Order Code RL33475
CRS Report for Congress
Received through the CRS Web
Dairy Policy Issues
June 16, 2006
Ralph M. Chite
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

---

Dairy Policy Issues
Summary
Several dairy issues have been or are being considered by the 109th Congress,
affecting the three major federal dairy policy tools — the Milk Income Loss Contract
(MILC) program, federal milk marketing orders, and the dairy price support program.
Under the MILC program, eligible dairy farmers receive a government payment
when the farm price of milk used for fluid consumption falls below an established
target price. A provision in the FY2006 budget reconciliation act (P.L. 109-171)
extended MILC program authority for two years, through September 30, 2007. As
a cost-saving measure, P.L. 109-171 prohibits any MILC payments for the last month
of its extended authority (September 2007), which, under current budget rules, means
that the program will have no baseline budget spending allocated to it beyond its
expiration date. A provision in the House-reported version of the FY2007 agriculture
appropriations bill (H.R. 5384) would have allowed payments in September 2007 and
preserved the program’s budget baseline for the next farm bill debate in 2007.
Because of its budget implications, the provision was deleted on the House floor.

Federal milk marketing orders regulate the farm price of milk for roughly two-
thirds of U.S. milk production by requiring processors to pay minimum prices for
farm milk. On April 11, 2006, the President signed into law a measure (P.L. 109-
215) that addresses farm milk pricing issues relevant to the western United States.
Under previous regulations, producer-handlers (i.e., fluid milk handlers who produce
and process their own milk) were exempt from federal order price regulation. P.L.
109-215 requires a large producer-handler in Arizona to become regulated. The
provision was supported by other milk producer and processor groups who contend
that unregulated processors undercut the competition. The producer-handler argues
that the provision is a tax being placed on its operations that will ultimately result in
higher prices to consumers. Meanwhile, USDA has issued regulations that eliminate
the exemption from federal order pricing for any producer-handler in the Southwest
or Pacific Northwest who bottles more than 3 million pounds of milk per month. A
Southwest producer-handler has challenged USDA’s new regulation in the courts.
Separately, the Administration’s FY2007 budget request contains three
legislative proposals that would reduce net federal dairy expenditures by more than
$1.2 billion over 10 years — (1) an assessment of 3 cents for every one hundred
pounds of milk production, to be paid by all dairy farmers; (2) a 5% across-the-board
reduction in government spending for all farm commodity support programs, which
would apply to the MILC program; and (3) enhanced authorities for USDA to adjust
federal purchase prices of surplus dairy commodities.
Dairy farmer groups are concerned that imports of milk protein concentrates
(MPCs) are displacing domestic dairy ingredients and thus depressing farm milk
prices. Bills have been introduced (H.R. 521 and S. 1417) to impose tariff rate
quotas on certain MPCs. Dairy processor groups are opposed to this provision.
This report replaces CRS Issue Brief IB97011, Dairy Policy Issues, by Ralph
M. Chite.

---

Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Milk Income Loss Contract (MILC) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MILC Program Mechanics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MILC Program Reauthorization Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MILC Payment History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Federal Cost of MILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dairy Price Support Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Background and Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Administration’s FY2007 Budget Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Milk Marketing Order Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Background on Federal Milk Marketing Orders . . . . . . . . . . . . . . . . . . . . . 9
Milk Regulatory Equity Act of 2005 (P.L. 109-215, S. 2120) . . . . . . . . . . 10
Regulation of Certain Interstate Milk Shipments . . . . . . . . . . . . . . . . 10
Producer-Handler Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Nevada Exclusion from Federal Milk Marketing Orders . . . . . . . . . . 11
Milk Protein Concentrate Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Monthly Milk Income Loss Contract (MILC) Payment Rates . . . . . . . . . 3
Table 2. Top 20 Recipient States of MILC Payments,
FY2003-FY2005 Cumulative Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 3. Commodity Credit Corporation Dairy Price and
Income Support Operations, 1980/81-2004/05 . . . . . . . . . . . . . . . . . . . . . . . 7

---

Dairy Policy Issues
Most Recent Developments
The House-reported version of the FY2007 agriculture appropriations bill (H.R.
5384) contained a provision that would have extended government payments to dairy
farmers under the Milk Income Loss Contract (MILC) program for one additional
month, through September 30, 2007. On May 23, 2006, the provision was deleted
from the bill on the House floor on a point of order that it constituted legislating in
an appropriations bill. Proponents of deficit reduction were opposed to the one-
month extension of MILC payments because it would have allowed new spending
in the next farm bill that was not previously authorized. The MILC program provides
direct payments to participating dairy farmers when the market price of farm milk
falls below a legislatively determined target price.
On April 11, 2006, the President signed into law a measure (P.L. 109-215, S.
2120) requiring the regulation of a certain large dairy operation in the West that was
previously exempt from paying federally mandated minimum farm milk prices.
Meanwhile, USDA issued a final regulation effective April 1, 2006, that requires this
dairy operation and all other large producer-handlers (fluid milk handlers who
produce and process their own milk) in the West to become regulated under federal
milk marketing orders. The new USDA regulation is being challenged in the courts.


