Order Code IB97011
CRS Issue Brief for Congress
Received through the CRS Web
Dairy Policy Issues
Updated May 26, 2005
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 Income Loss Contract (MILC) Payments
Background
MILC Program Mechanics
MILC Payment History
Federal Cost of MILC
MILC Program Reauthorization
Dairy Price Support Program
Background and Spending
The Administration’s FY2006 Budget Proposal
Milk Protein Concentrate Trade Issues
Dairy Forward Pricing Pilot Program
LEGISLATION

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Dairy Policy Issues
SUMMARY
Several dairy issues that were unresolved
have to be $4.3 billion instead of $3 billion, in
in the 108th Congress are continuing as issues
order to offset the projected cost of MILC
of interest in the 109th Congress. Separate bills
program extension.
were introduced in the 108th Congress to
extend authority for both the Milk Income
To help offset some of the $1.3 billion
Loss Contract (MILC) Program and the dairy
estimated cost of extending the program, the
forward pricing pilot program, and to address
Administration has proposed that USDA be
dairy producer concerns about the importation
given enhanced authority to adjust the govern-
of milk protein concentrates. Moreover, fed-
ment purchase prices of surplus butter and
eral dairy programs might be impacted this
nonfat dry milk. According to the Adminis-
year since the final FY2006 budget resolution
tration, this would minimize federal costs for
(H.Con.Res. 95) requires cuts in mandatory
the dairy price support program (DPSP), and
USDA spending.
save an estimated $600 million over 10 years.
The DPSP indirectly supports the farm price
Under the 2002 farm bill-authorized
of milk through government purchases of
MILC program, eligible dairy farmers can
surplus dairy products when market prices are
receive a direct government payment when the
low. The proposed Administration change to
farm price of milk used for fluid consumption
the program would require legislative action.
falls below an established target price. The
program is scheduled to expire after Septem-
Many dairy farmer groups are also con-
ber 30, 2005. Bills have been introduced in
cerned that imports of milk protein concen-
the 109th Congress (S. 273, S. 307, H.R. 859,
trates (MPCs) are displacing domestic dairy
and H.R. 1260) to extend program authoriza-
ingredients and thus depressing farm milk
tion for two years, until September 30, 2007.
prices. A bill has been reintroduced in the
MILC program extension is supported by
109th Congress (H.R. 521) to impose tariff rate
small to mid-sized dairy farms and the Ad-
quotas on certain MPCs. Dairy processor
ministration. Some groups would like to see
groups are opposed to this bill.
the payment limit raised to benefit larger dairy
operations (as in S. 273 and H.R. 1260).
A temporary pilot program that allows
processors to enter into forward price con-
Extension of the MILC program might be
tracts with individual dairy farmers or their
addressed in the context of budget reconcilia-
cooperatives for certain uses of milk expired
tion legislation later this year. The adopted
December 31, 2004. A forward price contract
FY2006 budget resolution requires the House
allows buyers and sellers of a commodity to
and Senate Agriculture Committees to report
negotiate a price for the commodity on a
legislation this year that would reduce spend-
future delivery date and insulates both parties
ing on mandatory agriculture and nutrition
from price volatility. To date, no bills have
programs by a total of $3 billion for FY2006-
been introduced in the 109th Congress. Exten-
FY2010. CBO estimates the total cost of a
sion of the program is supported by dairy
two-year MILC extension at $1.3 billion.
processors, but opposed by the largest organi-
Hence, if extension of the MILC program
zation of dairy cooperatives, which is con-
were included in budget reconciliation, total
cerned that the program might undermine
cuts for mandatory USDA spending would
federal minimum milk pricing requirements.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On April 29, 2005, Congress completed action on the FY2006 budget resolution
(H.Con.Res. 95). The adopted measure contains reconciliation instructions to the House and
Senate Agriculture Committees requiring them to report legislation this year to reduce
spending on mandatory USDA programs under their jurisdiction by a total of $3 billion over
five years (FY2006-FY2010). Of interest to the dairy sector is how possible reconciliation
action might affect two federal dairy programs — the dairy price support program and the
Milk Income Loss Contract (MILC) program. Authority for the MILC program is scheduled
to expire after September 30, 2005. A two-year extension of the program might be
considered by the agriculture committees in the context of budget reconciliation legislation.
