Order Code RL33475
Dairy Policy Issues
Updated February 9, 2007
Ralph M. Chite
Specialist in Agricultural Policy
Resources, Science, and Industry Division

---

Dairy Policy Issues
Summary
Two federal programs that support the price and income received by dairy
farmers are expiring in 2007 — the dairy price support program and the Milk Income
Loss Contract (MILC) program. The reauthorization of these and other farm
commodity price and income support programs is being debated by the 110th
Congress in the context of a pending omnibus 2007 farm bill.

The MILC program allows participating dairy farmers to receive a government
payment when the farm price of milk used for fluid consumption falls below an
established target price. In its original authorization in the 2002 farm bill (P.L. 107-
171), the MILC program was scheduled to expire in 2005. However, 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). Under budget rules, this means that the program will have no
baseline budget spending allocated to it beyond its expiration date. The MILC
program is generally supported by milk producer groups in the Northeast and the
Upper Midwest. Large farmers contend that the prohibition on MILC payments for
any annual milk production in excess of 2.4 million lbs. is biased against them.
The dairy price support program indirectly supports the farm price of milk
through government purchases of surplus dairy products from dairy processors. The
current support price is authorized at $9.90 per hundredweight (cwt.) through
December 31, 2007, by the 2002 farm bill. In order to achieve the support price,
USDA has a standing offer to dairy processors to purchase surplus manufactured
dairy products at stated prices. Consequently, the government purchase prices usually
serve as a floor for the market price of these products, which in turn indirectly
supports the farm price of milk at $9.90 per cwt. Government purchases and costs
have been relatively small in recent years, particularly when compared with the
1980s, when the support price was significantly higher. Most dairy farm groups view
the program as a necessary safety net in a market characterized by volatile prices.
Dairy processors consider the price support and MILC programs to operate at cross-
purposes, which they say contributes to surplus milk production. Others are
concerned that dairy support might have to be modified in order to comply with our
trade obligations in the World Trade Organization.
On January 31, 2007, the Administration released a comprehensive 2007 farm
bill proposal that included recommendations for both the dairy price support program
and the MILC program. The Administration supports the extension of the price
support program at the current level of $9.90 per cwt., viewing the program as a low-
cost stabilizing influence on farm milk prices. It also supports a continuation of
MILC payments at the current target price of $16.94 per cwt. In order to defray the
cost of MILC program extension, the Administration recommends that the payment
rate be gradually reduced over a five-year period. Annual payments to any producer
would continue to be restricted to 2.4 million lbs. under the proposal.

---

Contents
Milk Income Loss Contract (MILC) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MILC Program Mechanics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MILC Payment History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Cost of MILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MILC Issues in the 2007 Farm Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Administration’s Farm Bill Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Regional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dairy Price Support Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Farm Bill Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Federal Milk Marketing Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Milk Regulatory Equity Act (P.L. 109-215, S. 2120) . . . . . . . . . . . . . . . . . . 9
Regulation of Certain Interstate Milk Shipments . . . . . . . . . . . . . . . . . 9
Producer-Handler Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Nevada Exclusion from Federal Milk Marketing Orders . . . . . . . . . . 10
List of Tables
Table 1. Monthly Milk Income Loss Contract (MILC) Payment Rates . . . . . . . . . 3
Table 2. MILC Payments Ranked by State, FY2003-FY2006 . . . . . . . . . . . . . . . . 4
Table 3. Dairy Price Support Purchases and Costs, 1980/81-2005/06 . . . . . . . . . 7

---

Dairy Policy Issues
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
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 was created 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

---

CRS-2
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.
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 were 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://165.221.16.19/dafp/psd/MILC.htm].
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

---

CRS-3
cwt.) was made for June 2005 milk production, the only payment that was made in
all of FY2005. However, market prices declined in late 2005, triggering payments
in each month from December 2005 through January 2007.
Table 1. Monthly Milk Income Loss Contract (MILC)
Payment Rates
Payment (per
Payment (per
Month
Month
hundredweight)
hundredweight)
December 2001
$0.77
Sept.- Dec. 2003
$0.00
January 2002
$0.78
January 2004
$0.83
February 2002
$0.78
February 2004
$0.95
March 2002
$0.93
March 2004
$0.79
April 2002
$1.00
April 2004
$0.02
May 2002
$1.09
May 2004-May 2005
$0.00
June 2002
$1.20
June 2005
$0.03
July 2002
$1.38
July-November 2005
$0.00
August 2002
$1.45
December 2005
$0.04
September 2002
$1.45
Jan.-Feb. 2006
$0.105
October 2002
$1.59
March 2006
$0.41
November 2002
$1.39
April 2006
$0.84
December 2002
$1.43
May 2006
$0.925
January 2003
$1.41
June 2006
$1.00
February 2003
$1.56
July 2006
$0.80
March 2003
$1.75
August 2006
$0.925
April 2003
$1.82
September 2006
$0.965
May 2003
$1.79
October 2006
$0.43
June 2003
$1.78
November 2006
$0.44
July 2003
$1.76
December 2006
$0.43
August 2003
$1.22
January 2007
$0.03
Source: USDA, Agricultural Marketing Service (AMS)
Federal Cost of MILC
For the first four years of the MILC program, its cumulative cost was just under
$2.4 billion — $1.8 billion in FY2003, $221 million in FY2004, $8.8 million in
FY2005, and $350.5 million in FY2006. The FY2003 total 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 because
market farm milk prices were much stronger than in the two previous years, reaching
a record high in the summer of 2004. During the same four-year time period
(FY2003-FY2006), 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 $416 million in FY2007. However, this
estimate can change depending on market conditions.