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

---

CRS-2
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
strongly oppose 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. Authority for
the MILC program expired on September 30, 2005, as required by the 2002 farm bill.
However, the Deficit Reduction Act of 2005 (P.L. 109-171, S. 1932, enacted
February 8, 2006) authorized a two-year extension of the program until September
30, 2007. (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. Under the original farm bill authority, a producer received 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. As a
cost-saving measure, P.L. 109-171 reduced the payment rate from 45% to 34%
effective for MILC payments in any month from October 2005 through August 2007.
Under the law, a producer can receive a payment on all milk production during any
month, but no payments are made on any annual production in excess of 2.4 million
pounds per dairy operation.
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.

---

CRS-3
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.)
Table 1. Monthly Milk Income Loss Contract (MILC)
Payment Rates
Payment (per
Payment (per
Month
Month
hundredweight)
hundredweight)
December 2001
$0.77
June 2003
$1.78
January 2002
$0.78
July 2003
$1.76
February 2002
$0.78
August 2003
$1.22
March 2002
$0.93
Sept.- Dec. 2003
$0.00
April 2002
$1.00
January 2004
$0.83
May 2002
$1.09
February 2004
$0.95
June 2002
$1.20
March 2004
$0.79
July 2002
$1.38
April 2004
$0.02
August 2002
$1.45
May 2004-May 2005
$0.00
September 2002
$1.45
June 2005
$0.03
October 2002
$1.59
July-November 2005
$0.00
November 2002
$1.39
December 2005
$0.04
December 2002
$1.43
Jan.-Feb. 2006
$0.105
January 2003
$1.41
March 2006
$0.41
February 2003
$1.56
April 2006
$0.84
March 2003
$1.75
May 2006
$0.925
April 2003
$1.82
June 2006
$1.00
May 2003
$1.79
Source: USDA, Agricultural Marketing Service (AMS)
MILC Program Reauthorization Issues
The 2002 farm bill required the MILC program to expire on September 30,
2005, while all other major farm commodity support programs authorized by the
farm bill are scheduled to expire at the end of the 2007 crop year. Proponents of the
MILC program wanted program expiration to coincide with the expiration of all
other commodity support programs. Hence, a provision in the FY2006 omnibus

---

CRS-4
reconciliation act (P.L. 109-171, S. 1932) extends the MILC program through
September 30, 2007. It also reduces the MILC payment rate so that a recipient
receives 34% of the difference between the target price and the lower market price,
instead of the 45% payment rate in the recently expired program. This payment rate
reduction is effective from October 2005 through August 2007.
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 estimated
the two-year cost of the provision at $998 million, compared with $1.2 billion if the
program had been extended without the payment rate reduction.) Also, in order to
minimize the cost of program extension, P.L. 109-171 reduced the MILC payment
rate to 0% in September 2007, the last month of program authority. 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. Subsequently, MILC
program supporters attached an amendment to the House-reported version of the
FY2007 agriculture appropriations bill (H.R. 5384) that would have required MILC
payments to be made in September 2007 at the 34% payment rate, in order to
preserve its baseline budget allocation beyond its current authorized life. This
provision was deleted under a point of order on the House floor. Deficit reduction
proponents opposed the extension, stating that it would add $1.8 billion over five
years (FY2007-FY2012) to the cost of the next farm bill.
Although the MILC program originally expired on September 30, 2005, and was
not extended until several months after that date, P.L. 109-171 allowed for USDA
to make MILC payments retroactively for December 2005 through May 2006. For
FY2006, USDA accepted applications in two phases. Eligible milk producers had
until May 17, 2006 to sign up for payments to begin with one of the retroactive
payment months (December 2005 through May 2006). After May 17, retroactive
payments are no longer available, and a producer can only choose to begin receiving
payments in the current month or a future month. (For a USDA fact sheet on the
FY2006 MILC program, see [http://www.fsa.usda.gov/pas/publications/facts/
milc06.pdf].)
MILC Payment History
USDA began accepting applications for the original MILC Program” on August
15, 2002. (See Table 1 for MILC payment history.) 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 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

---

CRS-5
all of FY2005. However, market prices declined in late 2005, triggering payments
in each month from December 2005 through April 2006.
Federal Cost of MILC
For the first 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). The Congressional Budget Office (CBO)
estimates that MILC program outlays will be $428 million in FY2006 and $502
million in FY2007. However, these estimates can change based on market
conditions.
Table 2. Top 20 Recipient States of MILC Payments,
FY2003-FY2005 Cumulative Total
($ 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

---

CRS-6
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.
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 3.)

