Dairy Policy and the 2008 Farm Bill

Contents

• Overview
• Milk Income Loss Contract (MILC) Program
• Background
• 2008 Farm Bill Provisions and Issues
• MILC Provisions in the 2008 Farm Bill
• CBO Cost Estimates
• Administration and Industry Positions
• MILC Payments and 2008 Farm Bill Implementation
• Federal Cost of MILC
• Dairy Price Support Program
• 2008 Farm Bill Provisions and Issues
• WTO Implications
• 2008 Farm Bill Implementation
• Federal Milk Marketing Orders
• Background
• 2008 Farm Bill Provisions and Issues
• Dairy Forward Contracting
• Streamlining Rulemaking Procedures
• Dairy Export Incentive Program
• 2008 Farm Bill Provisions
• Dairy Import Assessment
• 2008 Farm Bill Provisions

Summary

Two ongoing federal programs that support the price and income received by dairy farmers—the dairy price support program and the Milk Income Loss Contract (MILC) program—were reauthorized with modifications in the Food, Conservation, and Energy Act of 2008 (P.L. 110-246, the 2008 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. The enacted 2008 farm bill extends the MILC program through FY2012 at the existing level of support, but increases the payment percentage rate and the amount of eligible production. The target price also can be increased in any month that feed costs are above a certain threshold. The MILC program is supported by milk producer groups in the Northeast and the Upper Midwest. Large farmers, particularly in the West, contend that the program payment limit is biased against them. Market prices for farm milk have recently declined to levels near the target price, increasing the likelihood of MILC payments in 2009.

Separately, under previous farm law, the dairy price support program indirectly supported the farm price of milk at $9.90 per hundredweight (cwt.) through government purchases of surplus dairy products from dairy processors. The 2008 farm bill extends the dairy support program through December 31, 2012, but modifies the program so that it directly supports the prices of dairy products at mandated levels. This program shift was designed to help reduce the program's exposure under World Trade Organization limitations. Most dairy farm groups and the Administration view the program as a necessary safety net in a market that is frequently 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. A recent milk product price decline has resulted in government purchases of nonfat dry milk.

A third federal dairy pricing policy tool, federal milk marketing orders, requires dairy processors in many regions to pay a minimum price for farm milk depending on its end use. Federal orders are permanently authorized and most changes are made administratively by USDA through the rulemaking process. However, a number of federal order issues were brought to the attention of Congress for the farm bill debate. Included in the final bill is a provision that exempts dairy processors from paying the federal minimum price whenever they forward contract prices with dairy farmers for milk used in manufactured products.

Separately, the enacted 2008 farm bill reauthorizes the Dairy Export Incentive Program, which subsidizes dairy product exports. The program was created in the 1985 farm bill and was particularly active during the 1990s.

The enacted 2008 farm bill also contains a provision that allows USDA to implement a 2002 farm bill-mandated assessment on imported dairy products, but reduces the import assessment to 7.5 cents per cwt. The import assessment is supported by most milk producer groups, but opposed by dairy importers and processors.

See the Appendix at the end of this report for a side-by-side comparison of the enacted 2008 farm bill dairy provisions with previous law and the House- and Senate-passed versions of the farm bill.

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Dairy Policy and the 2008 Farm Bill

Overview

The Food, Conservation, and Energy Act of 2008 (P.L. 110-246, the 2008 farm bill) is the most recent omnibus farm bill, authorizing or reauthorizing a wide range of programs for a multi-year period, including commodity price and income support, farm credit, agricultural conservation, research, rural development, and foreign and domestic food programs, among others. The 2008 farm bill became law on June 18, 2008, after the House and Senate successfully voted to override a veto of the measure.

Subtitle E of the commodity programs title (Title I) of the enacted 2008 farm bill contains the authority for two major ongoing dairy policy tools used by the U.S. Department of Agriculture (USDA) to support the prices and incomes received by dairy farmers—the dairy price support program (DPSP) and the Milk Income Loss Contract (MILC) program. Previous authority for these programs was governed by the 2002 farm bill (P.L. 107-171) through 2007, and extended into 2008 by the enactment of various short-term farm bill extensions. As part of more than one year of hearings and debate on the omnibus farm bill, Congress considered whether to reauthorize these two programs in their current forms or with modifications.