The two-year, CBO-estimated cost of MILC program extension is $1.3 billion, which would
have to be offset with additional USDA spending reductions beyond the $3 billion required
by the budget resolution. The Administration supports MILC extension, but has also
proposed a change to the dairy price support program that would reduce federal spending on
surplus dairy product purchases.
BACKGROUND AND ANALYSIS
Milk Income Loss Contract (MILC) 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
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, dairy processors and
Upper Midwest producers are strongly opposed to regional compacts.
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MILC Program Mechanics
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) program.) This program did not replace the dairy price support program or federal
milk marketing orders, other 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 MILC program, 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 were
made retroactively to December 1, 2001.
The MILC program is akin to 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 full 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 MILC 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
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 negatively affects 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 receives 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.
MILC Payment History
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
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September 30, 2005. Monthly market prices were sufficiently low between December 2001
and August 2003 that MILC payments were made in every month during this period.
Beginning in the late summer months, market farm milk prices greatly improved, rebounding
from a 25-year low that prevailed throughout most of the earlier months of 2003. Hence, no
MILC payments were required in September through December 2003. However, farm milk
prices began to decline again in the latter part of 2003. Consequently, MILC payments
resumed in January and February 2004. Market farm milk prices reversed their course in the
late winter months and early spring of 2004, increasing to record high levels by the spring
of 2004. Market prices remained sufficiently high from May 2004 through May 2005 so that
no MILC payments were required over that time period. However, market prices have
declined to the point that a small MILC payment ($0.03 per cwt.) will be made for June 2005
milk production (See Table 1, below.)
Federal Cost of MILC
For the first two years of the MILC program, its cumulative cost was just over $2 billion
— $1.8 billion in FY2003 and $221 million in FY2004. (The FY2004 outlays were
significantly lower than CBO’s earlier estimate of $935 million at the beginning of the fiscal
year.) FY2004 outlays were lower than expected because market farm milk prices were
much stronger than originally forecasted, reaching a record high in the summer of 2004. For
the first eight months of FY2005, no MILC program outlays were made because market
prices remained above the $16.94 target price. However, the market price dropped to $16.87
per cwt. for June, just below the $16.94 threshold, thus triggering the resumption of MILC
payments after a 13-month period of no payments being required.
Table 1. Monthly Milk Income Loss Contract (MILC) Payment Rates
Month
Payment Rate
Month
Payment Rate
(per hundredweight)
(per hundredweight)
December 2001
$0.77
February 2003
$1.56
January 2002
$0.78
March 2003
$1.75
February 2002
$0.78
April 2003
$1.82
March 2002
$0.93
May 2003
$1.79
April 2002
$1.00
June 2003
$1.78
May 2002
$1.09
July 2003
$1.76
June 2002
$1.20
August 2003
$1.22
July 2002
$1.38
Sept .- Dec. 2003
$0.00
August 2002
$1.45
January 2004
$0.83
September 2002
$1.45
February 2004
$0.95
October 2002
$1.59
March 2004
$0.79
November 2002
$1.39
April 2004
$0.02
December 2002
$1.43
May 2004-May 2005
$0.00
January 2003
$1.41
June 2005
$0.03
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MILC Program Reauthorization
The MILC program expires on September 30, 2005, while all other major farm
commodity support programs authorized by the 2002 farm bill expire at the end of the 2006
crop year. Proponents of the MILC program would like to see the program extended to at
least coincide with the expiration of all other commodity support programs. Four bills in the
109th Congress, H.R. 859 (C. Peterson), H.R. 1260 (Reynolds), S. 273 (Coleman), and S. 307
(Santorum), would extend the life of the MILC program for two additional years, through
September 30, 2007. In addition, a provision in H.R. 1260 and S. 273 would double the limit
on eligible production for a MILC payment from the current 2.4 million lbs. to 4.8 million
lbs., which is supported by larger milk producers who contend that the current production
limit is set too low to benefit them. H.R. 1260 and S. 273 also would raise the payment rate
for all MILC program payment recipients from the current $16.94 per cwt. to $17.10. To
date, no action has been taken on any of these measures. In its FY2006 budget request, the
Administration expressed its support of a two-year extension of the MILC program in its
current form. The Administration also proposed a 5% reduction in all direct farm payment
programs, including MILC. Such a change would require congressional action.

