002-03 (g)
0.5
2,902 (f)
9.90
0.3
Source: U.S. Department of Agriculture, Farm Service Agency, selected publications.
a. The marketing year is October 1-September 30.
b. The milk equivalent is the pounds of fluid milk used to manufacture cheese and butter, on a milkfat basis.
c. Includes $200 million in emergency “market loss” payments authorized by P.L. 105-277.
d. Includes $125 million in net outlays for market loss payments authorized by P.L. 106-78.
e. Includes $675 million in market loss payments authorized by P.L. 106-387.
f. Includes a USDA-estimated $2.4 billion in Milk Income Loss Contract payments
g. USDA forecast.
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Butter-Powder “Tilt”
Under current dairy price support law, USDA has the authority twice annually to adjust
the support prices of butter and nonfat dry milk (powder) in order to minimize federal
expenditures on the purchase of surplus dairy products. Whenever USDA reduces the
support price of one product, it must increase the support price of the other in order to
continue supporting the overall farm price of milk at the mandated level of $9.90 per cwt.
USDA recently exercised this authority effective November 15, 2002, when it reduced the
purchase price of nonfat dry milk by 10 cents, from $0.90 per lb to $0.80 per lb., and
increased the butter purchase by 19.5 cents to $1.05 per lb.
Many dairy processor groups favored the reduction in the government purchase price
for surplus nonfat dry milk. Proponents say that in the long run this will reduce government
costs, and make domestic nonfat dry milk more competitive in world markets. Most dairy
farmer groups strongly opposed a reduction in the nonfat dry milk purchase price. They
contend that the income of all dairy farmers will be adversely affected. Instead, dairy
producer groups contend that quotas should be placed on imports of milk protein
concentrates, which they say displace domestic production of nonfat dry milk and contribute
to powder surpluses. (See “Milk Protein Concentrate Trade Issues” below.)
At the time of the price adjustment, USDA said it took such action, because it has
accumulated nonfat dry milk stocks well above its ability to use the product and because of
the government cost associated with purchasing and storing the product. Despite a similar
price adjustment made in 2001 (when the powder price was reduced from $1.00 per lb. to
$0.90 per lb), market conditions are such that USDA continues to purchase surplus nonfat
dry milk in large quantities. In FY2002, USDA purchased 619 million lbs. of surplus
powder, compared with 371 million lbs. in FY2001. Consequently, at the beginning of
FY2003, USDA had uncommitted powder inventories of approximately 1.1 billion lbs. In
early November 2002, USDA announced that virtually all of the powder had been
committed for three major uses: overseas humanitarian assistance, domestic livestock feed
assistance, and domestic production of casein. Although 1.1 billion lbs. of powder have been
committed, USDA officials warn that it could take several years to move that much product
to those uses. USDA also projects that at the new, lower powder purchase price of $0.80
per lb., the government likely will purchase 400 million lbs. of surplus product in FY2003,
instead of the estimated 600 million lbs. under the previous purchase price of $0.90. USDA
also expects to begin purchasing butter under the higher purchase price of $1.05 but expects
to dispose of any surplus butter through various channels relatively quickly.
Estimated Impact of Butter-Powder Tilt on Dairy Farmers. USDA economists
estimate that the net cost to dairy farmers of the most recent butter-powder price adjustment
will be approximately 10 to 15 cents per hundred lbs. (cwt.) of milk marketed in 2003. This
would translate into about a $160 to $240 million reduction in dairy farmer income. This
estimate is based on a projection that the average farm milk price would decline by about 20
cents per cwt. However, approximately 5 to 10 cents of the price reduction would be offset
by an increase in Milk Income Loss Contract (MILC) payments, which rise as market prices
fall. (See “Milk Income Loss Contract (MILC) Payments” above for more information on
this program.)
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An analysis conducted by the National Milk Producers Federation (NMPF) projects a
much stronger negative effect on farm milk prices than the USDA study. NMPF forecasts
a net price reduction of 54 cents per cwt. in 2003, compared with the USDA projection of
10 to 15 cents. Dairy farm income would drop $870 million under the NMPF analysis. The
main difference between the two analyses is that NMPF projects a stronger decline in cheese
prices than USDA, which NMPF says would occur as powder prices fall and more farm milk
would be attracted to the cheese market.
