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Dairy Market and Policy Issues
Dennis A. Shields
Analyst in Agricultural Policy
October 7, 2009
Congressional Research Service
7-5700
www.crs.gov
R40205
CRS Report for Congress
P
repared for Members and Committees of Congress
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Dairy Market and Policy Issues
Summary
In 2009, U.S. dairy producers have been caught in a classic “price-cost squeeze,” with farm milk
prices declining sharply from record highs while feed costs remain high. From January through
September 2009, the all-milk price received by farmers was 36% below a year earlier, when
prices were near a record high. Meanwhile, feed costs, as measured by alfalfa prices, were down
only 20% from a year earlier.
Declining milk and dairy product prices in late 2008 and early 2009 reactivated government
programs to support dairy prices and dairy farm income. During this period, after several years of
relative inactivity, the dairy price support program resumed purchases of surplus dairy products as
prices approached support levels. The U.S. Department of Agriculture (USDA) estimates that it
removed 111 million pounds of nonfat dry milk in 2008 and expects to remove 379 million
pounds in 2009, along with small amounts of butter and cheese. In February 2009, milk prices
declined below the trigger for Milk Income Loss Contract (MILC) payments to dairy farmers for
the first time in two years. Payments have been triggered in all subsequent months to date,
totaling $704 million as of September 25.
The deteriorating economic picture has prompted calls for policymakers to consider how well
current dairy policies are assisting dairy producers and what other options might be available.
Throughout 2009, the National Milk Producers Federation (NMPF), the largest trade association
representing milk producer cooperatives, has requested that USDA take steps to assist dairy
producers. Members of Congress have also engaged the Secretary of Agriculture. On May 22,
2009, USDA restarted the Dairy Export Incentive Program to help remove excess dairy products
from the market. On July 31, 2009, USDA announced a temporary increase in price support for
cheese and nonfat dry milk. Since then, Congress has considered additional support for dairy
farmers. On October 7, 2009, the House passed the conference agreement for the FY2010
agriculture appropriations bill, which includes an extra $350 million for emergency dairy
assistance ($60 million to purchase dairy products and $290 million in direct payments to
farmers). Action is pending in the Senate.
Given the economic climate, producers are making business choices that are expected to reduce
milk production and lift prices. However, the full effect of those decisions is expected to take
several more months, raising the question of what, if any, policy changes are needed now.
Options to address the current dairy market situation include (1) keeping the status quo and
allowing remaining programs to operate, (2) implementing a new program such as a dairy buyout,
and (3) modifying existing programs to enhance dairy farmer income.
Proponents of keeping the status quo argue that current dairy programs—specifically the dairy
product price support program and the MILC program—already encourage additional milk
production, and that more production-related support will slow the supply adjustment process
needed to bring the dairy market back into balance. At any rate, any proposals that involve new
budgetary outlays could be challenged as adding to an already large federal deficit, and/or
burdening consumers with higher costs. Proponents of additional action point out that many
producers are facing significant income loss and that without additional assistance, they may not
survive financially. Producer groups and processors alike want to increase demand as a way to
bolster milk and dairy product prices.
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Contents
Introduction ................................................................................................................................ 1
Market Situation ......................................................................................................................... 1
Milk Production Grows......................................................................................................... 2
Demand Slows ...................................................................................................................... 2
Feed Costs Climb.................................................................................................................. 3
Outlook for 2009 and 2010.................................................................................................... 3
Current Dairy Policies to Assist Producers................................................................................... 4
Milk Income Loss Contract (MILC) Program........................................................................ 4
Dairy Product Price Support Program (DPPSP)..................................................................... 5
Milk Marketing Orders ......................................................................................................... 7
Dairy Export Incentive Program (DEIP)................................................................................ 8
Requests for Action..................................................................................................................... 9
USDA Actions To-Date ............................................................................................................. 10
Increase Price Support for Cheese and Nonfat Dry Milk ...................................................... 10
Transfer Product to Domestic Feeding Programs ................................................................. 10
Activate Dairy Export Incentive Program (DEIP) ................................................................ 11
Potential Policy Responses........................................................................................................ 11
Status Quo .......................................................................................................................... 12
Dairy Herd Buyout Program................................................................................................ 13
Modifying Existing Programs to Enhance Dairy Farmer Income ......................................... 14
Current Regulatory Issues ......................................................................................................... 16
Dairy Import Assessment .................................................................................................... 16
Producer-Handler Exemptions in Federal Milk Marketing Orders........................................ 16
Figures
Figure 1. Monthly All-Milk Farm Prices...................................................................................... 1
Figure 2. Monthly Alfalfa Prices ................................................................................................. 1
Tables
Table 1. Milk Income Loss Contract Program Payments .............................................................. 6
Contacts
Author Contact Information ...................................................................................................... 17
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Introduction
U.S. dairy producers are caught in a classic “price-cost squeeze,” with farm milk prices declining
sharply from record highs while feed costs remain high. From January through September 2009,
the all-milk price received by farmers was 36% below a year earlier. (The all-milk price is the
weighted average farm price of fluid-grade and manufacturing-grade milk produced.) Meanwhile
feed costs, as measured by alfalfa prices, were down only 20% from a year earlier.1 The
deteriorating economic picture has prompted calls for policymakers to consider how well current
dairy policies are assisting dairy producers and what other options might be available.
Market Situation
The dairy market since 2007 illustrates how an agricultural boom can turn into a bust. Dairy
farmers enjoyed excellent returns in 2007 and most of 2008 as strong demand pushed up the price
of dairy products and the farm price of milk. In November 2007, the all-milk price hit a record
$21.90 per hundredweight (cwt.). In 2008, milk prices remained high, but feed prices rose rapidly,
creating concern for dairy farmers. The financial danger was a further escalation of feed prices or
a price reversal in dairy product prices. Product prices have, in fact, dropped. Feed costs have
declined some, but not enough to offset the drop in milk prices.
