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Previewing Dairy Policy Options for the
Next Farm Bill
Dennis A. Shields
Specialist in Agricultural Policy
September 2, 2010
Congressional Research Service
7-5700
www.crs.gov
R41141
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008

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Previewing Dairy Policy Options for the Next Farm Bill

Summary
Financial stress in the dairy industry in 2009, brought on largely by sharply lower milk prices,
activated standing federal programs to support dairy farmers. In calendar year 2009, the federal
government spent more than $1 billion to support the industry through the Milk Income Loss
Contract (MILC) Program, the Dairy Product Price Support Program (DPPSP), and the Dairy
Export Incentive Program (DEIP). Following appeals from dairy farmers for more financial
assistance, Congress granted another $350 million in October 2009 in the form of supplemental
payments to dairy farmers and government purchases of dairy products.
While farm milk prices have increased since summer 2009, the financial stress seen throughout
the year and similar previous episodes have led the industry and Congress to reconsider how to
deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members
have voiced interest in developing alternatives to current polices and incorporating them as part
of the next omnibus farm bill in 2011-2012.
The dairy industry is currently developing or advocating a variety of policy changes in response
to the difficult financial situation affecting dairy farmers beginning in late 2008. All of the
proposals discussed in this report—loosely categorized as either supply management, market-
based, or tiered-pricing—have implications for U.S. dairy farmers, competitiveness of the U.S.
dairy industry, and international trade.
Under supply management, H.R. 5288 and S. 3531 are designed to prevent depressed farm milk
prices while reducing price volatility through supply management. The National Milk Producers
Federation (NMPF) has also proposed a market stabilization component as part of its
comprehensive package of suggested reforms to dairy policy. Supporters of price stabilization and
supply management say that inherent incentives to overproduce need to be offset by a program to
manage supplies in a measured way. Critics of supply management, including dairy processors,
contend that such measures could reduce the competitiveness of the U.S. dairy industry, limit its
incentive to innovate, and raise consumer prices, because, they argue, a pricing system based on
supply control and/or cost of production potentially rewards inefficiency.
The market-based approach, including a separate element of the NMPF package, represents an
opposing view on how the federal government should address the problem of farm milk price
volatility and periodic financial stress for dairy farmers. This approach contends that, because it is
difficult to manage milk supplies and prices administratively, the best approach is to provide a
government program that helps farmers manage risk associated with volatile prices of milk and
feed. Specifically, a new “safety net” would be established to protect a dairy farmer’s “margin”—
that is, the farm price of milk minus feed costs—regardless of current price levels. Critics expect
that incentives to overproduce will aggravate the financial woes of the dairy industry indefinitely,
and thus argue that controlling potential price variability and combating depressed farm prices
with supply management is necessary for the long-term financial health of producers.
The third area of potential policy change is to alter the current pricing approach used in federal
milk marketing orders (FMMOs) to directly increase dairy farm revenue. For example, one
proposed change to base milk pricing in FMMOs on the cost of milk production (S. 1645) would
imply higher prices received by dairy farmers. However, some are concerned that the long-run
competitiveness and stability of the U.S. dairy industry could be at risk because of the unknown
effectiveness of provisions to discourage overproduction.
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Previewing Dairy Policy Options for the Next Farm Bill

Contents
Introduction ................................................................................................................................ 1
Dairy Farm Structure................................................................................................................... 1
Brief History of Dairy Marketing and Policy ............................................................................... 4
Current Dairy Policy ................................................................................................................... 4
Dairy Product Price Support Program (DPPSP)..................................................................... 4
Federal Milk Marketing Orders (FMMOs) ............................................................................ 5
Milk Income Loss Contract (MILC) Program........................................................................ 6
Dairy Export Incentive Program (DEIP)................................................................................ 6
Import Barriers ..................................................................................................................... 7
Privately Run Dairy Herd Buyout.......................................................................................... 7
Dairy Policy Options................................................................................................................... 7
Supply Management ............................................................................................................. 8
The Dairy Price Stabilization Program Act of 2010 (H.R. 5288) and the
Dairy Market Stabilization Act of 2010 (S. 3531) ......................................................... 8
Dairy Market Stabilization Program (DMSP) ................................................................ 11
Views on Supply Management ...................................................................................... 12
Market-Based Plans ............................................................................................................ 13
Margin Insurance .......................................................................................................... 13
Improved Price Discovery............................................................................................. 15
Tiered Pricing ..................................................................................................................... 16
The Federal Milk Marketing Improvement Act of 2009 (S. 1645).................................. 16
Cooperative Marketing Initiative................................................................................... 18
Ration-all Milk Pricing Program ................................................................................... 18
Concluding Remarks................................................................................................................. 19