---

CRS-4
Table 2. MILC Payments Ranked by State, FY2003-FY2006
FY2003
FY2004
FY2005
FY2006 FY2003-FY2006 Total
Wisconsin
$372,042,880
$41,754,746 $1,369,537
$71,838,550
$487,005,713
New York
169,423,978
17,222,870
383,632
32,257,023
219,287,503
Pennsylvania
160,673,846
19,263,582
1,352,555
27,082,715
208,372,697
Minnesota
147,400,075
15,946,997
286,412
27,169,579
190,803,063
California
122,764,930
25,142,045
1,186,734
34,913,717
184,007,426
Michigan
75,828,865
8,799,034
316,507
15,563,328
100,507,734
Ohio
68,772,479
7,550,599
194,479
11,922,216
88,439,773
Iowa
60,686,427
6,512,172
236,348
11,629,909
79,064,855
Texas
38,793,821
6,282,787
199,362
9,024,192
54,300,162
Vermont
40,826,421
4,389,019
138,325
8,126,455
53,480,220
Idaho
33,211,800
5,496,523
371,276
8,719,484
47,799,082
Missouri
36,267,942
3,426,748
128,206
6,204,901
46,027,797
Illinois
34,170,687
3,818,084
158,274
6,144,976
44,292,022
Washington
30,869,213
5,064,507
111,841
7,539,782
43,585,343
Indiana
30,180,470
3,510,016
214,743
5,255,495
39,160,723
Kentucky
31,094,215
3,364,755
96,648
4,508,582
39,064,200
Virginia
29,876,611
2,895,202
324,527
5,174,178
38,270,519
Tennessee
24,469,076
2,545,783
62,281
3,853,946
30,931,087
South Dakota
20,355,578
2,148,893
31,015
3,738,836
26,274,321
Maryland
18,132,857
1,774,254
161,405
3,184,670
23,253,185
Oregon
16,295,432
2,178,087
35,910
4,036,387
22,545,817
Utah
15,782,707
2,027,249
-18,216
3,419,809
21,211,549
Georgia
15,764,327
1,930,999
31,078
3,136,152
20,862,557
Kansas
15,747,021
1,775,859
57,526
2,765,443
20,345,849
North Carolina
15,395,265
1,766,672
35,218
2,764,319
19,961,473
Nebraska
14,835,308
1,588,040
121,518
2,544,254
19,089,119
Puerto Rico
12,388,197
4,222,742
381,336
966,771
17,959,046
New Mexico
11,493,657
2,825,129
127,273
3,354,332
17,800,392
Oklahoma
12,519,405
1,307,138
50,983
1,958,338
15,835,863
Louisiana
11,430,924
1,066,703
31,415
1,517,821
14,046,862
Florida
9,783,286
1,761,420
31,601
2,342,573
13,918,880
Maine
10,250,302
984,845
13,481
1,904,303
13,152,931
Colorado
8,754,312
1,537,030
52,001
2,051,322
12,394,666
Arizona
7,641,285
1,526,600
163,838
2,138,679
11,470,403
North Dakota
8,964,621
1,111,814
56,389
1,291,575
11,424,400
Mississippi
8,916,963
880,166
66,520
1,189,543
11,053,191
Arkansas
7,499,823
665,206
27,202
1,011,333
9,203,563
Massachusetts
6,877,027
625,496
8,973
1,113,219
8,624,715
Connecticut
6,143,097
699,449
8,509
1,145,967
7,997,022
New Hampshire
5,095,796
515,693
11,031
973,494
6,596,015
Montana
4,901,714
519,903
21,112
1,023,945
6,466,674
South Carolina
4,779,476
529,781
52,581
914,359
6,276,197
Alabama
4,286,766
512,368
3,719
593,777
5,396,629
West Virginia
3,942,927
459,851
13,707
614,441
5,030,926
New Jersey
4,012,708
373,719
2,101
596,928
4,985,455
Nevada
2,014,582
351,358
25,597
589,067
2,980,605
Delaware
1,768,299
184,425
2,947
310,154
2,265,824
Wyoming
1,015,120
101,807
2,655
205,252
1,324,835
Hawaii
407,366
117,018
46,913
52,150
623,447
Rhode Island
451,901
36,430
390
58,558
547,279
Alaska
350,368
26,291
358
35,340
412,358
Virgin Islands
100,347
7,723
83
8,682
116,835
TOTAL
1,795,452,502
221,125,627
8,789,854
350,480,820
2,375,848,803