One simple measure of today’s price-cost squeeze affecting dairy farmers is the milk-feed price
index, as reported by the U.S. Department of Agriculture (USDA). The ratio averaged 2.01 in
2008, the lowest since at least 1985 and down from 2.81 in 2007, a year with record-high milk
prices. Thus far in 2009 (January-September), the ratio has averaged 1.56, down from the 10-year
average of 2.90. A ratio near 3 or higher is considered positive for milk production.
Figure 1. Monthly All-Milk Farm Prices
Figure 2. Monthly Alfalfa Prices
$ per cwt.
$ per ton
25
200
20
150
15
100
10
50
5
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: U.S. Department of Agriculture.
Source: U.S. Department of Agriculture.
The major factors leading to the current economic stress in the dairy industry are continued weak
demand relative to milk supplies and relatively high feed costs. In 2009, USDA expects the all-
1 Prices are from Agricultural Prices, U.S. Department of Agriculture (USDA), National Agricultural Statistics Service,
September 29, 2009.
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milk price to average between $12.05 per cwt. and $12.25 per cwt., down from $18.29 per cwt. in
2008 and 17%-19% below the 10-year average of $14.83.2
Milk Production Grows
Productivity growth is a hallmark of U.S. agriculture, and dairy is no exception. Over the years,
improved dairy cattle genetics and better feed management practices have increased output per
cow. Dairy farmers continued the advancement last year: USDA estimates milk per cow in 2009
at a record high of 20,493 pounds, up from 20,396 in 2008 (one gallon of milk equals about 8.6
pounds).
Normally, higher productivity is partially offset by a decline in cow numbers, resulting in more
modest gains in total milk production. However, in 2008, dairy farmers increased herds in
response to attractive returns, particularly in 2007. As a result, U.S. milk production rose 2.3% in
2008, compared with the increase in milk per cow of only 1.0%. Milk supplies expanded at about
the same time that demand started to weaken.
In 2009, lower returns have encouraged farmers to cull dairy cows, with the national herd
declining 123,000 head or 1.3%. Productivity gains, though, are expected to offset some of the
reduction in cow numbers, leaving U.S. milk production down just 0.8%. In 2009, the decline in
production has been less than the drop-off in demand, resulting in sharply lower prices than a
year ago.
Demand Slows
Dairy exports account for a relatively small but important share of U.S. dairy product sales. On a
fat basis, exports were estimated at 3% of total use in 2007 and 4% in 2008. (On a skim-solids
basis, the export shares were 12% in 2007 and 15% in 2008.)3 Growth in U.S. dairy exports
stemmed from lower product availability from New Zealand and Australia (and other countries)
and the lower-valued dollar. U.S. cheese exports saw particularly strong gains.4
Export prospects have weakened in 2009, with USDA forecast exports dropping below 2007
levels. Among the factors USDA cites for the decline in export demand are the global recession,
lower incomes, higher dairy production abroad, and a stronger dollar. The drop-off in export
demand means that more product must be sold on the domestic market, which has driven down
dairy product prices and farm milk prices.
Domestic demand has also reportedly slowed, given reduced restaurant sales and sales of
premium food products, including some dairy items, as consumers reduce overall spending.
However, increased purchases of food for home consumption are likely supporting the market to
some degree in 2009.
2 Current market situation and forecasts in this section are from World Agricultural Supply and Demand Estimates,
USDA, World Agricultural Outlook Board, September 11, 2009; and Livestock, Dairy, & Poultry Outlook, USDA,
Economic Research Service, September 17, 2009.
3 The milk equivalent of the dairy products can be calculated on the basis of fat content or skim-solids content.
4USDA, Economic Research Service, Livestock, Dairy, and Poultry Outlook and Feed Outlook, various 2008 issues.
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Feed Costs Climb
Feed costs rose sharply in mid-2008. Expanding corn demand for ethanol use, strong global
demand for grain, and heightened investment in commodity markets collided with uncertain
prospects for U.S. corn and soybean yields. In spring/summer 2008, massive flooding in the
Midwest led to fears that the U.S. corn and soybean supplies would be sharply curtailed at a time
when demand seemed limitless. In July 2008, the farm price of corn peaked at $5.47 per bushel,
up nearly $2 per bushel from a year earlier. Alfalfa prices followed suit, with farm prices reaching
$180 per ton in August compared with $135 a year earlier.5
The commodity price boom of 2008 began to collapse in September when financial and
commodity markets faltered. Large amounts of investment money began to leave the market, and
crop yield prospects for both corn and soybeans firmed up. Supply fears essentially evaporated.
As 2008 came to a close, prices for dairy feedstuffs had dropped substantially from highs earlier
in the year but remained well above year-earlier levels. Corn prices in December averaged $4.10
per bushel compared with $3.77 in December 2007. The price of alfalfa was $155 per ton in
December 2008, compared with $135 in December 2007. In contrast, soybean prices, which had
seen a faster rise the year before, averaged $9.24 per bushel, down from $10.00 in December
2007.
Thus far in 2009, average prices for dairy feed have moderated from 2008 highs but remain well
above 2007 levels. In recent months, USDA has revised its forecasts of 2009 corn and soybean
prices downward based on prospects for larger crops this fall.
Outlook for 2009 and 2010
Given the downturn in dairy farm income, dairy economists expect producers in 2009 to send
more cows to slaughter and adjust feed rations to save money, which together would result in a
slight decline in total milk production in 2009.6 On the demand side, dairy exports in 2009 have
declined as global economic weakness slows foreign demand. Based on USDA forecasts, the
expected supply adjustments and higher support prices announced by USDA on July 31 will lift
milk prices in the last quarter of 2009. Average farm-level milk prices are expected to rise from
$11.60 per cwt. in the April-June quarter to $12.90 per cwt. in October-December 2009 (midpoint
of the USDA forecast range). The October-December 2008 prices averaged nearly $17 per cwt.
In 2010, USDA expects milk production to decline further as farmers cull more cows following
low returns in 2009. Also, exports are expected to pick up slightly as the global economy
improves, although USDA expects export prospects will be limited by higher domestic prices and
larger exportable supplies in competitor countries. With less milk and somewhat higher demand,
the all-milk price is forecast to increase from $12.15 per cwt. in 2009 to $15.05 per cwt in 2010.