Livestock Disaster Assistance
In response to widespread drought in many livestock and dairy production regions of
the country, USDA announced September 19, 2002, that it would provide $752 million for
a new 2002 Livestock Compensation Program (LCP) (for details, see the USDA press release
online at [http://www.usda.gov/news/releases/2002/09/0392fs2.htm]). In early December,
USDA added $185 million in available funding to the program, bringing potential total
payments to $937 million. The program is designed to compensate livestock producers and
dairy farmers experiencing severe 2001 and 2002 feed and pasture losses.
Under the original program, direct payments currently are being made to producers of
beef, dairy, sheep and goats in any county that has been declared a disaster area by the
Secretary between January 1, 2001 and September 19, 2002 , including disaster designation
requests pending on September 19, 2002, that were subsequently approved. (Farm disaster
assistance provisions in the enacted FY2003 omnibus appropriations resolution (P.L. 108-7)
extended the September 19, 2002 cutoff date to February 20, 2003.) The payment rates are
$31.50 per adult dairy cattle, $18 per adult beef cattle, $13.50 for certain livestock over 500
lbs, and $4.50 per sheep or goat. Payments are limited to $40,000 per person, and will not
be made to any person with qualifying gross revenue over $2.5 million. Most of the funding
for the program came through Section 32 funds, which originate from a portion of customs
receipts that are made available to USDA to support the farm sector through various
activities. (For details on Section 32, see CRS Report RS20235.) P.L. 108-7 requires any
new spending to come from the Commodity Credit Corporation, instead of Section 32, and
reimburses Section 32 with $250 million in CCC funds to compensate for a portion of the
past payments of the program.
To date, $855 million has been obligated to livestock growers. Of the amount
obligated, approximately one-half of the total has been disbursed in seven states: Texas
($67.1 million), Nebraska ($66.2 million), Missouri ($62.2 million), Oklahoma ($62.0
million), Kansas ($57.0 million), California ($53.2 million) and South Dakota ($51.1
million).
P.L. 108-7 also includes an additional $250 million to further compensate livestock
producers with forage losses caused by a disaster in either 2001 or 2002. These funds will
be administered in the same manner as previous Livestock Assistance Programs that have
been authorized on an ad-hoc basis, most recently in 2000. Under past programs, direct
payments were made to eligible livestock producers (including dairy producers) in a disaster-
declared region, who suffered a minimum 40% loss of available grazing for at least 3
consecutive months.
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For more on disaster assistance, see CRS Report RL31700, see the CRS Electronic
Briefing Book, Agricultural Policy and the Farm Bill, page on “Farm Disaster Assistance”
[http://www.congress.gov/brbk/html/ebagr48.html].
Dairy and the 2002 Farm Bill (P.L. 107-171)
The Farm Security and Rural Investment Act of 2002 (P.L. 107-171, the 2002 farm bill),
which was signed into law on May 13, 2002, establishes federal farm commodity price and
income support policy for the next 6 years. Among the major dairy provisions in the enacted
2002 farm bill is an extension of the dairy price support program at the current level of
support, and authorization for counter-cyclical payments to dairy farmers when market prices
for farm milk fall below a target level.
See Table 3 below for a side-by-side comparison of the 2002 farm bill dairy provisions
with previous law or policy. Earlier sections of this brief provide more detail on the two
major federal dairy pricing policy tools authorized by the 2002 farm bill – the dairy price
support program and the counter-cyclical dairy farmer payments program. For an overview
of all major provisions in the 2002 farm bill, see CRS Report RS21233, The 2002 Farm Law
at a Glance.