Figures
Figure 1. Dairy Farms and Productivity....................................................................................... 1
Figure 2. Milk Production, Number of Cows, and Productivity.................................................... 2
Figure 3. Average Cost of Milk Production.................................................................................. 3

Tables
Table 1. Trend in Dairy Farm Numbers Depends on Farm Size.................................................... 2
Table 2. Dairy Farm Numbers and Average Size in Selected States, by Farm Size........................ 3
Table 3. Comparison of Dairy Supply Management Provisions in Current Proposals ................. 10

Contacts
Author Contact Information ...................................................................................................... 19
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Previewing Dairy Policy Options for the Next Farm Bill

Introduction
Financial stress in the dairy industry in 2009, brought on largely by sharply lower milk prices,
activated standing federal programs to support dairy farmers. In calendar year 2009, the federal
government spent more than $1 billion to support the industry through the Milk Income Loss
Contract (MILC) Program, the Dairy Product Price Support Program (DPPSP), and the Dairy
Export Incentive Program (DEIP). After appeals from dairy farmers for more financial assistance,
Congress granted another $350 million in October 2009 in the form of supplemental payments to
dairy farmers and government purchases of dairy products for domestic feeding programs.
Under financial pressure, many dairy farmers sent milk cows to slaughter and some went out of
business. The subsequent decline in milk production and a simultaneous rebound in foreign
demand for dairy products have lifted the farm price for milk. The preliminary May 2010 all-milk
price reported by the U.S. Department of Agriculture (USDA) was $15 per hundredweight, up
29% from a year earlier. Still, financial concerns remain for dairy farmers who lost significant
amounts of farm equity during the milk price collapse. According to USDA, the number of dairy
farms in the United States declined from 67,000 to 65,000 in 2009.
The financial stress of 2009 and similar episodes over the years have led the industry and
Congress to reconsider how to handle fluctuations in milk prices and financial prospects for dairy
farmers. Some Members have voiced interest in developing alternatives to current polices and
incorporating them in the next omnibus farm bill in 2011-2012. As part of groundwork for the
next farm bill, the House Committee on Agriculture held a hearing on dairy policy on April 20,
2010. The Administration is also collecting information through USDA’s establishment of a Dairy
Industry Advisory Committee, which is reviewing issues of farm milk price volatility. The
committee is expected to make recommendations to the Secretary by the end of 2010.
This report provides background on the U.S.
Figure 1. Dairy Farms and Productivity
dairy industry, including an overview of dairy
farm numbers and industry structure, and a
1,00
1,
0
1,000 l
1,
b
000 l s
b .
s
.
oper
p at
er i
at o
i ns
n
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mi k pe
k
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pe co
c w
brief history of dairy marketing and policy.
1,25
1,
0
25
Next, current dairy policy is reviewed.
Milk per cow
1,00
1,
0
20
Finally, the report examines options for
Da
D iry
i fa
ry
rms
rm
federal dairy policy being considered by the
750
15
industry and/or Congress.
500
10
Dairy Farm Structure
250
5
0
0
Increased dairy cow output and advances in
1965
1975
1985
1995
2005

dairy farm technology and management have
Source: U.S. Department of Agriculture, National
led to a sharp reduction of the number of
Agricultural Statistics Service “Quick Stats.”
dairy farms, particularly during the 1960s and
Notes: Number of dairy operations (any place having
1970s (Figure 1). Larger operations tend to
one or more head of milk cows on hand) as of
have lower per-unit costs, and as firms reduce
December 31.
their costs, they become more competitive and can increase sales and market share. Firm size is a
limiting factor for growth, however, once the gains to economies of scale have been exhausted.1