5For more information on factors behind feed cost increases, see CRS Report RS22908, Livestock Feed Costs:
Concerns and Options, by Geoffrey S. Becker.
6 In January, dairy producers increased herd culling in most regions of the country, according to National Dairy Market
News, USDA, Agricultural Market Service, January 26-30, 2009. Also, prices for dairy heifers fell as demand declined
for herd replacements.
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Current Dairy Policies to Assist Producers
U.S. dairy policy has been developed over the last seven decades. The early policies addressed
three main problems: (1) producers lacked bargaining power with milk buyers; (2) producers
suffered from volatile or low prices; and (3) market participants encountered severe
shortages/gluts resulting from marketing a highly perishable commodity (fluid milk). The policy
response resulted in the development of two major government activities that still function today:
federal milk marketing orders (FMMOs) and the Dairy Product Price Support Program (DPPSP).
While both FMMOs and the DPPSP have their roots in the 1930s and 1940s, the programs have
changed modestly over the years as the industry structure and markets changed.
Two other components of U.S. dairy policy are relatively new programs. First, the 1985 farm bill
established the Dairy Export Incentive Program (DEIP) to counter foreign competitor subsidies.
Second, the Milk Income Loss Contract (MILC) program was established in the 2002 farm bill as
a government payment for dairy farmers in times of low milk prices. Like U.S. crop programs,
the MILC program pays dairy producers when prices decline below a specified level.
The following sections describe each of these four components and how they relate to the current
market situation.7 Lower milk and dairy product prices since late 2008 have generated new
program activity. USDA began purchasing dairy products last fall under the DPPSP; MILC
payments were triggered beginning in February.
Milk Income Loss Contract (MILC) Program
The Milk Income Loss Contract (MILC) program pays dairy farmers when farm milk prices fall
below an established target price. Section 1506 of the 2008 farm bill (P.L. 110-246) extends
authority for the MILC program until September 30, 2012. This program is similar to long-time
subsidy programs for crops (e.g., wheat, corn, and soybeans) that pay farmers when farm prices
drop below certain levels. USDA’s Farm Service Agency implements the MILC program.
Under MILC, participating dairy farmers nationwide are eligible for a federal payment whenever
the minimum monthly market price for farm milk used for fluid consumption (Class I; see
discussion on “Milk Marketing Orders”) in Boston falls below $16.94 per cwt. Eligible farmers
then receive a payment equal to 45% of the difference between the $16.94 target price and the
lower monthly market price. The payment quantity is limited to 2.985 million pounds of annual
production (equivalent to about a 160-cow operation). Since the inception of the MILC program,
large dairy farm operators have expressed concern that the payment limit has 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.
To address the issue of rising feed costs, the 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
7 Portions of this section are taken from CRS Report RL34036, Dairy Policy and the 2008 Farm Bill, by Ralph M.
Chite and Dennis A. Shields.
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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 $7.35.8
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. However, milk prices have since
declined below the trigger for MILC payments. The Class I Boston farm milk price for February
2009 (advance pricing) was $13.97 per cwt. With the adjustment for feed costs raising the trigger
to $17.33 per cwt., MILC payments were activated for the first time in two years at a payment
rate of $1.51 per cwt. (($17.33 - $13.97) times 45%).9 The payment rate rose to $2.01 per cwt. in
March. Given current prospects in the futures markets for milk, corn, and soybeans, payments are
expected to continue during 2009, but at smaller rates.10 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. As of September 25, 2009, total MILC
payments distributed to date were $704 million (Table 1).
The timing of the payments has caused some concern for producers this spring. While milk price
data become available during the payment month, data needed for the feed cost adjustor are not
available until USDA publishes monthly average feed prices in Agricultural Prices at the end of
the next month. Consequently, MILC payments for a particular month are not processed until two
months later.
Dairy Product Price Support Program (DPPSP)
The Agricultural Act of 1949 first established a 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 multiyear omnibus farm acts and budget reconciliation acts.
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. Whenever market
prices fall to product support levels, 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 for all dairy farmers. The effectiveness of the dairy price supports depends on
removal of products from the market and placement into government storage.11
8 In the final month of the program (September 2012), the payment percentage rate reverts to 34% so that the budget
baseline for future years does not include the cost of the increase. Similarly, the eligible production limit reverts to its
original level (2.4 million lbs.), and the threshold feed cost rises to $9.50 per cwt.
9 Monthly payment rates published by USDA’s Farm Service Agency are available at http://www.fsa.usda.gov/Internet/
FSA_File/milc_rates.pdf.
10 Expected MILC payment rates based on futures prices are available from Cornell University at
http://www.cpdmp.cornell.edu/CPDMP/Pages/Home.html.
11 The program supports market prices by purchasing products, unlike USDA’s marketing loan program for field crops.
The marketing loan program minimizes government ownership of crops by encouraging farmers to sell their crop in the
open market and receive a “loan deficiency payment” instead of placing the commodity under loan. If farmers do
decide to place their crop under loan, the commodity serves as collateral, which may be forfeited to the government or
(continued...)
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Table 1. Milk Income Loss Contract Program Payments
(April 1, 2009, through September 25, 2009)
Payments
Payments
State
($ thousands)
State
($ thousands)
Alabama
1,178
Nebraska
4,236
Alaska
40
Nevada
1,102
Arizona
4,709
New Hampshire
1,905
Arkansas
1,428
New Jersey
1,206
California
81,499
New Mexico
8,294
Colorado
4,855
New York
61,690
Connecticut
2,284
North Carolina
5,229
Delaware
605
North Dakota
2,178
Florida
4,503
Ohio
24,498
Georgia
6,226
Oklahoma
3,165
Hawai
81
Oregon
7,563
Idaho
17,550
Pennsylvania
55,816
Illinois
11,719
Rhode Island
132
Indiana
10,469
South Carolina
1,891
Iowa
22,723
South Dakota
6,624
Kansas
5,311
Tennessee
6,971
Kentucky
8,040
Texas
19,166
Louisiana
2,225
Utah
6,234
Maine
3,858
Vermont
15,082
Maryland
5,838
Virginia
10,271
Massachusetts
1,891
Washington
14,357
Michigan
32,638
West Virginia
1,145
Minnesota
54,535
Wisconsin
143,533
Mississippi
1,843
Wyoming
316
Missouri
10,545
Puerto Rico
3,193
Montana
1,760
TOTAL 704,150
Source: U.S. Department of Agriculture, Farm Service Agency.
