Order Code IB97011
CRS Issue Brief for Congress
Received through the CRS Web
Dairy Policy Issues
Updated January 10, 2006
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
Federal Milk Marketing Order Issues
Background on Federal Milk Marketing Orders
Milk Regulatory Equity Act of 2005 (H.R. 4015, S. 2120)
Regulation of Certain Interstate Milk Shipments
Producer-Handler Exemption
Nevada Exclusion from Federal Milk Marketing Orders
Milk Protein Concentrate Trade Issues
LEGISLATION

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Dairy Policy Issues
SUMMARY
Several dairy issues are being considered
United States. An identical bill (H.R. 4015) is
by Congress, some of which affect the three
pending in the House. Under current regula-
major federal dairy policy tools — the Milk
tions, producer-handlers (i.e. fluid milk han-
Income Loss Contract (MILC) program,
dlers who produce and process their own
federal milk marketing orders, and the dairy
milk) are exempt from federal order price
price support program.
regulation. H.R. 4015/S. 2120 would require
a large producer-handler in Arizona to become
Under the MILC program, which expired
regulated. The provision is supported by other
on September 30, 2005, eligible dairy farmers
milk producer and processor groups who
received a government payment when the
contend that unregulated processors undercut
farm price of milk used for fluid consumption
the competition. The producer-handler argues
fell below an established target price. Since
that the provision is a tax being placed on its
the inception of the program, its cumulative
operations that would adversely affect its
cost was nearly $2 billion. However, FY2005
business, and ultimately result in higher prices
outlays were negligible since farm milk prices
to consumers.
were relatively strong. Extension of the MILC
program is supported by small to moderate-
Another federal dairy policy tool, the
sized dairy farmers. Large dairy farmers gen-
dairy price support program (DPSP), indi-
erally oppose program extension in its autho-
rectly supports the farm price of milk through
rized form, because of its payment limitations.
government purchases of surplus dairy prod-
ucts when market prices are low. Earlier this

The conference agreement on
the
year, the Administration proposed that USDA
FY2006 omnibus budget reconciliation bill
be given enhanced authority to adjust the
(H.Rept. 109-362, S. 1932) would extend the
government purchase prices of surplus butter
MILC program until September 2007 at a
and nonfat dry milk. According to the Admin-
somewhat lower level of support than the
istration, this would save an estimated $600
expired program. The issue has been contro-
million over 10 years. Neither the House or
versial, since the two-year estimated cost of
Senate version of the FY2006 budget reconcil-
nearly $1 billion for program extension had to
iation bill adopted this provision, or any other
be at least partially offset by reductions in
provision that would directly affect dairy price
other mandatory USDA programs. Final
support program spending.
action is expected shortly after the 109th Con-
gress returns for its second session.
Separately, dairy farmer groups are
concerned that imports of milk protein con-
Federal milk marketing orders regulate
centrates (MPCs) are displacing domestic
the farm price of milk for roughly two-thirds
dairy ingredients and thus depressing farm
of U.S. milk production by requiring proces-
milk prices. Bills have been introduced (H.R.
sors to pay minimum prices for farm milk
521 and S. 1417) to impose tariff rate quotas
depending in its end use. S. 2120, as passed
on certain MPCs. Dairy processor groups are
by the Senate in December 2005 addresses
opposed to this bill.
marketing order issues relevant to the western
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
The conference agreement on the FY2006 omnibus budget reconciliation bill (H.Rept.
109-362, S. 1932) contains a two-year extension of the Milk Income Loss Contract (MILC),
which expired on September 30, 2005. The MILC program provides direct payments to
participating dairy farmers when the market price of farm milk falls below a legislatively
determined target price. The conference agreement would reduce the payment rate to 34%
of the difference between the target price and the lower market price, instead of 45% as
provided in the original authorizing statute. The agreement reduces the payment rate to 0%
in September 2007, effectively ending the program on August 31, 2007, so that the program
will have no budget baseline when the next farm bill is formulated in 2007.
Separately, the Senate passed by unanimous consent on December 16, 2005, a bill (S.
2120) that addresses several federal milk marketing order issues that affect Western states.
A similar House bill (H.R. 4015) is pending.
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
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were seeking new authority to create a separate compact. However, dairy processors and
Upper Midwest producers are strongly opposed to regional compacts.