1 For background on milk production and dairy farm structure, see Don P. Blayney, The Changing Landscape of U.S.
(continued...)
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For the dairy industry, the number of farms continues on a downward trajectory, though at a much
slower pace during the last decade than in the late 1960s and 1970s. Annual losses averaged
96,000 operations in the late 1960s and 37,000 in the 1970s. In recent years, the annual drop in
dairy farm operations has slowed to about 2,000 to 5,000 farms per year, with operations totaling
65,000 on December 31, 2009.
Figure 2. Milk Production, Number of
Increases in productivity have more than
Cows, and Productivity
offset declines in the numbers of dairy farms
and cows, resulting in a steady upward trend
(rising milk production per cow offsets the declining
in total milk production (Figure 2).
number of milk cows)
Meanwhile, domestic demand for milk, on a
Index:
x:
per-capita basis, has grown slowly, at 0.4 %
1987
1
=
987 100
1
per year since 1990.2 Rising consumption of
160
16
dairy products such as cheese has offset a
Milk p
lk e
p r c
r ow
o
140
14
decline in fluid milk consumption. Exports of
Number of mil
mi k c
k ow
o s
120
12
dairy products have increased in recent years,
Pr
P oduc
od
t
uc i
t on
o
100
10
reaching record levels in 2008.
80
The trend in farm numbers depends on farm
60
size. Between 2005 and 2009, farms with
40
fewer than 500 cows registered declines,
1965
19
1975
19
1985
19
1995
19
2005
20
while farms with 500 to 999 cows held steady

(Table 1). In contrast, the number of farms
Source: U.S. Department of Agriculture, National
with 1,000 or more cows increased 20%,
Agricultural Statistics Service.
driven by significantly lower costs of production. In 2005, dairy farms with 1,000 cows or more
had average costs of production of $13.59 per cwt, 15% below the average for farms with 400-
999 head and 35% below the cost for farms with 100-199 head. Average costs were much higher
for even smaller operations.3
Table 1. Trend in Dairy Farm Numbers Depends on Farm Size
(number of farms by herd size)

1-49 head 50-99 head 100-499 head 500-999 head 1,000+ head
Total
2005 37,325
23,185
14,717
1,700
1,373
78,300
2006 35,305
22,115
14,327
1,700
1,433
74,880
2007 33,975
19,330
13,370
1,720
1,600
69,995
2008 33,200
17,800
12,650
1,720
1,630
67,000
2009 31,900
17,300
12,450
1,700
1,650
65,000
Change 2005-2009
- 15%
-25%
-15%
no change
+20%
-17%
Source: U.S. Department of Agriculture, National Agricultural Statistics Service “Quick Stats.”
Notes: Number of dairy operations (having one or more head of milk cows on hand) as of December 31.

(...continued)
Milk Production, U.S. Department of Agriculture, Economic Research Service, Statistical Bulletin Number 978,
Washington, DC, June 2002, http://www.ers.usda.gov/publications/sb978/sb978.pdf.
2 Jerry Cessna, “Situation and Outlook for the U.S. Dairy Industry,” Agricultural Outlook Forum 2010, Arlington, VA,
February 19, 2010, http://www.usda.gov/oce/forum/2010_Speeches/Speeches/DairyOutlook2010.pdf.
3 James M. MacDonald and William D. McBride, The Transformation of U.S. Livestock Agriculture—Scale, Efficiency,
and Risks, U.S. Department of Agriculture, Economic Research Service, Electronic Information Bulletin Number 43,
Washington, DC, January 2009, p. 14, http://www.ers.usda.gov/publications/EIB43/.
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The structure of dairy farms also varies by region of the country (Table 2). The average farm size
in western states (e.g., California, with 850 cows per farm) is well above the U.S. average of 133
cows per farm. In contrast, Wisconsin has many small farms and an average farm size of 88 cows.
Table 2. Dairy Farm Numbers and Average Size in Selected States, by Farm Size
Selected state
Number of farms
Number of cows (1,000)
Cows per farm
California 2,165 1,841
850
Idaho 811
536
661
Texas 1,293
404
313
Florida 422
120
284
Michigan 2,647 344
130
New York
5,683
626
110
Vermont 1,219 140
115
Wisconsin 14,159 1,249
88
Pennsylvania 8,333
553
66
U.S. 69,890
9,267
133
Source: 2007 Census of Agriculture.
Cost structure varies by state (Figure 3). In the western states, where large dairy farms dominate
the industry, operating costs have been affected by high feed costs in recent years because these
farms purchase much of their feed (alfalfa and grain prices reached record levels in 2008).
However, per-unit overhead costs tend to be relatively low for these operations because fixed
costs (e.g., buildings/equipment) can be spread over a large number of animals. In other parts of
the country, such as Wisconsin, where producers feed more grain and hay that is produced on the
farm, operating costs tend to be lower when grain and feed prices rise. However, these farms tend
to have fewer dairy cows, so per-unit overhead costs are relatively high.
Figure 3. Average Cost of Milk Production