Notes: Payments in FY2009 began in April 2009, since farm milk prices were above the target price in previous
months. For payments in previous fiscal years, see CRS Report RL34036, Dairy Policy and the 2008 Farm Bill, by
Ralph M. Chite and Dennis A. Shields.
(...continued)
repaid at the local market price if it is below the loan rate (i.e., the farmer sells the crop in the market, repays the loan,
and receives a “marketing loan gain”).
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The Dairy Product Price Support Program (DPPSP) as authorized by the 2008 farm bill 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. 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.
In late 2008 and 2009, after several years of relative inactivity, the price support program
resumed purchases when dairy product prices approached support levels. As of September 11,
2009, USDA estimated that it purchased 111 million pounds of nonfat dry milk under the program
in 2008 and expects to purchase 379 million pounds in 2009, along with small amounts of butter
and cheese (including amounts exported under the Dairy Export Incentive Program). Total
expenditures on the DPPSP were $223 million from October 1, 2008, through September 10,
2009.12 With an expected rise in milk and product prices next year, USDA forecasts only a small
amount of butter to be purchased in 2010.
Following heightened industry and congressional interest in taking action to boost milk prices for
farmers, USDA announced on July 31, 2009, a temporary increase in price support for cheese and
nonfat dry milk from August 2009 through October 2009. (See “Increase Price Support for
Cheese and Nonfat Dry Milk” below for more information.) Subsequently, the Senate approved
an amendment to the Senate-passed FY2010 agriculture appropriations bill to increase Farm
Service Agency funding by $350 million, ostensibly for an additional increase in dairy product
price support levels.13 However, the conference agreement for the FY2010 Agriculture
appropriations bill, which was reported on September 30, 2009, provides for a different use of the
funds ($60 million to purchase dairy products and $290 million in direct payments to farmers).
See “Modifying Existing Programs to Enhance Dairy Farmer Income,” below, for more
information.
Milk Marketing Orders
Federal milk marketing orders (FMMOs) mandate minimum prices that processors must pay
producers for milk depending on its end use. This compares with the MILC program, which
provides direct payments to producers, and the DPPSP, which buys surplus dairy products at
specified minimum prices. The DPPSP serves as a price floor for products and undergirds FMMO
minimum milk prices.
The farm price of approximately two-thirds of the nation’s fluid milk is regulated under FMMOs.
Federal orders, which are administered by USDA’s Agricultural Marketing Service, 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.
12 U.S. Department of Agriculture, USDA Efforts Regarding Dairy, briefing paper, September 11, 2009.
13 Senator Bernie Sanders, remarks in the Senate, Congressional Record, August 4, 2009, p. S8714.
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FMMOs also address how market proceeds are distributed among producers delivering milk to
federal marketing order areas. Producers 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 products) than for milk used in manufactured dairy products such as yogurt,
ice cream, and sour cream (Class II), cheese (Class III), and butter and dry milk products (Class
IV). 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.
Over the years, dairy farmers have supported minimum prices afforded by FMMOs because they
help balance marketing power traditionally held by processors. In contrast, dairy processors
generally oppose them. Mandated minimum prices, they say, do not allow for timely adjustments
in a rapidly changing market and can leave product manufacturers in unprofitable situations.
Also, they contend that the FMMO system distorts markets, saying fixed differentials contributed
to high fluid milk prices last year.14
Dairy Export Incentive Program (DEIP)
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 (while removing surplus dairy products from the market), but
subsequent farm bill reauthorizations have added market development to the role of DEIP.
Payments since the program’s inception have totaled $1.1 billion. The program was active
throughout the 1990s, peaking in 1993 with $162 million in bonuses. DEIP funding is a
mandatory account provided through the Commodity Credit Corporation (CCC) borrowing
14 International Dairy Foods Association, Dairy Forum, January 12, 2009.
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authority from the U.S. Treasury, rather than through annual USDA appropriations bills.15 The
program had not been used since FY2004 until USDA announced its reactivation on May 22,
2009. (See “Activate Dairy Export Incentive Program (DEIP),” below.)
U.S. dairy product exports made with DEIP bonuses are subject to annual limitations under the
Uruguay Round Agreement of the World Trade Organization (WTO). The limits are 68,201
metric tons of skim milk powder, 21,097 tons of butterfat, 3,030 tons of various cheeses, and 34
tons of other dairy products (quantity limits are on a July-June year). Total expenditures under
WTO commitments are now capped at $117 million per year (value limits on a October-
September year).
Requests for Action
The reversal of market fortunes for dairy farmers since 2008 has prompted calls from dairy
producer groups to address the situation. The National Milk Producers Federation (NMPF), the
largest trade association representing milk producer cooperatives, wrote to the Secretary of
Agriculture on January 8, 2009, asking the Department to take several steps to assist dairy
producers. Subsequently, letters to the Secretary were also sent by Members of Congress. On
January 26, the International Dairy Foods Association, which represents dairy manufacturers and
marketers, wrote to the Secretary, focusing only on ways to bolster demand for dairy products.16
The recommended industry actions deal also with revisions in the support program to increase
dairy product purchases by the government, specifically asking USDA to be more flexible with
the acceptable types and forms of eligible dairy products. Additional purchases are expected to
spur domestic demand and slow the decline in prices. The request from NMPF also included
reactivation of the Dairy Export Incentive Program to boost exports and remove excess inventory
while helping exporters maintain business relationships developed in recent years.