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. (The MILC program expired on September 30, 2005, as required by the 2002
farm bill. The pending conference agreement on the FY2006 omnibus reconciliation bill
(H.Rept. 109-362, S. 1932) contains a two-year extension of the program. See “MILC
Program Reauthorization” below for details.)
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 could receive a payment on all milk production during that
month, but no payments are made on any annual production in excess of 2.4 million pounds
per dairy operation. Under current law, all contracts expired 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 shifted the responsibility of the payment
from the processor (and ultimately the consumer) to the federal government.
During the 2002 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
would cause excess milk production that would 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,
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when the funding responsibility was shifted to the federal government as in the final version
of the program.
Table 1. Monthly Milk Income Loss Contract (MILC) Payment Levels
Payment (per
Payment (per
Month
Month
hundredweight)
hundredweight)
December 2001
$0.77
April 2003
$1.82
January 2002
$0.78
May 2003
$1.79
February 2002
$0.78
June 2003
$1.78
March 2002
$0.93
July 2003
$1.76
April 2002
$1.00
August 2003
$1.22
May 2002
$1.09
Sept.- Dec. 2003
$0.00
June 2002
$1.20
January 2004
$0.83
July 2002
$1.38
February 2004
$0.95
August 2002
$1.45
March 2004
$0.79
September 2002
$1.45
April 2004
$0.02
October 2002
$1.59
May 2004-May 2005
$0.00
November 2002
$1.39
June 2005
$0.03
December 2002
$1.43
July-November 2005
$0.00 (*)
January 2003
$1.41
December 2005
$0.04 (*)
February 2003
$1.56
January 2006
$0.105 (*)
March 2003
$1.75
Source: USDA, Agricultural Marketing Service (AMS)
* Legislative authority for the MILC program expired on September 30, 2005. The pending conference
agreement to the FY2007 omnibus budget reconciliation bill contains a two-year extension of program
authority. The payments posted in this table for December 2005 ($0.04 per cwt.) and January 2006
($0.105 per cwt.) will be made retroactively if MILC extension is enacted in its present form in the
conference agreement.
MILC Payment History
USDA began accepting applications for the “Milk Income Loss Contract (MILC)
Program” on August 15, 2002 and continued to do so until the program expired on
September 30, 2005, as required by the 2002 farm bill. 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 of 2003, market
farm milk prices greatly improved, rebounding from a 25-year low that prevailed throughout
most of the early 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
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high from May 2004 through May 2005 so that no MILC payments were required over that
time period. Market prices declined to the point that a small MILC payment ($0.03 per cwt.)
was made for June 2005 milk production, the only payment that was made in all of FY2005.
If the conference agreement to the FY2006 omnibus budget reconciliation bill is enacted in
its present form, retroactive payments will be made for December 2005 and January 2006.
(See Table 1 for MILC payment history.)
Federal Cost of MILC
For the three years of the MILC program, its cumulative cost was just over $2 billion
— $1.8 billion in FY2003, $221 million in FY2004, and $8.8 million in FY2005. The
FY2003 total actually includes two fiscal years worth of payments, since retroactive
payments for FY2002 were made over the course of FY2003. FY2004 and FY2005 outlays
were significantly lower than originally estimated because market farm milk prices were
much stronger than originally forecasted, reaching a record high in the summer of 2004.
Farm milk prices remained strong throughout all of FY2005, and MILC payments were
triggered in only one month during the year (June 2005). During the first three fiscal years
of the program (FY2003-FY2005), five states accounted for just over one-half of the total
payments made over the time period (see Table 2).
Table 2. Top 20 Recipient States of MILC Payments, FY2003-2005
Cumulative Total
($ in millions)
FY2003-2005
FY2003-2005
State
State
Total Payments
Total Payments
1. Wisconsin
$415.2
11. Missouri
$39.8
2. New York
$187.0
12. Idaho
$39.1
3. Pennsylvania
$181.3
13. Illinois
$38.1
4. Minnesota
$163.6
14. Washington
$36.0
5. California
$149.1
15. Kentucky
$34.6
6. Michigan
$84.9
16. Indiana
$33.9
7. Ohio
$76.5
17. Virginia
$33.1
8. Iowa
$67.4
18. Tennessee
$27.1
9. Vermont
$45.4
19. South Dakota
$22.5
10. Texas
$45.3
20. Maryland
$20.1
20-State Total
$1,740.1
U.S. Total
$2,025.4
Source: U.S. Department of Agriculture, Farm Service Agency
MILC Program Reauthorization
The MILC program expired on September 30, 2005, while all other major farm
commodity support programs authorized by the 2002 farm bill expire at the end of the 2007
crop year. Proponents of the MILC program would like to see the program extended to
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coincide with the expiration of all other commodity support programs. The conference
agreement on the FY2006 omnibus reconciliation bill contains a provision (H.Rept. 109-362,
S. 1932) that extends the MILC program through September 30, 2007. It also reduces the
MILC payment rate so that a recipient would receive 34% of the difference between the
target price and the lower market price, instead of the 45% payment rate in the recently
expired program.