P.L. 110-246 reauthorizes the MILC program through September 30, 2012, and the DPSP through December 31, 2012, with several modifications as discussed in this report. The DPSP provides indirect price support to dairy farmers through government purchases of surplus dairy products at statutory prices. The MILC program supports farmer income through direct payments to participating dairy farmers when the market price of farm milk in any month falls below a legislatively mandated target price.

A third federal dairy policy tool, federal milk marketing orders, requires dairy processors to pay a minimum price for farm milk depending on its end use. Federal orders are permanently authorized and hence do not require periodic reauthorization. Instead, changes are generally made administratively by USDA and approved by farmer referendum. However, issues such as the proposed authority for processors to be exempt from federal order minimum prices processors when they forward contract with dairy farmers were brought to the attention of Congress in the farm bill debate. P.L. 110-246 authorizes a forward contract program (through September 30, 2012) and contains safeguards designed to ensure that dairy farmers are not compelled by processors to participate in the program. The 2008 farm bill also authorizes a commission to review and evaluate federal milk marketing order policies and procedures.

Separately, the 2008 farm bill reauthorizes the Dairy Export Incentive Program. It also requires Alaska, Hawaii, and Puerto Rico to contribute to an ongoing dairy promotion program that is currently supported by mandatory assessments on dairy producers in the 48 contiguous states. This provision was included to allow USDA to implement a 2002 farm bill-mandated extension of this assessment to imported dairy products. This provision was supported by most milk producer groups, but opposed by dairy importers and processors.

See the Appendix at the end of this report for a side-by-side comparison of the enacted 2008 farm bill with previous law and the House and Senate farm bill dairy provisions.

Milk Income Loss Contract (MILC) Program

Background

In FY1999-FY2001, Congress provided just over $32.5 billion in emergency spending for U.S. Department of Agriculture (USDA) farm commodity support programs, primarily to help farmers recover from low farm commodity prices. The majority of these funds were for supplemental direct farm payments made to producers of certain supported farm commodities, including milk. Of this amount, dairy farmers received total supplemental "market loss" payments of $1 billion over three years.

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 these emergency payments, 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 opposed regional compacts.

In response, 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 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 originally expired on September 30, 2005, as required by the 2002 farm bill. However, several subsequent measures granted short-term extensions of the MILC program and many other expiring farm bill authorities to allow Congress to complete work on the 2008 farm bill.

2008 Farm Bill Provisions and Issues

Under the now-expired 2002 farm bill authority for the MILC program, participating dairy farmers nationwide were eligible for a federal payment whenever the minimum monthly market price for farm milk used for fluid consumption (Class I) in Boston fell below $16.94 per hundredweight (cwt.).¹ Eligible farmers then received a payment equal to 34% of the difference between the $16.94 target price and the lower monthly market price. The 2002 law required that payments be limited to the first 2.4 million pounds of annual milk production per dairy operation (which is roughly equivalent to the total annual production of a 130-cow operation).

MILC Provisions in the 2008 Farm Bill

Section 1506 of the 2008 farm bill (P.L. 110-246) extends the authority for the MILC program until September 30, 2012, and retains the base target price at $16.94 per cwt. However, the 2008 farm bill makes significant changes to the MILC payment structure in the following ways:

• Payment Percentage Rate Increased: Until September 30, 2008, a dairy producer continued to receive a payment equal to 34% of the difference between the $16.94 per cwt. target price and the market price, in any month that the Boston market price fell below $16.94. However, from October 1, 2008 through August 31, 2012, the 2008 farm bill raises the payment rate to 45% of the price deficiency, which results in a one-third larger payment to eligible farmers in months when a payment is triggered. The payment percentage rate will revert to the 34% level for the final month of the program (September 2012). This reversion was included to minimize long-term budget outlays, so that the cost of increasing the percentage payment rate does not get built into the baseline budget once the program expires.
• Production Payment Limit Increased: The 2008 farm bill maintained the payment quantity limit at 2.4 million pounds through September 30, 2008, and then raised the payment limit to 2.985 million pounds of annual production (equivalent to about a 160-cow operation) between October 1, 2008, and August 31, 2012. Like the increase in the percentage payment rate, the eligible production limit will revert to its original level (2.4 million lbs.) for the last month of program authority (September 2012) so that the budget baseline for future years does not include the cost of the increase. Since the inception of the MILC program, large dairy farm operators expressed concern that the 2.4 million lb. payment limit negatively affected their income. For larger farm operations, their annual production is well in excess of the limit, and any production in excess of that receives no federal payments. An increase was not part of the House-passed version of the bill, and the final level of 2.985 million lbs. is below the Senate-passed level of 4.15 million lbs.
• Payment Level Feed-Price Adjustment: Because of the rapidly rising cost of feed, some dairy farm groups had sought some type of adjustment to federal dairy support programs to soften the impact. The final 2008 farm bill includes a provision that adjusts upward the $16.94 target price in any month when feed prices are above a certain threshold. The law requires USDA to calculate monthly a National Average Dairy Feed Ration Cost based on a formula that USDA currently uses to calculate feed costs. In any month that the average feed cost is above $7.35 per cwt., the $16.94 target price will be increased by 45% of the difference between the monthly feed cost and $7.35. To reduce budget exposure, the threshold feed cost will rise to $9.50 per cwt., effective for the last month of the program (September 2012).