In early May 2009, the National Milk Producers Federation reiterated its request that the U.S.
government restart the Dairy Export Incentive Program to help remove excess dairy products
from the market.17 Subsequently, NMPF asked USDA to increase the support prices of both
cheese and nonfat dry milk.18
Another policy proposal is a dairy herd buyout to reduce the milk supply. A federal buyout has
not been included in the NMPF requests, but it had been discussed in the agricultural media
earlier in 2009.19 The industry currently operates a voluntary, producer-funded program to remove
dairy cows from milk production. USDA operated a federal dairy herd buyout program in the
mid-1980s.
15 CRS Report RL33553, Agricultural Export and Food Aid Programs, by Charles E. Hanrahan.
16 The National Milk Producers Federation wrote a second letter on January 29, 2009. It is available at
http://www.nmpf.org/files/file/NMPF%20Lttr%20to%20Sec_%20Vilsack%20on%20Dairy%20Crisis%20012909.pdf.
The January 26, 2009, letter from the International Dairy Foods Association is at http://www.idfa.org/news/stories/
2009/02/vilsack_ltr_0202.pdf.
17 National Milk Producers Federation, “URGENT! Please Act Now—U.S. Dairy Export Incentive Program (DEIP),”
press release, May 8, 2009, http://www.nmpf.org/files/file/DEIP%20Talking%20Points_2009_final.pdf.
18 National Milk Producers Federation, “NMPF Calls for Temporary Expansion of Dairy Price Support Program to
Help Farmers,” press release, June 26, 2009, http://www.nmpf.org/latest_news/press_releases/
dairy_price_support062609.
19 Agweb.com, January 21, 2009, and TheCattleSite, January 28, 2009.
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In July 2009, the Subcommittee on Livestock, Dairy, and Poultry of the House Agriculture
Committee held a series of hearings to review economic conditions facing the dairy industry. The
subcommittee heard a range of opinions from the witnesses, with some asking for increased
intervention in the form of higher support prices or supply management. Others argued that the
industry would benefit if the government did nothing because inaction would more quickly bring
supply in line with current demand.20
USDA Actions To-Date
USDA has taken several actions in 2009 to support dairy farm income, including increasing dairy
product price supports, transferring dairy products to domestic feeding programs, and activating
the Dairy Export Incentive Program. USDA expects to spend about $1 billion in fiscal 2009 on
purchases of dairy products and payments to producers under the Milk Income Loss Contract
(MILC) program.
Increase Price Support for Cheese and Nonfat Dry Milk
Following heightened industry and congressional interest in taking action to boost milk prices for
farmers, USDA announced on July 31, 2009, a temporary increase in price support for cheese and
nonfat dry milk from August 2009 through October 2009.21 This raises the government purchase
price for nonfat dry milk from $0.80 per pound to $0.92 per pound, the price for cheddar blocks
from $1.13 per pound to $1.31 per pound, and the price of cheddar barrels from $1.10 per pound
to $1.28 per pound. USDA expects that temporarily raising the price of these dairy products will
increase the price that dairy farmers receive for their milk and boost U.S. dairy farmers’ revenue
by $243 million. The change is expected to result in the government purchase of an additional
150 million pounds of nonfat dry milk and an additional 75 million pounds of cheese. According
to USDA, the purchases will be a no-net-cost transaction because the product will presumably be
resold at higher prices when the dairy product market recovers next year. Following USDA’s
announcement, cheese prices rose to the new support levels.22 Separately, market observers have
noted a modest strengthening in product markets overseas, with milk powder prices increasing in
recent months following improved demand in Asia.23
Transfer Product to Domestic Feeding Programs
On March 26, 2009, USDA announced that approximately 200 million pounds of nonfat dry milk
(purchased under the Dairy Product Price Support Program) would be transferred from the
Commodity Credit Corporation to USDA’s Food and Nutrition Service for use in domestic
feeding programs. Besides helping needy families by providing food through the National School
20 Written statements from the hearings are available at http://agriculture.house.gov/hearings/statements.html.
21 U.S. Department of Agriculture, “Agriculture Secretary Vilsack Announces Immediate Relief For Struggling Dairy
Producers,” press release, July 31, 2009, http://www.usda.gov/wps/portal/
!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2009/07/0355.xml.
22 Alan Levitt, Dairy Dairy Report, August 11, 2009, http://www.dailydairyreport.com/.
23 Gavin Evans, “Dairy Prices May Make ‘Slow, Gradual’ Recovery, Fonterra Says,” Bloomberg, September 23, 2009,
http://www.bloomberg.com/apps/news?pid=email_en&sid=aRAFGHs40oNg.
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Lunch program and others, the transfer is expected to increase dairy product consumption,
thereby supporting the prices farmers receive for milk.24
Activate Dairy Export Incentive Program (DEIP)
On May 22, 2009, USDA announced allocations under DEIP for the marketing year that ends
June 30, 2009, as allowed under the rules of the World Trade Organization (WTO).25 During the
month of June, USDA accepted bids for nonfat dry milk, cheddar cheese, mozzarella cheese,
butter, and anhydrous milk fat from exporters shipping to Africa, the Middle East, and Asia. On
July 6, 2009, USDA announced initial DEIP allocations for the marketing year spanning July 1,
2009, through June 30, 2010. Subsidized export quantities are limited on a July-June marketing
year basis. USDA had committed $18 million in DEIP awards through September 10, 2009.
The use of export subsidies has the economic effect of moving more product into market
channels, reducing inventories, and raising farm prices. However, economists say significant
quantities would be necessary to appreciably move farm prices from current levels based on
prevailing supply and demand. Free trade supporters caution that if price-enhancing DEIP export
quantities are above the limits agreed to in the Uruguay Round Agreement, the U.S. government
will need to break its World Trade Organization commitments; otherwise the action might result
in little impact on farm milk prices.
Free trade supporters also say that policymakers need to weigh the merits of returning to an
aggressive export subsidy stance, how export subsidies fit with current overall U.S. trade policy,
and the potential reaction from major agricultural trading partners.