The payment rate was reduced as a budget-saving measure in order to keep the two-year
estimated cost of program extension just below $1 billion. (CBO estimates the two-year cost
of the provision at $998 million, compared with $1.2 billion if the program were extended
without the payment rate reduction.) Also, in order to minimize the cost of program
extension, the conference agreement reduces the MILC payment rate to 0% in September
2007, the last month of program extension. This means that when the next farm bill is
formulated in 2007, the MILC program will have no baseline budget spending allocated to
it beyond August 2007.
During the budget reconciliation debate, some farm groups opposed MILC program
extension, since the agriculture committees had to offset its cost with reductions in other
USDA mandatory programs in order to reach its budget deficit reduction targets. In its
FY2006 budget request, the Administration expressed its support of a two-year extension of
the MILC program in its current form. (See CRS Report RS22086, Agriculture and FY2006
Budget Reconciliation, by Ralph M. Chite, for more information.)
Separately, a number of free-standing bills in the 109th Congress have been introduced
to extend the MILC program. No action was taken on any of these measures. H.R. 859 (C.
Peterson), H.R. 1260 (Reynolds), H.R. 3847 (Green), S. 273 (Coleman), and S. 307
(Santorum), would extend the life of the MILC program for two additional years, through
September 30, 2007. Two other bills would provide shorter-term extensions, until October
31, 2005 (H.R. 3848) and December 31, 2005 (H.R. 3846). 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.
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 3, 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.
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Table 3. Commodity Credit Corporation Dairy Price and
Income Support Operations, 1980/81-2004/05
CCC
Net Removals
CCC Support
Purchases as
Marketing
Net Outlays
Milk Equivalent
Price
Percentage
Yeara
(million $)
(billion lbs.)b
($ per cwt.)
of
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
2004-05 h
NA
33
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.
h. USDA estimate.
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
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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 3.)
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 had 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.
The Administration proposes the elimination of the twice a year limit on price
adjustments and instead would require USDA to adjust purchase prices when surplus dairy
product purchases are excessive, in order to minimize federal costs. Separately, it would
prohibit USDA from purchasing any dairy products under the price support program in any
month that the prior month’s market price of the commodity is above the support price. The
Administration estimates that its dairy proposals would save approximately $600 million
over 10 years. Legislation would have to be enacted to cause any changes to the program.
Neither the House nor the Senate versions of the FY2006 omnibus reconciliation bills
contains any changes to the dairy price support program. Proponents say that in the long run
the Administration’s proposal would 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. The issue might resurface when the farm bill is debated next year.
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Federal Milk Marketing Order Issues
Background on Federal Milk Marketing Orders
The farm price of approximately two-thirds of the nation’s fluid milk is regulated under
federal milk marketing orders. Federal orders, which are administered by the U.S.
Department of Agriculture (USDA), were instituted in the 1930s to promote orderly
marketing conditions by, among other things, applying a uniform system of classified pricing
throughout the market. Some states, California for example, have their own state milk
marketing regulations instead of federal rules. Producers delivering milk to federal
marketing order areas are affected by two fundamental marketing order provisions: the
classified pricing of milk according to its end use, and the pooling of receipts to pay all
farmers a blend price.
Proponents of federal orders argue that orders are necessary because dairy farmers have
a competitive disadvantage vis-a-vis dairy handlers (processors) when it comes to
determining prices that farmers receive for their raw, perishable milk. Federal orders
regulate handlers who sell milk or milk products within a defined marketing area by
requiring them to pay not less than established minimum class prices for the Grade A milk
they purchase from dairy producers, depending on how the milk is used. This classified
pricing system requires handlers to pay a higher price for milk used for fluid consumption
(Class I) than for milk used in manufactured dairy products such as yogurt, ice cream, and
sour cream (Class II products), cheese (Class III), and butter and dry milk products (Class IV
products). These differences between classes reflect the different market values for the
products.