Table 3. A Comparison of the Dairy Provisions of the 2002 Farm Bill
with Previous Law or Policy
Previous Law/Policy
Enacted 2002 Farm Bill Dairy Provisions
1. Dairy Price Support Program (DPSP)
The 1996 farm bill (P.L. 104-127), as
Extends the DPSP through December 31, 2007
amended, reauthorized the DPSP at the then-
at the current level of support ($9.90 per cwt.).
current level of support ($9.90 per
The Secretary is permitted to adjust purchase
hundredweight (cwt.) of milk). The DPSP
prices of butter and nonfat dry milk twice
indirectly supports the farm price of milk
annually to minimize government expenditures
through USDA purchases of surplus cheese,
on the program. [Section 1501]
butter and nonfat dry milk (powder). The
law allows the Secretary of Agriculture to
adjust government purchase prices of butter
and powder twice annually in order to
minimize government expenditures.
[Section 141]
The FY2002 agriculture appropriations act
(P.L. 107-76) extended the DPSP through
May 31, 2002 [Section 772(a)]
2. Counter-Cyclical Payments for Dairy
Farmers
The 1996 farm bill (P.L. 104-127) gave
Authorizes a new counter-cyclical payment
contingent authority for the six New
program for dairy farmers through September
England states to create an interstate dairy
30, 2005. Whenever the minimum monthly
compact. [Section 147] The compact
fluid farm milk price in Boston falls below
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Previous Law/Policy
Enacted 2002 Farm Bill Dairy Provisions
required fluid milk processors in New
$16.94 per cwt., all eligible farmers
England to pay a minimum price for farm
nationwide will receive a direct government
milk used for fluid consumption that is
payment equal to 45% of the difference
higher than the minimum price established
between $16.94 and the lower Boston price.
under federal regulation. Compact was
Payments to individual farmers can be
established in 1997 at a minimum price of
received on up to 2.4 million lbs. of annual
$16.94 per hundredweight (cwt.).
production. Retroactive payments will be
Legislative authority expired on September
made for each month back to December 2001.
30, 2001.
No budget limitations on how much can be
spent each year or in total. CBO estimates the
Separately, emergency authority included in
total cost of the program at $963 million over
the agriculture appropriations acts of
the life of the program. [Section 1502]
FY1999 (P.L. 105-277), FY2000 (P.L. 106-
78) and FY2001 (P.L. 106-387) provided
ad-hoc direct government payments to all
dairy farmers in response to volatile farm
milk prices.
3. Recourse Loan Program
P.L. 104-127 permanently authorized a new
No provision.
recourse loan program to help dairy
processors balance their inventories, to be
implemented once the dairy price support
program (DPSP) expires. [Section 142]
P.L. 104-127 originally required the
elimination of the DPSP on January 1, 2000.
However, subsequent legislation extended
price support authority. Recourse loan
program was never implemented, and its
authority was repealed by P.L. 107-76.
4. Dairy Export Incentive Program
The 1985 farm bill (P.L. 99-198) first
Extends program authority through 2007.
authorized the dairy export incentive
[Section 1503(a)]
program, which helps U.S. exporters counter
subsidized sales by foreign competitors
through cash or commodity bonuses.
[Section 153]
Program was reauthorized periodically in
subsequent farm bills. Most recently, the
1996 farm bill (P.L. 104-127) reauthorized
the program through 2002. [Section 148]
5. Dairy Indemnity Program
Authorized in 1964, the dairy indemnity
Reauthorizes the program through September
program indemnifies dairy farmers and
30, 2007. [Section 1503(b)]
processors who, through no fault of their
own, suffer income losses due to
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Previous Law/Policy
Enacted 2002 Farm Bill Dairy Provisions
contamination of milk or dairy products
caused by pesticides and certain other toxic
substances. Legislative authority expired
September 30, 1995. However, annual
appropriations have been made subsequent
to program expiration.