Source: U.S. Department of Agriculture, Economic Research Service.
Notes: Estimates for the month of January 2010.
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Brief History of Dairy Marketing and Policy
In the mid-1850s, most milk was consumed on farms by the family or fed to livestock; some was
sold for very local use. As urban areas grew, milk was sent to processors to supply these areas
with both fluid and manufactured products. By the turn of the century, producers banded together
into cooperative associations to bargain with milk handlers (fluid milk processors) as a way to
offset handler market power stemming from a large number of producers facing a small number
of processors. In the early 1900s, dairy farmers increasingly looked toward cooperatives as a
means of marketing their milk, specifically by negotiating with milk buyers using collective
bargaining. By 1925, handlers were paying farmers for milk according to its use (fluid or
manufactured products). This concept is known as “classified pricing” and is still in use today.
Milk for fluid use has the highest value, reflecting higher transportation and handling costs.4
When the Great Depression hit, demand dropped sharply and the voluntary classified pricing
system broke down. Federal milk marketing orders were established (and continue to function
today) to stabilize the market and help equalize the market power of dairy farmers with dairy
processors (see “Federal Milk Marketing Orders (FMMOs),” below). Another motivation for
establishing FMMOs was to ensure that consumers had adequate and dependable supplies of milk
at reasonable prices. During this same period, legislators enacted import quotas on dairy products
to protect producers from foreign competition. Eventually, during World War II, demand
increased for farm commodities, including milk. In the late 1940s, the government began
supporting the price of milk (and other commodities) to protect against price declines through a
price support program for milk, now called the Dairy Product Price Support Program (DPPSP).
Current Dairy Policy
Current federal dairy policy has essentially five components: (1) dairy product price support
(through the DPPSP), (2) federal milk marketing orders (FMMOs), (3) direct payments under the
Milk Income Loss Contract (MILC) Program, (4) the Dairy Export Incentive Program (DEIP),
and (5) tariff-rate quotas on dairy imports.5 A nongovernment program that has been used in
recent years and affects milk production (called Cooperatives Working Together or CWT) is also
described below.
Dairy Product Price Support Program (DPPSP)
Under the DPPSP, the federal government stands ready to purchase butter, American cheese, and
nonfat dry milk from dairy manufacturers at specified minimum prices. Purchases under the
DPPSP, which occurred during FY2009 when demand declined, essentially prevent market prices

4 Material for this section is drawn from (1) Andrew M. Novakovic, “Economic History of Dairy Markets,”
presentations at the 16th Annual National Workshop for Dairy Economists and Policy Analysts, Washington, DC, April
24, 2009, http://www.cpdmp.cornell.edu/CPDMP/Pages/Workshops/Washington09/PDFs/Novakovic.pdf; and (2)
Alden C. Manchester, The Public Role in the Dairy Economy—Why and How Governments Intervene in the Milk
Business (Boulder, CO: Westview Press, Inc., 1983).
5 For more on the interaction between the price support program and federal milk marketing orders, as well as dairy
pricing issues in general, see CRS Report R40903, Dairy Pricing Issues, by Dennis A. Shields. For information on
federal dairy policy, see CRS Report R40205, Dairy Market and Policy Issues, by Dennis A. Shields.
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for dairy products from dropping below support levels, which indirectly supports the farm price
of milk. In contrast, when product prices are above support levels, the DPPSP is not a factor in
the market and farm milk prices reflect prevailing supply and demand conditions. Year-to-year
changes in farm milk prices have increased since the mid-1990s because price support levels have
been reduced below typical market-average prices through legislation.6 USDA’s Farm Service
Agency administers the DPPSP. Section 1501 of the enacted 2008 farm bill (P.L. 110-246)
extended the program through December 31, 2012.
Federal Milk Marketing Orders (FMMOs)
Marketing orders were created in the 1930s to balance market power between farmers and milk
handlers while reducing “destructive competition” between milk producers that can drive down
prices to their mutual detriment.7 FMMOs mandate minimum prices that processors in milk
marketing areas must pay producers or their agents (like the dairy cooperatives) for delivered
milk depending on its end use. Under FMMOs, the farm price of approximately two-thirds of the
nation’s fluid milk is regulated in 10 geographic marketing areas. Some states, California being
the largest, have their own milk marketing regulations instead of federal rules.
Unlike other dairy programs, FMMOs are permanently authorized under the Agricultural
Marketing Agreement Act of 1937, as amended, (7 U.S.C. § 601-674), and therefore do not
require periodic reauthorization by Congress. The authorizing statute requires USDA to use
formal rulemaking procedures to make changes to orders. Congress also makes periodic revisions
(e.g., the 2008 farm bill streamlined the rulemaking process). Any interested party can petition
USDA to create a new order or amend an existing one. USDA’s Agricultural Marketing Service
administers the federal order system.
Minimum FMMO milk prices are based on current wholesale dairy product prices collected by
USDA’s National Agricultural Statistics Service in a weekly survey of manufacturers.8 As such,
FMMO minimum prices rise and fall each month with overall changes in the wholesale dairy
product market. Under marketing orders, the price farmers receive for their milk is calculated
based on these minimum prices and on how milk is utilized (fluid vs. manufacturing) in the
marketing order, which collectively is called “classified pricing.” The 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).
FMMOs also address how market proceeds are distributed among the producers delivering milk
to federal marketing order areas—called “pooling”—whereby all farmers receive a “blend price”