Blend pricing allows all dairy farmers who ship to the market to pool their milk receipts
and then be paid a single price for all milk based on order-wide usage (a weighted average
of the four usage classes). Paying all farmers a single blend price is seen as an equitable way
of sharing revenues for identical raw milk directed to both the higher-valued fluid market and
the lower-valued manufacturing market.
Manufactured class (Class II, III and IV) prices are the same in all orders nationwide and
are calculated monthly by USDA based on current market conditions for manufactured dairy
products. The Class I price for milk used for fluid consumption varies from area to area.
Class I prices are determined by adding to a monthly base price, a “Class I differential” that
generally rises with the geographical distance from milk surplus regions in the Upper
Midwest, the Southwest, and the West. Class I differential pricing is a mechanism designed
to ensure adequate supplies of milk for fluid use at consumption centers. The supply of milk
may come from local supplies or distant supplies, whichever is more efficient. However,
local dairy farmers are protected by the minimum price rule against lower-priced milk that
might otherwise be hauled into their region.
Milk Regulatory Equity Act of 2005 (H.R. 4015, S. 2120)
On December 16, 2005, the Senate passed by unanimous consent the Milk Regulatory
Equity Act (S. 2120) which addresses several federal milk marketing order issues relevant
to the western United States. An identical bill (H.R. 4015) was introduced earlier in the
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House, but no action has been taken. Among the milk marketing order issues addressed in
H.R. 4015/S. 2120 are: 1) the regulation of fluid milk processors who operate a plant in a
federal order area, are not regulated by that order, and ship packaged milk into a state
marketing order (not a federal order); 2) the regulation of fluid processors who produce,
package and distribute their milk, also known as producer-handlers or producer-distributors;
and 3) the exclusion of Nevada from federal milk marketing orders.
Regulation of Certain Interstate Milk Shipments. H.R. 4015 and S. 2120 affect
any processor (handler) of Class I (fluid-use) milk who operates a plant that is located in a
federal milk marketing order area, is not regulated by the federal order because it has no sales
in the federal marketing area, and has packaged fluid milk deliveries to a state that is
regulated by a state marketing order. Such a plant is not currently paying a regulated price
for the raw milk that is used for these dispositions or sales. The bill would require any such
processor to pay into the federal order pool the minimum federal milk marketing order price
for the raw milk that went into the shipments sold into the state order.
This provision would primarily affect a large fluid processor who is located in Yuma,
Arizona (which is part of the Arizona-Las Vegas milk marketing order area), but ships all
of its packaged milk into California. Under current law and regulations, this plant’s interstate
shipments to California are not regulated by either the Arizona-Las Vegas order or the
California state order. This provision is supported by other processors and milk producers
who contend that this processor’s current exclusion from paying the minimum regulated
price is a “loophole” in the current federal order system, which they say provides that
processor with an unfair advantage. Opponents of this provision contend that it would
adversely affect their operations and raise the price of milk to consumers. They also contend
that Congress and USDA should hold hearings on the issue before any legislative changes
are considered.
Producer-Handler Exemption. As defined by USDA, producer-handlers are dairy
farmers who process milk from their own cows in their own plants and market their packaged
fluid milk and other dairy products themselves. Producer-handlers sometimes are referred
to as producer-distributors, or P-Ds. Producer-handlers may sell products directly to
consumers through their own stores, directly to consumers on home-delivery routes, or to
wholesale customers such as food stores, vendors, or institutions. Current regulations exempt
producer-handlers from the minimum price requirements of federal milk marketing orders,
but minimal reporting is required.

H.R. 4015 and S. 2120 would require the full regulation of any producer-handler with
distribution of fluid milk in the Arizona-Las Vegas order area in excess of 3 million pounds
in the previous month. The proposed legislation primarily would affect the same producer-
handler in Arizona that would be affected by the interstate milk shipment provision discussed
above. USDA has been considering regulatory changes that would establish a 3 million lb.
per month route disposition limit for a producer-handler exemption, both in the Pacific
Northwest and the Arizona-Las Vegas order areas. The proposed USDA regulation also
would affect at least three large producer handlers in the Pacific Northwest. A final USDA
decision is pending.