6. Fluid Milk Processor Promotion
Program
The Fluid Milk Promotion Act of 1990
1) Gives permanent authority to the fluid milk
(contained within the 1990 farm bill (P.L.
promotion program; 2) strikes the statutory
101-624)), as amended, authorized a
definition of a fluid milk product and uses the
research and promotion program for fluid
definition promulgated in USDA regulations;
milk products. [Sections 1999A-1999R]
and 3) changes the definition of a fluid milk
The program is funded through an
processor for the purpose of the required
assessment on fluid milk processors who
assessment, to exclude any fluid processor that
handle more than 500,000 lbs. of fluid milk
handles less than 3 million pounds of fluid
products each month. The 1996 farm bill
milk products each month. Fluid milk
(P.L. 101-624) extended program authority
delivered directly to consumer residences does
through December 31, 2002. [Section 146]
not count toward the 3 million pound
minimum requirement for the processor
assessment. [Section 1506]
7. Dairy Promotion and Research
Program
The Dairy Producer Stabilization Act of
1) Extends the 15-cent assessment to imported
1983 authorized a national dairy producer
dairy products. The 15-cent assessment is to
program for generic dairy product
be paid to U.S. Customs by the importer on the
promotion, research, and nutrition
equivalent of milk that went into the
education. The program is funded through a
manufacturing of the imported product. 2)
mandatory 15-cent per hundredweight
None of the importer-collected funds can be
assessment on all milk produced and
used for foreign market promotion. 3)
marketed in the contiguous 48 states. Dairy
Importers must be represented on the Board in
farmers administer the program through the
the same proportion that imported dairy
National Dairy Promotion and Research
products comprise the total U.S. dairy market.
Board.
4) The Secretary of Agriculture is required to
consult with the U.S. Trade Representative to
determine whether this provision is compatible
with U.S. trade obligations. 5) Dairy products
must be promoted without regard to the
country of origin of the product. [Section
1505]
8. Dairy Product Mandatory Reporting
The Dairy Market Enhancement Act of 2000
Amends the 2000 act to include “substantially
(P.L. 106-532) established a mandatory
identical products designated by the Secretary
reporting system for dairy product
(of Agriculture)” as part of the mandatory
inventories and prices. It requires USDA’s
reporting system. Changes the definition of a
National Agricultural Statistics Service to
covered dairy product to include
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Previous Law/Policy
Enacted 2002 Farm Bill Dairy Provisions
regularly collect data on the prices and
“substantially identical products designated by
inventories of cheese, butter and nonfat dry
the Secretary.”
milk sold by dairy manufacturers.
[Section 1504]
9. Dairy Studies
No provision in previous law.
Requires the Secretary of Agriculture to
submit to Congress two reports. Both are due
by May 13, 2003. 1) A comprehensive
economic evaluation of national dairy policies
(i.e., the price support program, federal milk
marketing order, over-order premiums and
state pricing programs, dairy compacts and
export programs) and their effect on the farm
and rural economy, domestic food and
nutrition programs, and consumer costs. 2) A
series of studies on a) the market effects of
terminating all federal dairy programs relating
to price support and supply management; and
b) the effects of changing the standard of
identity for fluid milk so that the required
minimum protein content of fluid milk is
commensurate with the average nonfat solids
contents of farm milk directly from the cow.
[Section 137]
[Note: California has a standard of identity for
fluid milk that requires a nonfat solids content
higher than the national requirement and
higher than the average content of raw milk
from the cow.] [Section 1508]
LEGISLATION
P.L. 108-7 (FY2003 Consolidated Appropriations Resolution)
Division N, Title II contains $3.1 billion in supplemental disaster assistance for farmers
and ranchers, including an extension in the cutoff date for eligibility in the Livestock
Compensation Programs, $250 million in direct payments under a 2001-2002 Livestock
Assistance Programs, and a $250 million reimbursement of Section 32 for previous outlays
for the Livestock Compensation Program. Signed into law February 20, 2003.
S. 40 (Feingold)
Quality Cheese Act of 2003. Prohibits products that contain dry ultra-filtered milk
products or casein from being labeled as domestic natural cheese. Introduced January 7,
2003; referred to Agriculture Committee.
S. 560 (Craig), H.R. 1160 (Sherwood)
Imposes tariff-rate quotas on certain casein and milk protein concentrates. Introduced
January 14, 2003; referred to Finance Committee.
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H.R. 324 (Vitter)
To restore the consent of Congress to the Northeast Interstate Dairy Compact and to
grant the consent of Congress to the Southern Dairy Compact, a Pacific Northwest Dairy
Compact, and an Intermountain Dairy Compact. Introduced January 8, 2003; referred to the
Judiciary Committee.
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