Extending the MILC program has raised some budgetary concerns. The MILC program
is a mandatory program and has a fixed expiration date. Therefore, any spending beyond that
date would be considered new spending above what was authorized by the 2002 farm bill.
Also, an increase in either the target price or the maximum eligible production would add
further to the cost of the program. The Congressional Budget Office estimates that an
extension of the MILC Program in its current form would cost a total of $1.3 billion over the
two-year period. Hence, an extension of the MILC program would have to be offset with
comparable reductions in other mandatory programs.
The extension of the MILC program might be considered in the context of an FY2006
budget reconciliation bill. The final version of the FY2006 budget resolution (H.Con.Res.
95) requires the House and Senate Agriculture Committees to reduce spending on mandatory
USDA programs by $3 billion over five years (FY2006-FY2010). (See CRS Report
RS22086, Agriculture and FY2006 Budget Reconciliation, for more information.) Hence,
if the agriculture committees were to extend the MILC program in the context of budget
reconciliation, they would be required to reduce total mandatory spending by $4.3 billion
over five years, instead of the $3 billion mandated by the FY2006 budget resolution.
Attempts were made to extend the MILC program in the 108th Congress. On September
21, 2004, a provision was attached to the FY2005 VA/HUD appropriations bill (S. 2825) in
the full Senate Appropriations Committee markup that would have extended the MILC
program through September 30, 2007, and raised the fluid milk target price from the current
level of $16.94 per cwt. to $17.10 per cwt. The provision was deleted in conference when
the FY2005 VA/HUD funding bill was folded into the final FY2005 omnibus appropriations
act (P.L. 108-447).
Some groups would like to see the MILC program terminated and replaced with
regional compacts or a similar pricing mechanism. In the 108th Congress, H.R. 324 (Vitter)
would have restored the consent of Congress for the Northeast Dairy Compact and granted
consent to three new compacts, in the South, the Pacific Northwest, and the Intermountain
states (Colorado, Utah and Nevada). No action was taken on this measure. Also in the 108th
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Congress, a proposed National Dairy Equity Act (H.R. 4597 (Reynolds) and S. 2525
(Specter)) would have created five regional marketing areas that would have been allowed
to establish a minimum fluid farm milk price for the region. No action was taken on this
measure. Under the proposal, if the market price of farm milk were to fall below the
established price, processors would be required to pay the difference between the two prices
into a national fund, which would be distributed back to dairy farmers in the participating
regions by a formula. The payment formula would be funded in part by a government
contribution to the fund. States choosing not to participate in the program would be allowed
to continue participating in the MILC program, which would be extended through FY2007,
while participating states would be prohibited from receiving MILC payments. Supporters
contend that this proposed program would help dairy farmers weather the effects of volatile
farm milk prices. Opponents say that it distorts dairy markets and could lead to
overproduction.
Dairy Price Support Program
Background and Spending
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 5½-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
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considered a related activity to the price support program. Hence, MILC outlays are included
in Table 2.)
Table 2. Commodity Credit Corporation Dairy Price and
Income Support Operations, 1980/81-2002/03
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
0.5
2,494 (f)
9.90
0.3
2003-04 NA
350
(g)
9.90
NA
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 $1.8 billion in Milk Income Loss Contract payments.
g. Includes an estimated $220 million in Milk Income Loss Contract payments.
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The Administration’s FY2006 Budget Proposal
In its FY2006 budget request, released on February 7, 2005, the Administration made
several proposals for reducing the cost of all federal farm commodity price and income
support programs over a multi-year period. As part of dairy’s contribution to deficit
reduction, the Administration has proposed that USDA be required to adjust the government
purchase prices of surplus butter and nonfat dry milk (powder) so that government purchases
and federal costs can be minimized. Under current law, USDA has the authority to adjust
the butter and powder prices twice annually, which it has exercised infrequently. Whenever
USDA reduces the purchase price of one product, it must increase the purchase price of the
other in order to continue supporting the overall farm price of milk at the mandated level of
$9.90 per cwt. Although the Administration has not issued details on its proposal, it would
likely eliminate the twice a year limit on price adjustments and instead require USDA to
adjust purchase prices when surplus dairy product purchases are excessive, in order to
minimize federal costs. Legislation would have to be enacted to cause this change.