---

CRS-7
Table 3. Commodity Credit Corporation Dairy Price and
Income Support Operations, 1980/81-2004/05
CCC
Net Removals
CCC Support
Marketing
Net Outlays
Purchases as
Milk Equivalent
Price
Yeara
(million $)
Percentage of
(billion lbs.)b
($ 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
622
9.90
0.1
2002-03
0.5
2,494 f
9.90
0.3
2003-04 NA
295
g
9.90
NA
2004-05 NA
-
95
h
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 (MILC) payments.
g. Includes $221 million in MILC payments.
h. Includes $9 million in MILC payments . Net outlays in 2004-05 were negative because USDA’s
disposition of surplus dairy product inventory exceeded product purchases.

---

CRS-8
The Administration’s FY2007 Budget Proposal
In its FY2007 budget request released on February 6, 2006, 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 made three separate proposals that it says
would reduce the net cost of federal dairy policy by nearly $1.2 billion over 10 years:
(1) an assessment of 3 cents for every one hundred pounds of milk production to be
paid by all dairy farmers; (2) a 5% across-the-board reduction in all farm commodity
support payments, including the Milk Income Loss Contract (MILC) program; and
(3) enhanced authority for USDA to adjust the government purchase prices for
surplus dairy products under the dairy price support program in order to minimize
government costs. Legislation would be required to authorize any of these policy
changes. Last year, the Administration proposed two of these changes (the 5%
rescission and the enhanced price support authorities). However, neither proposal
was considered when the agriculture committees recommended spending reductions
as part of the FY2006 budget reconciliation process. Major dairy farm groups oppose
these proposals which they say comes at a time when dairy farmers are feeling the
burden of higher production costs. Dairy processor groups, which support any efforts
to restrain federal spending on dairy production support, generally concur with the
Administration’s dairy proposals.
The proposed 3 cents per hundredweight (cwt.) assessment on all milk
production would generate average revenue of $58 million per year for the federal
government to help defray the federal budget deficit, according to Administration
estimates. A similar type of assessment mechanism previously was required of dairy
farmers from January 1991 through April 1996, as part of two separate budget
reconciliation acts in the early 1990s. During this period, the assessment ranged from
5 cents to 11.25 cents per cwt., before it was repealed by the 1996 farm bill. Dairy
farm groups are strongly opposed to any assessment calling it a “tax” on their
operations which they estimate would reduce their income by an average of $5.86 per
cow per year.
The Administration proposal to give USDA more flexibility within the dairy
price support program would allow the Secretary of Agriculture 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. It also
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 price support proposals
would save $618 million over 10 years. Proponents say that in the long run the
Administration’s proposal would reduce government costs and make domestic milk

---

CRS-9
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.
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-à-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.

---

CRS-10
Milk Regulatory Equity Act of 2005 (P.L. 109-215, S. 2120)
On April 11, 2006, the President signed into law the Milk Regulatory Equity Act
(P.L. 109-215, S. 2120), which addresses several federal milk marketing order issues
relevant to the western United States. 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. P.L. 109-215 affects
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 is targeted at 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 price 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.

P.L. 109-215 requires 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 act primarily affects the same producer-handler
in Arizona that is affected by the interstate milk shipment provision discussed above.
Meanwhile, USDA has published a final regulation effective April 1, 2006, that
establishes a 3 million lb. per month route disposition limit for a producer-handler

---

CRS-11
exemption, both in the Pacific Northwest and the Arizona-Las Vegas order areas. The
final USDA regulation affects at least three large producer handlers in the Pacific
Northwest, as well as the Arizona producer-handler. (For USDA’s final rule, see
[http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/
2006/06-1587.htm].) The Arizona producer-handler (Hein Hettinga) is challenging
the new USDA regulation in court.
The producer-handler provision is a separate issue from the provision above
relating to the interstate shipment of milk, but with similar implications. Producers
of regulated milk want 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 P.L.
109-215 completely removes 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)

---

CRS-12
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 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,

---

CRS-13
“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 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.

---