CBO Cost Estimates

In 2008, the Congressional Budget Office (CBO) estimated that the increase in the percentage payment rate to 45%; the increase in the payment limit to 2.985 million lbs. of annual production; and the institution of a new feed cost adjuster would together add $395 million to the cost of the MILC program over the five-year authorization period (FY2008-FY2012). This budget scoring was based on the March 2007 CBO baseline, which was the official benchmark for the scoring of the 2008 farm bill. When scored against the more recent CBO baseline (January 2009), the increased costs associated with changes in the MILC program are, in fact, more than offset by lower overall program costs associated with higher projected milk prices through FY2012, even after incorporating the effect of the recent decline in milk prices.

Administration and Industry Positions

During the farm bill debate, the Bush Administration supported a continuation of MILC payments at the then-current target price of $16.94 per cwt. and the 2.4 million lb. payment cap. However, in order to defray the cost of MILC program extension, the Administration recommended that the percentage payment rate be gradually reduced over a five-year period to 20% by FY2013. The Administration also wanted to base payments on historical production rather than current production in order to forestall potential challenges in the World Trade Organization (WTO).

The National Milk Producers Federation (NMPF), the largest trade association representing dairy farmer cooperatives, also supported a direct payment program for farmers. In order to make the program less susceptible to challenges in the WTO, NMPF initially proposed making direct payments of $0.50 per cwt. to dairy farmers (regardless of the level of market prices) on the average production level of 2005 and 2006, up to $40,000 per farm.

The International Dairy Foods Association (IDFA), the largest trade association of dairy processors, opposed extension of the MILC program, contending that it works at cross purposes with the dairy price support program and contributes to the overproduction of milk and to high government costs. Instead, IDFA proposed a dairy farm revenue insurance program that it said would provide a better safety net for farmers without distorting milk markets.

MILC Payments and 2008 Farm Bill Implementation

USDA began accepting applications for the original MILC Program on August 15, 2002. (See Table 1 for MILC payment history.) In September 2007, farm milk prices set a record high as the Class I Boston farm milk price reached $25.16 per cwt., which is $9.22 above the $16.94 per cwt. target price. For the latter half of 2007 and all of 2008, farm milk prices remained well above the MILC trigger price, precluding the need for any MILC payments. Falling milk prices in recent months, however, have raised the likelihood of MILC payments in 2009. While the Class I Boston farm milk price for January 2009 is $18.99 per cwt, or $2.05 per cwt above the trigger (excluding any feed cost adjustment), many dairy economists are projecting that farm milk prices will decline to the point that the MILC payments will be triggered for the balance of 2009. Individual producers must select which month to begin receiving payments, based on their projection of potential payment rates and the possibility of hitting the production payment limit.

USDA issued a final rule on December 4, 2008, amending the regulations for the previous MILC program to change the payment rate formula and production limit and include the feed cost adjustment (73 Federal Register 73764-73768). Also, payments are subject to adjusted gross income (AGI) provisions in the 2008 farm bill, which are being implemented through a separate rule (73 Federal Register 79267-79284, issued December 29, 2008). If nonfarm AGI is greater than $500,000, the farm is not eligible to receive MILC payments. USDA began program signup on December 22, 2008. Producers may sign up through the program's expiration on September 30, 2012.

Federal Cost of MILC

Over the more than five years of MILC program payment authority, its cumulative cost has been $2.5 billion. The FY2003 total of $1.8 billion includes two fiscal years worth of payments, since retroactive payments for FY2002 were made over the course of FY2003. Five states have accounted for just over one-half of the total payments made over the time period (see Table 2).