Proponents say that in the long run this will reduce government costs and make domestic
milk products more competitive in world markets. Most dairy farmer groups oppose
reductions in government purchase prices, and contend that the income of all dairy farmers
would be adversely affected. Changes to farm commodity programs could be addressed in
the context of a budget reconciliation bill this year, since the final FY2006 budget resolution
requires the agriculture committees to reduce spending on mandatory agricultural programs
by $3 billion over five years (FY2006-FY2010). (For more on the budget resolution, see CRS
Report RS22086, Agriculture and the FY2006 Budget Reconciliation.)
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 and casein (the main protein found in milk) 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 formulated 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]. According to International Trade Commission data, MPC imports peaked in
2000 at 52,677 metric tons, before falling back to 28,469 metric tons in 2001, and rising
again to 33,626 metric tons in 2002 and 29,111 metric tons in the first 10 months of 2003
(7.8% higher than the first 10 months of 2002). Imports of casein have also risen over the
years, peaking at 74,230 metric tons in 2000, before declining in 2001 and 2002, but rising
again in 2003 on a pace with the peak in 2000.
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Currently, MPC is not 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 petitioned FDA for a change in standards to allow MPC in cheese
production. FDA currently is considering this request.

Identical bills were introduced in the 108th Congress that would have affected the
importation and use of MPCs, but no action was taken. A similar measure has been
reintroduced in the 109th Congress (H.R. 521) that would impose tariff rate quotas (TRQs)
on certain MPCs. Under the proposed TRQ, any imports of MPC above the quota level
would be subject to a high tariff that would economically prohibit MPC imports above that
level.
Supporters of TRQs on MPC, including most milk producer groups, contend that
foreign MPC and casein are being dumped in the United States. Opponents of the legislation
include dairy processor groups, the largest of which is the International Dairy Foods
Association (IDFA), who contend that MPC imports are not displacing U.S. production of
nonfat dry milk. IDFA and other MPC-user groups contend that MPCs have certain
properties that are important in the manufacturing of certain food products (e.g. high-protein
sport drinks and food bars) and that nonfat dry milk is not a substitute for the use of MPCs.
These groups also maintain that the domestic support price for nonfat dry milk should be
reduced instead, as a way to stimulate the market for domestic powder. (For more
information on the dairy price support program, see the section on the program 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 an appeal of the Customs ruling, a
process which could take more than one year.
As requested by the Senate Finance Committee, the International Trade Commission
completed a year-long investigation of U.S. market conditions for milk proteins, and filed
a written report on May 18, 2004. (See [ftp://ftp.usitc.gov/pub/reports/studies/PUB3692.
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PDF] for the full report.) The ITC was asked to provide an overview of the global market
of milk proteins, information on how government support and intervention affects the protein
market, and assess how imported milk proteins affect U.S. farm milk prices. The ITC
determined that imports of milk proteins may have displaced 318 million lbs. of U.S.-
produced milk protein products over the 1998-2002 period, or an average of 63 million lbs.
per year. The ITC states that during this period, domestic milk proteins were in surplus by
a greater amount than what was likely displaced by protein imports. Therefore, they
concluded that most of the impact of milk protein product imports was absorbed by the
taxpayer through additional purchases of surplus nonfat dry milk, and that farm-level prices
were not significantly affected. The ITC study also determined that the dairy price support
program creates a disincentive to manufacture MPCs in the United States. They found that
under most conditions, U.S. dairy processors could receive a higher return on the production
of nonfat dry milk compared with the production of MPCs.
Legislation was introduced in the 108th Congress (H.R. 4223) that would have
authorized a federal program to subsidize the domestic production of MPCs, with payment
levels set at the discretion of the Secretary of Agriculture. No action was taken on the
measure, and a similar bill has not been reintroduced in the 109th Congress. Supporters
contend that the cost of these payments would be offset by reduced purchases of surplus
nonfat dry milk. They say that manufacturers will divert production from surplus nonfat dry
milk to MPCs, thus improving farm milk prices. Opponents are concerned that the proposed
subsidy program might be subject to a challenge in the World Trade Organization. They also
contend that even with a subsidy program, it will be difficult for domestic producers to profit
in the market because foreign competitors have a greater price advantage.