6 Current law provides price support for specific dairy products. Under previous law, the support price for farm milk
was statutorily set at $9.90 per hundredweight, 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.
7 See testimony by Andrew M. Novakovic, Cornell University, at the hearing conducted by the Senate Committee on
Agriculture, Nutrition, and Forestry, Legislative Responses to the Dairy Crisis: Reforming the Pricing Structure, 111th
Cong., 1st sess., August 27, 2009, http://ag.senate.gov/site/calendar.html.
8 Many buyers and sellers of manufactured dairy products (e.g., cheese, butter, nonfat dry milk) look to prices
established in the spot and futures markets on the Chicago Mercantile Exchange as benchmark price levels for the
industry.
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each month based on order-wide revenue. The blend price is the weighted average price in a
marketing order, with the weights being the volume of milk sold in each class of utilization.
Milk prices actually received at the farm level reflect the minimum prices paid by handlers under
the marketing orders, plus any premiums generated from local supply/demand factors, such as a
seasonal mismatch between supply and demand or special retail promotions, minus costs such as
transport and marketing charges. FMMO regulations do not apply to retail product prices. Instead,
retail prices reflect prices at the wholesale (manufacturer) level and the amount of competition
among retailers in local markets.
Milk Income Loss Contract (MILC) Program
Under the Milk Income Loss Contract (MILC) Program, participating dairy farmers nationwide
are eligible for a federal payment whenever the minimum monthly price for farm milk used for
fluid consumption (called “Class I”) 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 price. The payment quantity is limited to 2.985 million pounds of annual production
(equivalent to about a 160-cow operation). USDA’s Farm Service Agency administers the MILC
Program.
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.
Section 1506 of the 2008 farm bill (P.L. 110-246) extended authority for the MILC Program until
September 30, 2012. This program is similar to longtime subsidy programs for crops (e.g., wheat,
corn, and soybeans) that pay farmers when average farm prices drop below certain levels.
Dairy Export Incentive Program (DEIP)
First authorized in 1985, the Dairy Export Incentive Program (DEIP) provides cash bonus
payments to U.S. dairy exporters, subject to limits on both quantity and value. 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
more than $1 billion. The program was active throughout the 1990s, peaking in 1993 with $162
million in bonuses. The program had not been used since FY2004 until USDA announced its
reactivation on May 22, 2009.9 Bonuses worth $19 million were awarded in FY2009. Section
1503 of the 2008 farm bill (P.L. 110-246) extended the authority for the DEIP until December 31,
2012.