Producer groups favoring the reactivation of DEIP point to the European Union (EU), which has
already taken action to address falling dairy prices in Europe. In January 2009, the EU announced
it would restart its dairy export subsidy program for butter, cheese, and milk powder in an attempt
to stabilize the domestic market.26
For more information on DEIP, see CRS Report R40584, Implications of Reactivating the Dairy
Export Incentive Program (DEIP), by Dennis A. Shields and Charles E. Hanrahan.
Potential Policy Responses
Most policy responses that are currently being discussed fall into three categories: (1) maintain
the status quo and allow remaining programs to operate, (2) implement a new program such as a
24 U.S. Department of Agriculture, “Agriculture Secretary Vilsack Announces Plan to Benefit Nutrition Programs and
Dairy Farmers,” press release, March 26, 2009, http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/
7_0_1OB?contentidonly=true&contentid=2009/03/0071.xml.
25 U.S. Department of Agriculture, “USDA Announces 2008-09 Allocations for Dairy Export Incentive Program,”
press release, May 22, 2009, http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=
true&contentid=2009/05/0178.xml.
26 European Commission, “Dairy Market: Commission Proposes Additional Measures to Help Dairy Sector,” press
release, January 15, 2009, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/57&format=HTML&aged=
0&language=EN&guiLanguage=en.
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dairy buyout, and (3) modify existing programs to enhance dairy farmer income. Each is
discussed in sections below.
A change in federal milk marketing orders could also be used for boosting dairy farm returns. The
Federal Milk Marketing Improvement Act of 2009 (S. 1645; first introduced as S. 889) is
expected to “help farmers get a fair price for their milk” and provide relief and assistance to dairy
farmers by using the cost of milk production as the basis for pricing milk.27 While the bill could
raise farm milk prices, some are concerned that it could also reduce the competitiveness of the
U.S. dairy industry because, they argue, a pricing system based on cost of production potentially
rewards inefficiency. Also, some are concerned that provisions in the bill for USDA to influence
supply may not be sufficient to bring supply and demand into balance.
Increasing import barriers is another approach for addressing the issue of low milk prices. The
Milk Import Tariff Equity Act was introduced in the Senate (S. 1542) on July 30, 2009, and in the
House (H.R. 3674) on September 29, 2009, to impose tariff-rate quotas on imports of casein (the
main protein found in milk) and milk protein concentrates.28 Similar bills have been introduced in
virtually every Congress over the last decade, but no action has occurred. For more information,
see CRS Report R40839, Proposed Import Restrictions on Milk Protein Concentrates (MPCs).
The current and prospective price environment complicates the policy decision. Given reduced
returns, producers are culling herds and reducing milk production, which is expected to lift farm
prices. However, the full effect of the production decisions is expected to take several more
months.29
Status Quo
One option for policymakers is to do nothing and allow current programs to operate as intended.
U.S. dairy programs, particularly the DPPSP and MILC, are now operative. USDA is purchasing
dairy products under the DPPSP. These actions take excessive inventory off the market and
support overall milk prices.
Similarly, the MILC program is expected to continue making payments to dairy farmers in 2009.
To the extent that feed prices remain above the threshold level, the feed cost adjustor plays a role
in compensating dairy farmers to offset the high cost of feed.
Supporters of the status quo argue that current dairy programs already encourage additional milk
production when the market is not calling for it. The International Dairy Foods Association
(IDFA), representing dairy manufacturers, contends that the MILC program, the dairy product
27 Office of Senator Arlen Specter, “Specter, Casey Work to Help Dairy Farmers ,” press release, April 24, 2009,
http://specter.senate.gov/public/index.cfm?FuseAction=NewsRoom.NewsReleases&ContentRecord_id=D92E3B27-
A176-F0A0-E68C-40B249E3492E.
28 Tariff-rate quotas impose low import duties on quantities inside a quota, while quantities above the quota are charged
higher duty rates. Milk protein concentrate (MPC) 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
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.
29 Further complicating the supply adjustment was unseasonably cool weather in several dairy-producing areas in late
spring, which reportedly resulted in higher-than-expected milk production.
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price support program, and recent USDA decisions on FMMOs contribute to excess milk
supplies. Similarly, some farmers do not favor raising support prices because “ ... it has the strong
potential to send the wrong signal to the market to increase or at least maintain, rather than to
decrease, production.”30 As a result, modifications to enhance producer incomes could exacerbate
the milk supply and price situation. At any rate, any proposals that involve new budgetary outlays
could be challenged as adding to an already large federal deficit and/or burdening consumers with
higher costs.
Proponents of additional action point out that many producers are facing significant income loss
and that without additional assistance, they may not survive financially. Also, some producers
argue that the level of support—no longer specified for milk directly, but effectively providing
support at roughly $9.90 per cwt—is too low given current feed prices.
Dairy Herd Buyout Program
In 1986 and 1987, the Dairy Termination Program, authorized under the Food and Security Act of
1985 (P.L. 99-198, the 1985 farm bill) was designed to reduce government costs associated with
federal purchases of surplus dairy products. The program paid participating farmers to remove
more than 1 million dairy cows from milk production, or about 9% of the U.S. dairy herd in 1985.
Participating farmers were barred from the dairy industry for five years. The program temporarily
reduced the nation’s milk production capacity and was designed to ease farmers’ transition to a
lower price support level that was also included in the 1985 farm bill.31
One concern with pursuing another buyout is raised by the beef industry. Beef producer groups
note that dairy cow slaughter under the 1980s program added beef to total meat supplies, which
reduced beef and cattle prices. Under the Dairy Termination Program, USDA purchased beef for
other programs as a way to lessen the price impact on the beef and cattle markets.32
The National Milk Producers Federation (NMPF) currently operates its own, producer-funded
dairy buyout program called Cooperatives Working Together (CWT). It has purchased and
removed from dairy production 276,000 cows representing more than 5 billion pounds of annual
milk production during its first six herd retirement rounds, which began in 2003.33 In early
February, the NMPF said it was not pursuing a new federal program.