---

CRS-5
MILC Issues in the 2007 Farm Bill
Funding. 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 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 2007 farm bill is formulated, the MILC program will have no baseline
budget spending allocated to it beyond August 2007. This does not necessarily
preclude the possibility of the MILC program being extended in the 2007 farm bill.
However, if the total spending allocated to the farm bill is no greater than the
baseline budget, the cost of the MILC program might have to be offset with
reductions in spending in other farm bill programs.
Administration’s Farm Bill Proposal. On January 31, 2007, the
Administration released a comprehensive 2007 farm bill proposal that included
several recommendations for the MILC program. The Administration supports a
continuation of MILC payments at the current target price of $16.94 per cwt. In
order to defray the cost of MILC program extension, the Administration recommends
that the payment rate be gradually reduced over a five-year period. It proposes
maintaining the payment rate at the current level of 34% through FY2008, and then
reducing it to 31% in FY2009, 28% in FY2010, 25% in FY2011, 22% in FY2012,
and 20% in FY2013-FY2017. Annual payments per operation would continue to be
restricted to 2.4 million lbs. under the proposal. It would also base payments on
historical production rather than current production in order to forestall potential
challenges to the program in the World Trade Organization.
Regional Issues. Since its inception, the MILC program has been 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 have expressed concern that the MILC program causes excess milk
production that in turn decreases market farm milk 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

---

CRS-6
pounds is roughly equal to the annual production of a herd of approximately 120 to
130 dairy cows.)
Dairy Price Support Program
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. Reauthorization of the program will be debated
in the context of a new omnibus farm bill this year.
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 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 supports the farm price of milk at $9.90 per cwt.
Government purchases of surplus dairy products have been relatively small
since late 2003, as market prices have remained above the support price during that
period. In the early 1980s, the support price was $13.10 per cwt. and government
purchases peaked at $2.6 billion in 1983. A gradual decline in the support price to
the current level of $9.90 has significantly reduced the cost of the program from peak
levels. (See Table 3 for a history of government purchases and costs since the 1981
marketing year.)

---

CRS-7
Table 3. Dairy Price Support Purchases and Costs,
1980/81-2005/06
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
280
10.05-9.90
0.2
1999-2000
0.8
569
9.90
0.5
2000-01
0.3
465
9.90
0.2
2001-02
0.2
622
9.90
0.1
2002-03
0.5
699
9.90
0.3
2003-04 NA
74
9.90
NA
2004-05 NA
-
104
9.90
NA
2005-06
NA
55
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.
NA = Not Available
Farm Bill Issues
At issue in Congress this year is whether the dairy price support program should
be extended beyond its December 31, 2007, expiration date. Funding is available in
the budget baseline to extend the program at the current $9.90 per cwt. level of
support. In its January 31, 2007, farm bill proposal, the Administration recommended
the extension of the program, viewing it as a low-cost stabilizing influence on farm

---

CRS-8
milk prices. It stated that many dairy producers see the need for a floor to be kept
under farm milk prices to maintain an adequate milk supply and provide a safety net.
Dairy processor groups have expressed concern that the dairy price support program
in combination with MILC payments work at cross-purposes, by artificially
stimulating milk production and causing persistent surpluses. They also question
whether having the government as a guaranteed buyer of surplus products
discourages investment to produce dairy ingredients (e.g. milk protein concentrates)
that are increasingly in demand in the market.
Separately, some policymakers are concerned that because of the way domestic
price support programs are viewed under our trade obligations in the World Trade
Organization (WTO), modifications to dairy support might be required under a new
trade agreement. Although federal outlays for the dairy price support program have
been relatively small (under $100 million) in recent years (see Table 3), the WTO
measures the level of support differently. Under our current trade obligations, the
aggregate measure of support for dairy is based on how much higher the domestic
support price is set above a fixed world reference price, and this imputed subsidy is
applied to all domestic milk production. Using this formula, the WTO views the
aggregate measure of support for the dairy price support program to be more than
$4.5 billion annually, and classifies it as “amber box” or the most trade-distorting
category. The current U.S. proposal in the Doha Round is to reduce its total amber
box support from the current $19.1 billion to $7.6 billion. With dairy support such
a large percentage of the proposed new maximum, some have expressed interest in
shifting future policy away from price support to some type of WTO-compliant direct
payment that is decoupled from price and production.

Federal Milk Marketing Orders
Background
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

---

CRS-9
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 (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 addressed 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

---

CRS-10
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
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.

---

CRS-11
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.

---