Dairy Forward Pricing Pilot Program
A provision in the FY2000 Consolidated Appropriations Act (P.L. 106-113) authorized
a temporary pilot program to allow individual dairy farmers or their cooperatives to enter into
forward price contracts with processors for certain uses of milk. Identical bills in the 108th
Congress (H.R. 3308 and S. 2565) would have converted the pilot program to a permanent
program. However, no action was taken, and the program expired on December 31, 2004,
as specified by the authorizing statute. Bills to reauthorize the program might be offered in
the 109th Congress.
A forward contract allows buyers and sellers of a commodity to negotiate a price for the
commodity for future delivery and insulate both parties from price volatility. The current
pilot program allows dairy producers and cooperatives to enter into forward contracts for
milk used in all manufactured products, but not for milk used for fluid consumption. Under
the federal milk marketing order system, which regulates the farm price of much of the milk
produced, a dairy processor must pay a minimum price for purchased milk depending on
market conditions. However, under the pilot program, the contracted price becomes the
relevant price that the processor has to pay, regardless of what the market price is at the time
of delivery. Some groups view forward pricing as a desirable risk management tool, which
they say can lend some stability to volatile wholesale milk prices. Other farm groups have
expressed concern that forward pricing might undermine the federal milk marketing order
system.
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An ongoing USDA study of the effect of the pilot program on dairy farmer prices
determined that for the period September 2000 through June 2003, forward contracted milk
prices on average were $0.72 per hundredweight higher than non-contract prices. The
difference varied significantly over the period, with contract prices being significantly higher
than non-contract prices when market prices were low, particularly from June 2002 through
June 2003. Contract prices were significantly lower than farm milk prices not under contract
through much of 2001, when market prices were relatively high.
LEGISLATION
H.Con.Res. 95 (Nussle), S.Con.Res. 18 (Gregg)
The final FY2006 budget resolution (H.Con.Res. 95) contains reconciliation instructions
to the House and Senate Agriculture Committees, requiring them to report legislation that
reduces mandatory agricultural spending by $3 billion over five years (FY2006-FY2010).
The committees must report language to their respective budget committees by September
16, 2005. The earlier House-passed version of the resolution would have required the House
Agriculture Committee to reduce spending by $5.3 billion over five years. The Senate-
passed version (S.Con.Res. 18) would have required five-year reductions of $2.8 billion of
the Senate Agriculture Committee. H.Con.Res. 95 was introduced and reported on March
11, 2005 (House Rept. 109-17); initially passed the House on March 17, 2005, by a vote of
218-214. S.Con.Res. 18 was introduced and reported (without a written report) on March
11, 2005; passed the Senate with amendments on March 17. The final FY2006 budget
resolution (H.Con.Res. 95) was agreed to by both chambers on April 28, 2005 — by a vote
of 214-211 in the House and 52-47 in the Senate. Presidential approval of a budget
resolution is not required.
H.R. 521 (Sherwood)
Imposes tariff-rate quotas on certain casein and milk protein concentrates. Introduced
February 2, 2005; referred to House Ways and Means Committee.
H.R. 859 (C. Peterson), S. 307 (Santorum)
Amends the Farm Security and Rural Investment Act of 2002 to extend contracts for
national dairy market loss (MILC) payments through FY2007. H.R. 859 was introduced
February 16, 2005, and referred to House Agriculture Committee. S. 307 was introduced
February 7, 2005, and referred to Senate Agriculture Committee
H.R. 1260 (Reynolds) S. 273 (Coleman)
Amends the Farm Security and Rural Investment Act of 2002 to (1) extend contracts
for national dairy market loss payments through FY2007; (2) increase the eligible portion
of a producer’s milk production from the current 2.4 million lbs. to 4.8 million lbs.; and (3)
raise the payment target price from the current $16.94 per hundredweight (cwt.) to $17.10
per cwt. H.R. 1260 was introduced March 10, 2005, and referred to House Agriculture
Committee; S. 273 was introduced February 3, 2005, and referred to Senate Agriculture
Committee.
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