On May 1, 2009, the CWT closed its seventh round of bidding for dairy cow purchases. Dairy
cow culling reportedly slowed in March and April as farmers who had applied for the program
30 U.S. Congress, House Committee on Agriculture, Subcommittee on Livestock, Dairy, and Poultry, To Review
Economic Conditions Facing The Dairy Industry, Statement by Craig Lang, President of Iowa Farm Bureau, 111th
Cong., 1st sess., July 28, 2009, http://agriculture.house.gov/testimony/111/h072809/Lang.pdf. Note that his testimony
also supported the removal of the MILC production payment limitation.
31 General Accounting Office (now Government Accountability Office), Dairy Programs: Effects of the Dairy
Termination Program and Support Price Reductions, June 1993.
32 USDA, Economic Research Service, “The Dairy Buyout: A New Approach to an Old Problem,” Farmline, April
1986.
33 Under CWT’s program, the producer is paid 90% of the bid total when CWT verifies that the farm has sent all the
milk cows to slaughter. The final 10% (plus interest) is paid when CWT verifies that neither the producer nor the dairy
facility has commercially produced milk during the 12 months following the CWT farm audit. Statistics are available at
http://www.cwt.coop.
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awaited the results.34 CWT announced in mid-May that it had accepted bids representing nearly
101,000 cows and almost 2 billion pounds of milk production capacity, CWT’s largest single herd
retirement program to date.35 Herd culling occurred over the summer months. On July 10, 2009,
CWT announced its eighth round, which was completed September 24, 2009. Compared with
previous rounds, the bid period was shortened to two weeks in order to have a more immediate
impact. In this round, CWT accepted bids on 74,114 cows, representing 1.5 billion pounds of
milk. Also, nearly 3,000 bred heifers were sent to processing plants.36 Most recently, on October
1, 2009, CWT announced yet another round, with bids due by October 15.
A herd buyout-related bill was introduced in Congress on July 23, 2009. H.R. 3322 would direct
USDA to use Section 32 funds to enter into a contract with a producer association or other third
party to encourage dairy producers to remove dairy cows from production. It would also
temporarily increase MILC payments (see next section).
Modifying Existing Programs to Enhance Dairy Farmer Income
Another option being offered to address the current market situation is to modify existing
programs. The National Farmers Organization (NFO) and other farm groups have proposed
adding funds to increase the amount of Milk Income Loss Contract (MILC) payments, which
resumed in February 2009. The groups contend that adding payments to the existing income
support program provides a necessary addition to dairy farmer income. Several bills have been
introduced in Congress to increase MILC payments.37 However, opponents of this option argue
that additional payments could slow the supply adjustment process needed to bring the dairy
market back into balance. Congressional leadership has reportedly been reluctant to act on the
proposal because the move would be considered as re-opening the 2008 farm bill, which would
likely result in a multitude of requests from other groups seeking changes.
Earlier in 2009 , the National Milk Producers Federation proposed several administrative changes
to the price support program, such as loosening packaging requirements and expanding the list of
eligible products. Such changes would likely remove additional products from the market and
provide some additional support to prices. Similarly, the International Dairy Foods Association
(IDFA) proposes to boost demand by exchanging government-owned bulk dairy inventory for
consumer-ready dairy products and using existing authorities to purchase and donate additional
dairy products like yogurt. A regulation addressing some of these issues in currently in review at
USDA.
Congress has included additional assistance to dairy farmers in the FY2010 Agriculture
appropriations bill (H.Rept. 111-279 to H.R. 2997), which was reported on September 30, 2009.
34 University of Idaho, “PNW Dairy Monitor,” press release, May 18, 2009, http://www.ag.uidaho.edu/aers/PDF/PNW/
2009/PNW_MON_MAY09.pdf.
35 Cooperatives Working Together, “CWT To Remove Over 100,000 Cows, 2 Billion Pounds of Milk in Largest-Ever
Herd Retirement,” press release, May 13, 2009, http://www.cwt.coop/about/news_releases/news_release_051309.pdf.
36 Cooperatives Working Together, “CWT Completes Eighth Herd Retirement Round,” press release, September 24,
2009, http://www.cwt.coop/sites/default/files/news_releases/Herd%20retirement%20details%20092409.pdf.
37 Several bills would increase the MILC payment factor from 45% to 90% between March 1, 2009, and November 30,
2009, including S. 1330 (introduced on June 23, 2009), S. 1398 (July 6, 2009), and H.R. 3322 (July 23, 2009). Other
bills (S. 1331 and H.R. 3166) would adjust the payment rate for inflation.
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The conference agreement (in the General Provisions, Section 748) provides a total of $350
million, divided between $290 million for supplemental income payments to dairy farmers and
$60 million for the purchase of cheese and other dairy products to be distributed through food
banks and similar locations. Provisions for expedited rulemaking are expected to allow USDA to
make the additional payments in a timely manner. The House passed the conference agreement on
October 7, 2009, and action is pending in the Senate.
The conference agreement does not specify how the Secretary should allocate the funding for
direct payments among producers. This issue is a source of contention because the eventual
distribution method used by the Secretary will determine which size of farm will receive the most
benefits.38 Under the Milk Income Loss Contract (MILC) program, for comparison, the payment
quantity is limited to 2.985 million pounds of annual production (equivalent to about a 160-cow
operation), as specified in the 2008 farm bill.
The idea for an additional dairy appropriation originated in the Senate-passed bill, which included
an amendment for an additional $350 million in FSA salaries and expenses, ostensibly for dairy
disaster assistance through an increase in dairy product price supports.39 Amendment proponents
in Congress expected that the additional funding, if used for the price support program, would
raise minimum purchase prices another $0.05 per pound for nonfat dry milk and $0.09 per pound
for cheese from levels USDA announced on July 31, 2009.40 The House-passed appropriations
bill did not have a similar provision.