Dairy Price Support Program

The Agricultural Act of 1949 first established the dairy price support program (DPSP) 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 for a recent history of spending on the dairy price support program and related activities.) 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. Several measures were enacted to provide short-term extensions of many expiring USDA programs, including the DPSP, so that Congress could complete work on a new farm bill.

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. Under the 2002 farm bill, prices paid to the processors were set administratively by USDA at a level that would permit them to pay dairy farmers at least the federal support price for their milk.

Prior to passage of the 2008 farm bill, in order to achieve the support price of $9.90 per cwt. of milk specified in the 2002 farm bill, USDA had a standing offer to processors to purchase surplus manufactured dairy products at the following prices, which were administratively established by USDA: $1.05 per pound for butter, $0.80 for nonfat dry milk, $1.13 per pound for block cheddar, and $1.10 per pound for barrel cheese. Whenever market prices fell to the support level, processors generally made the business decision of selling surplus product to the government rather than to the marketplace. Consequently, the government purchase prices usually served as a floor for the market price, which in turn indirectly supported 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. 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 $9.90 significantly reduced the cost of the program from peak levels.

In late 2008 and early 2009, after several years of relative inactivity, the price support program resumed purchases following a decline in milk product prices. USDA estimated that it removed 115 million pounds of nonfat dry milk in 2008 and expects to remove 320 million pounds in 2009, along with small amounts of cheese and butter.

2008 Farm Bill Provisions and Issues

Section 1501 of the enacted 2008 farm bill (P.L. 110-246 ) extends the dairy support program for five years (through December 31, 2012), but modifies the program so that it directly supports the prices of manufactured dairy products at mandated levels. The 2008 farm bill renames the program the Dairy Product Price Support Program and requires USDA to purchase products at the following minimum prices: block cheese, $1.13/lb.; barrel cheese, $1.10/lb.; butter, $1.05/lb.; and nonfat dry milk, $0.80/lb.² Under previous law, the support price for farm milk was statutorily set at $9.90 per cwt., and USDA was given the administrative authority to establish a combination of dairy product purchase prices that indirectly supported the farm price of milk at $9.90. Although the 2008 law does not specifically state that the overall support price is $9.90 per cwt, each of the mandated product prices in the law is equivalent to the existing product purchase prices, so farm milk prices effectively continue to be supported at $9.90.

The shift to a mandated product price support program was based on a proposal submitted by the National Milk Producers Federation (NMPF), which contended that the previous discretion given to USDA to establish purchase prices has "undermined the program's effectiveness."³ NMPF also contends that a shift to a dairy product price support program would be viewed as less trade distorting in the WTO than the previous support program. (See "WTO Implications", below.)

In order to minimize program costs and the potential accumulation of excess inventories, the 2008 farm bill allows USDA to temporarily reduce the mandated prices when government purchases of a product exceed a certain specified level. The law allows USDA to reduce (1) the cheese purchase price by up to $0.10 per lb. when government purchases for a consecutive 12-month period are between 200 million and 400 million lbs, and up to $0.20 per lb when purchases exceed 400 million lbs.; (2) the butter purchase price by $0.10 per lb. when 12-month butter purchases are between 450 million and 600 million lbs, and up to $0.20 per lb. when purchases exceed 650 million lbs.; and (3) the nonfat dry milk purchase price by $0.05 per lb. when 12-month nonfat dry milk purchases are between 600 million and 800 million lbs., and up to $0.10 per lb. when purchases exceed 800 million lbs. Also, at any time, USDA can sell inventoried dairy products at prevailing market prices, as long as the selling price is at least 120% of the supported price.

In its farm bill proposal, the Bush Administration supported the extension of the dairy price support program, viewing it as a low-cost stabilizing influence on farm 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.

WTO Implications

Separately, some policymakers have been 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 current U.S. 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 (established in the WTO at a fixed level of $7.25 per cwt.). The imputed subsidy of $2.65 per cwt. (i.e., the $9.90 domestic support price less the $7.25 reference price) is applied to all domestic milk production. Using this formula, the United States has notified the WTO that the aggregate measure of support for the dairy price support program is more than $4.8 billion annually; and it is classified 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 representing 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. Supporters of the shift to a dairy product price support program maintain that, under the revised program, only the portion of milk production that goes into the production of the supported products would have to be notified to the WTO, and that fluid-use milk and milk used for unsupported manufactured products such as yogurt and ice cream would be exempt.