The producer-handler issue is a separate issue from the provision above relating to the
interstate shipment of milk, but with similar implications. Producers of regulated milk want
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this unregulated milk to become regulated so it will increase the blend price received by all
regulated dairy farmers. Regulated processors contend that it is unfair that they have to pay
the regulated price while certain handlers are exempt. The producer-handlers who would
become regulated argue that this is a tax being placed on independent family farms that
would ultimately result in higher prices to consumers.
Nevada Exclusion from Federal Milk Marketing Orders. Section 760 of the
FY2000 agriculture appropriations act (P.L. 106-78) was intended to remove Clark County,
Nevada from the Las Vegas-Arizona federal milk marketing order area so that the only
handler in this county would be subject to the lower Nevada state order price for fluid milk.
However, the enacted provision was phrased in a way that did not completely remove Clark
County from the federal order system. The enacted language exempted any plant operating
in Clark County from being subject to any federal milk marketing order. However, it did not
remove Clark County from the Arizona-Las Vegas milk marketing order area. This means
that milk that is currently shipped from California to Clark County is partially regulated and
compensatory payments to the Arizona-Las Vegas order are required. Hence, a provision in
H.R. 4015 and S. 2120 would completely remove the state of Nevada from the marketing
area definition of any order, which supporters say would end the required compensatory
payments paid by California milk shippers and allow all of Nevada to be joined together in
the state order.

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.
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
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production. On October 19, 2005, FDA issued a proposed rule that would allow liquid ultra-
filtered milk to be used in standardized cheeses. Processors say that the use of ultra-filtered
milk enhances product consistency and allows for more efficient transportation of milk. This
rule does not address the use of dry ultra-filtered milk (i.e, milk protein concentrate) in
standardized cheese production.

Measures have been introduced in the 109th Congress (H.R. 521 and S. 1417) 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 [http://hotdocs.usitc.gov/docs/pubs/332/pub3692.pdf]
for the full report.) The ITC was asked to provide an overview of the global market of milk
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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.
LEGISLATION
Milk Income Loss Contract (MILC) Program Extension
S. 1932 (Gregg)
Deficit Reduction Omnibus Reconciliation Act of 2005. Section 1101 of the conference
agreement extends authority for Milk Income Loss Contract (MILC) payments until
September 30, 2007, and reduces the payment rate to 34% of the difference between the
target price for farm milk and the lower market price. Section 1101 further reduces the
MILC payment rate to 0% in September 2007, effectively prohibiting any payments for that
month’s milk production and ensuring that the program has no baseline budget spending
allocated to it when the next farm bill is formulated. Differing versions of S. 1932 were
agreed to in the Senate on November 3, 2005 and in the House (originally offered as H.R.
4241) on November 18, 2005. The conference agreement (H.Rept. 109-362) was approved
by the House on December 19, 2005, and by the Senate, with an amendment, on December
21, 2005.
H.R. 859 (C. Peterson), H.R. 3847 (Green), 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
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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.
H.R. 3846 (Green), H.R. 3848 (Green)
Extends the MILC program until December 31, 2005 (H.R. 3846) and October 31, 2005
(H.R. 3848). Both measures were introduced on September 21, 2005, and referred to the
House Agriculture Committee.
Milk Protein Concentrate Tariff- Rate Quotas
H.R. 521 (Sherwood), S. 1417 (Craig)
Imposes tariff-rate quotas on certain casein and milk protein concentrates. H.R. 521 was
introduced February 2, 2005; referred to House Ways and Means Committee. S. 1417 was
introduced July 18, 2005; referred to Senate Finance Committee.
Milk Regulatory Equity Act
H.R. 4015 (Nunes) and S. 2120 (Kyl)
Identical bills that address several federal milk marketing order issues relevant to the
western United States. Among these issues are: 1) the regulation of fluid milk processors
who operate a plant in a federal order area, are not regulated by that order, and ship packaged
milk into a state marketing order (not a federal order); 2) the regulation of fluid processors
who produce, package and distribute their milk, also known as producer-handlers or
producer-distributors; and 3) the exclusion of Nevada from federal milk marketing orders.
H.R. 4015 was introduced on October 7, 2005, and referred to the House Agriculture
Committee. S. 2120 was introduced on December 16, 2005, and passed by unanimous
consent on the Senate floor on the same day.
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