The National Milk Producer Federation (NMPF), representing dairy farmers, favors direct
purchases, while the National Farmers Union supports higher purchase prices. NMPF contends
removing surplus products would raise overall price levels and provide benefits through higher
market prices that would be nearly four times greater than the value of benefits derived from
either higher purchase prices under the DPPSP or additional direct farmer payments.41 In contrast,
the International Dairy Foods Association (IDFA) favors other options to minimize market
impacts, including additional MILC payments and government purchases of a wide variety of
products rather than a large-scale purchase of a single product such as cheese. IDFA also argues
against higher purchase prices that, they say, would increase costs for food processors and
encourage additional milk production, exacerbating the milk surplus problem.
38 Office of Senator Barbara Boxer, “Boxer Requests Urgent Meeting with Agriculture Secretary to Discuss Fair
Distribution of Emergency Dairy Funding ,” press release, October 1, 2009, http://boxer.senate.gov/news/releases/
record.cfm?id=318568.
39 The amendment added funding for Farm Service Agency salaries and expenses without specifying that it should be
used for price support. However, on the Senate floor, Senator Bernie Sanders stated that the funding would be for
higher price supports. See Congressional Record, August 4, 2009, p. S8714. The amendment was controversial since it
was designated emergency funding and was not offset elsewhere in the bill. The Sanders amendment (S.Amdt. 2276)
was adopted by voice vote, after a procedural vote of 60-37 to waive budget rules to allow the bill to exceed its 302(b)
appropriations subcommittee allocation. The House-passed bill did not have a similar provision. The funding in the
conference agreement does not have the emergency designation with regard to funding ceilings.
40 Office of Senator Bernie Sanders, “Senate Approves Help for Dairy Farmers,” press release, August 4, 2009,
http://sanders.senate.gov/newsroom/news/?id=a8567c42-8810-4e1d-a752-5776662bc0ac.
41 Letter from Jerry Kozak, President and CEO, National Milk Producers Federation, to Senator Herb Kohl, September
9, 2009, http://www.nmpf.org/files/file/
AgApprops%20letter%20on%20Sen%20Sanders%20350M%20dairy%20amendment.pdf.
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Current Regulatory Issues
Recent USDA regulatory actions have included a dairy import assessment as part of the 2008
farm bill implementation, as well as proposed changes to federal milk marketing orders.
Dairy Import Assessment
On May 19, 2009, USDA published a proposed rule in the Federal Register to establish a dairy
import assessment program as required by the 2002 and 2008 farm bills. U.S. dairy producers in
the 48 contiguous states currently pay a 15-cent per cwt. assessment on all milk produced to fund
a national dairy producer program for generic dairy product promotion, research, and nutrition
education. Authorization for the program stems from the Dairy Producer Stabilization Act of 1983
(7 U.S.C. 4501-4514). The 2002 farm bill (Section 1505) amended the act requiring that the
assessment also be collected on all imported dairy products. After consulting with the Office of
U.S. Trade Representative (USTR), the Secretary of Agriculture determined that a mandatory
dairy import assessment was 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.
To remedy the situation, Section 1507 of the 2008 farm bill extends the domestic assessment to
Alaska, Hawaii, and Puerto Rico. The statutory change is designed to make the definition of the
United States consistent with the definition used by the USTR and U.S. trading partners, thus
allowing the assessment on imported products. The enacted 2008 farm bill also sets the
assessment on imports at 7.5 cents per cwt.
The import assessment is supported by most dairy producer groups because importers “benefit
from domestic dairy promotion efforts without contributing to programs aimed at growing the
U.S. market.”42 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. The argument is that because some imported products
are subject to quantity limits under tariff rate quotas, importers will not benefit from the
assessment in terms of building additional demand for their product.
Producer-Handler Exemptions in Federal Milk Marketing Orders
In May 2009, USDA held a public hearing on proposals to amend federal milk marketing orders
(FMMOs) regarding producer-handler provisions. 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.43
42 National Milk Producers Federation, “News for Dairy Co-Ops,” press release, May 4, 2009, http://www.nmpf.org/
latest_news/news_dairy_coops/may_4_09articles.
43 For more information, see USDA, Agricultural Marketing Service, http://www.ams.usda.gov/AMSv1.0/
ams.fetchTemplateData.do?template=TemplateD&navID=IndustryMarketingandPromotion&leftNav=
IndustryMarketingandPromotion&page=ProducerHandlers&description=Producer-Handlers&acct=dmktord.
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Currently, dairy farmers who qualify as producer-handlers under federal milk marketing orders
are exempt, as handlers, from the pricing and pooling provisions of the orders. The provisions
require handlers to pay minimum prices to dairy farmers for milk depending on its use (e.g., fluid
milk, cheese). The pooling process redistributes revenue among producers from across a
marketing area (10 regions in total) so that all producers receive the same “blend” price. Thus, as
handlers, the producer-handlers can produce and sell their milk without being required to
participate in the pool, and therefore not be subject to paying minimum prices as other handlers
must do. As a result, producer-handlers may have a cost advantage over other handlers. This
possibility helped motivate proposals to eliminate the producer-handler exemption.
The proposed changes would eliminate or modify who is exempt from federal marketing orders.
Some of the proposals allow for continued exemptions for producer-handlers based on the size of
the operation, ranging from milk production of 450,000 pounds of milk per month (equivalent to
about a 275-cow operation) to 3 million pounds per month (about 1,750 cows). Nationwide, about
15 producer-handlers fall into that range of production. Three other firms are larger yet.
Once a record of all testimony is compiled, USDA will issue a recommended decision on the
proposals by October 15, 2009.44 After a 60-day comment period, USDA will issue a final
decision. A referendum is then conducted among individual producers (or as represented by
cooperatives) and, if approved by two-thirds of producers, the amendment to the order is made
effective by final rule in the Federal Register. A negative vote on an amended order would
eliminate the order.
Author Contact Information
Dennis A. Shields
Analyst in Agricultural Policy
dshields@crs.loc.gov, 7-9051
44 Expedited procedures for altering FMMOs were established in the 2008 farm bill (P.L. 110-246).
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