2008 Farm Bill Implementation

With product support prices already specified in statute, USDA issued a final rule on December 4, 2009 (73 Federal Register 73764-73768), in conjunction with the MILC program, to adjust milk price support regulations (7 CFR Part 1430). USDA specified that support purchases will only be made from manufacturers and not from third parties such as brokers.

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.

Federal orders regulate dairy handlers (processors) 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.

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. Critics contend that federal orders are arcane and outdated, and that the complexity of the system places dairy processors at a competitive disadvantage in the market.

2008 Farm Bill Provisions and Issues

Dairy Forward Contracting

A forward contract is a cash market transaction in which a seller agrees to deliver a specific commodity to a buyer at some point in the future at a mutually agreed to price. A dairy farmer and a proprietary milk handler⁴ theoretically can engage in a forward contract, whereby the farmer would deliver milk to the processor at an agreed to price and future date of delivery. However, prior to enactment of the 2008 farm bill, if the monthly federal milk marketing order minimum price was above the forward contract price, the handler was still required to pay at least the federal order price for the milk. Proprietary handlers, therefore, had little incentive to enter into forward contracts, since they were prohibited from paying a price less than the federal milk marketing order minimum price. A pilot dairy forward pricing program was authorized by the FY2000 omnibus appropriations act, which USDA implemented from mid-2000 until its required expiration date of December 31, 2004.⁵

2008 Farm Bill Provisions and Implementation

Section 1502 of the enacted 2008 farm bill authorizes a dairy forward pricing program that is to be administered in a similar manner as the temporary pilot program in 2000-2004. Like the original pilot program, the forward pricing program allows dairy farmers and cooperatives to voluntarily enter into forward contracts with milk handlers. Any payments made by milk handlers under the contract will be deemed to satisfy the minimum price requirements of federal milk marketing orders. The program applies only to milk purchased for manufactured products (Classes II, III, and IV), and therefore does not include milk purchased for fluid consumption (Class I). The provision allows new contracts to be entered into until September 30, 2012, but no contract can extend beyond September 30, 2015. USDA issued a final rule for the Dairy Forward Pricing Program on October 31, 2008 (73 Federal Register 64868-64872).

Dairy processor groups, primarily the International Dairy Foods Association, sought this provision so that proprietary handlers could be exempt from the minimum pricing requirements of federal orders when they enter into a forward contract with dairy farmers. Proponents contend that proprietary handlers should have the same ability to forward contract as dairy cooperatives. (Under current law, dairy cooperatives are exempt from having to pay the federal order minimum prices to its members.) They also maintain that forward pricing is an effective risk management tool for both farmers and processors, allowing them to insulate themselves from the volatility of farm milk prices. Critics, including the National Milk Producers Federation, were concerned that handlers might compel small farmers to participate in a contract, and possibly use the contract as a means of undermining the federal order pricing system.

Streamlining Rulemaking Procedures

Unlike the dairy price support program and the milk income loss contract program, federal milk marketing orders are permanently authorized and therefore do not require periodic reauthorization by Congress. Instead, changes to federal milk marketing orders are handled administratively by USDA's Agricultural Marketing Service. The authorizing statute for federal milk marketing orders requires USDA to use formal rulemaking procedures to make changes to orders. Any interested party can petition USDA to create a new order or amend an existing one. The terms of a new or amended order are developed through public participation (producers, processors and consumers) in hearings held by USDA prior to the issuance of the order. USDA analyzes the hearing records and then recommends the terms and provisions of milk marketing orders. If two-thirds of the voting producers approve a new or an amended marketing order, the Secretary then approves and issues the order.

Some dairy producer groups have expressed concern that this rulemaking procedure can take many months and sometimes years to reach a conclusion and that the process needs to be streamlined. USDA admits that the process is time consuming, but counters that it provides for maximum industry participation and transparency. The International Dairy Foods Association (IDFA) contends that the rulemaking process prevents dairy farmers and processors from competing with other food and beverage industries that are not faced with government intervention. IDFA considers federal milk marketing orders to be outdated and unresponsive to market forces, and proposed that Congress establish a blue ribbon commission of stakeholders and experts to review the federal order system in its entirety.⁶

2008 Farm Bill Provisions and Implementation

Section 1504 of the enacted 2008 farm bill contains several revisions to federal order amendment procedures that include time limits for USDA to take specific actions. On August 20, 2008, USDA issued a final rule to provide supplemental guidelines, time frames, and procedures for amending federal milk marketing agreements and orders (73 Federal Register 49085-49090). Section 1509 includes the authorization of a blue ribbon commission to examine the future and efficacy of federal milk marketing orders.

Dairy Export Incentive Program

First authorized in 1985, the Dairy Export Incentive Program (DEIP) provides cash bonus payments to U.S. dairy exporters. The program was initially intended to counter foreign (mostly European Union) dairy subsidies, but subsequent farm bill reauthorizations expanded its purpose to market development. Payments since the program's inception have totaled $1.1 billion, with the most recent expenditures made in FY2004. The program was active throughout the 1990s, peaking in 1993 with $162 million in bonuses (see Table 4).

U.S. dairy product exports made with DEIP bonuses are subject to annual limitations under the WTO Uruguay Round Agreement. The limits are 68,201 metric tons of nonfat dry milk, 21,097 tons of butterfat, and 3,030 tons of various cheeses. Total expenditures under WTO commitments are capped at $117 million per year.

2008 Farm Bill Provisions

Section 1503 of the 2008 farm bill (P.L. 110-246) extends the authority for the DEIP until December 31, 2012.

Dairy Import Assessment

The Dairy Producer Stabilization Act of 1983 (7 U.S.C. 4501-4514) authorized a national dairy producer program for generic dairy product promotion, research, and nutrition education. The program is funded through a mandatory 15-cent per hundredweight assessment on all milk produced and marketed in the 48 contiguous states. Section 1505 of the 2002 farm bill (P.L. 107-171) amended the 1983 act requiring that the 15-cent assessment be collected on all imported dairy products. Section 1505 also required USDA to consult with the Office of the U.S. Trade Representative (USTR) before implementing the assessment on imports to ensure that the new requirement is consistent with U.S. international trade obligations. After consulting with the USTR, the Secretary of Agriculture determined that a mandatory dairy import assessment is not permissible, since Alaska and Hawaii are exempt from the domestic assessment. According to USDA, the exemption treats some domestic producers more favorably than importers, thereby violating U.S. trade obligations. Hence, USDA has never implemented the import assessment.

2008 Farm Bill Provisions

Section 1507 of the enacted 2008 farm bill adopts the Administration's proposal to ensure that the current 15-cent assessment applies to Alaska, Hawaii and Puerto Rico. The Administration contends that the statutory change would make the definition of the United States consistent with the definition used by the USTR and U.S. trading partners, thus allowing them to implement the assessment in imported products. The enacted 2008 farm bill also reduces the assessment on imports from 15 cents to 7.5 cents.

The import assessment is supported by most dairy producer groups. However, milk producers in Alaska and Hawaii were opposed to any definition change that required them to contribute to the program. Dairy importers and processors are opposed to the import assessment, contending that it is an unfair tax on imported products which they say could be challenged as trade distorting in the World Trade Organization, regardless of whether Alaska and Hawaii are included.

Appendix. Summary of Major Dairy Provisions in the Enacted 2008 Farm Bill: Comparison with Previous Law and House- and Senate-Passed Bills

Footnotes

1.	A hundredweight (or one hundred pounds) of milk is roughly equivalent to 11.6 gallons of milk.
2.	USDA formally announced these prices in a Farm Service Agency information bulletin dated January 5, 2009, http://www.fsa.usda.gov/Internet/FSA_File/dpd_bulletin_090105.pdf.
3.	See p. 4 of "National Dairy Policy Direction: NMPF's 2007 Farm Bill Package," at http://www.nmpf.org/files/file/NMPF%20Policy%20Direction.pdf.
4.	A proprietary handler is a milk processing company that is owned privately or publicly by investors other than milk producers. This structure differs from a cooperative, which is owned and operated by its farmer members.
5.	For more information on the pilot program, see the USDA Agricultural Marketing Service website at http://www.ams.usda.gov/dairy/for_contr_pilot.htm.
6.	See page 22 of the International Dairy Foods Association's Blueprint for the 2002 Farm Bill, "Ensuring a Healthy U.S. Dairy Industry" at http://www.healthydairyindustry.org.