9 CRS Report R40584, Implications of Reactivating the Dairy Export Incentive Program (DEIP), by Dennis A. Shields
and Charles E. Hanrahan.
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Import Barriers
Until 1995, imports of almost all dairy products (butter, cheese, dry milk) were subject to Section
22 import quotas. Section 22 of the Agricultural Adjustment Act of 1933 (7 U.S.C. 624(f))
requires the President to impose quantitative limitations or fees on imports that the President finds
are being, or are practically certain to be, imported under such conditions and in such quantities
as to render or tend to render ineffective, or materially interfere with, any USDA domestic
support or stabilization program. Dairy products that were not covered by Section 22 quotas
included casein, caseinates, whey, and soft-ripened cow’s milk cheese (e.g., brie).
Legislation to implement the World Trade Organization (WTO) Uruguay Round Agriculture
Agreement (P.L. 103-465) amended Section 22 to prohibit the application of quantitative import
limitations or fees on products from other WTO members. Tariff rate quotas (TRQs) for dairy
products were established in the U.S. tariff schedule.10 Importers of dairy products under the low
tariff in a TRQ must apply for a license from USDA. No license is required for over-quota (high-
tier) imports, which are subject to a higher tariff.
Privately Run Dairy Herd Buyout
The National Milk Producers Federation (NMPF), the largest trade association representing milk
producer cooperatives, currently operates its own, producer-funded dairy program called
Cooperatives Working Together (CWT). The program has two facets: herd buyouts and dairy
product export assistance. During 2008 and 2009, five installments of the program retired a total
of 276,000 cows and 5,700 bred heifers, representing 5.4 billion pounds of annual milk
production.11 (USDA estimated annual milk production in 2009 at 189 billion pounds.) Another
herd buyout was conducted in May/June 2010. The program is funded by assessments on dairy
producers from 35 dairy cooperatives (as well as individual producers), representing nearly 70%
of the total milk supply in the United States. No federal funding is involved.
Dairy Policy Options
The dairy industry and Members of Congress are currently developing or advocating a variety of
policy changes in response to the difficult financial situation that began affecting dairy farmers in
late 2008. Current proposals can be categorized as either supply management, market-based, or
tiered-pricing approaches.
• Supply management attempts to prevent depressed farm milk prices while
reducing price volatility by affecting the level of milk production. Current dairy
programs, specifically milk marketing orders, regulate the pricing of milk but not
the volume produced.

10 A tariff rate quota or TRQ imposes a low import duty on quantities within a quota, while quantities above the quota
are charged higher duty rates. See CRS Report R40839, Proposed Import Restrictions on Milk Protein Concentrates
(MPCs), by Dennis A. Shields and Charles E. Hanrahan.
11 CWT News, December 2009, p. 1, http://www.cwt.coop/sites/default/files/newsletters/CWTNewsDecember2009.pdf.
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• Under market-based plans, advocates argue that the best approach is one that
helps farmers manage risk associated with volatile prices of milk and feed,
because it is difficult to administratively manage milk prices and supplies.
• The third area would enhance producer revenue and stabilize the market through
changes in “tiered pricing,” which allow producers to receive a higher price for a
portion of their milk while receiving a lower price for the remainder.
Each approach has implications for U.S. dairy farmers, competitiveness of the U.S. dairy
industry, and international trade.
The National Milk Producers Federation (NMPF) advocates using a combination of the supply
management and market-based approaches, plus a continuation of the group’s Cooperatives
Working Together Program (see “Privately Run Dairy Herd Buyout”).
Supply Management
Two supply management proposals are currently under consideration. The first has been
introduced in both chambers—in the House as the Dairy Price Stabilization Program Act of 2010
(H.R. 5288), on May 12, 2010, and in the Senate as the Dairy Market Stabilization Act of 2010
(S. 3531), on June 24, 2010. The second proposal is included as part of the NMPF’s
comprehensive package of dairy policy reforms. It is also described below, and Table 3 compares
the NMPF proposal with H.R. 5288.
The Dairy Price Stabilization Program Act of 2010 (H.R. 5288) and the
Dairy Market Stabilization Act of 2010 (S. 3531)
H.R. 5288 and S. 3531 would create a mandatory, nationwide program designed to manage the
U.S. milk supply so that milk producers could avoid low and volatile farm milk prices.12 The
program would attempt to stabilize farm milk prices by assessing producers who increase milk
production over specified levels. Both the market access fee and the production growth rate
would be determined based on market indicators. The program would operate alongside existing
dairy programs, including marketing orders, price support, and the MILC program.13
Under H.R. 5288, each dairy producer would be assigned an inital base raw milk marketing
quantity using the highest annual marketings among calendar years 2007, 2008, or 2009. The
base would be adjusted to an “allowable milk marketings” amount for each farm, depending on
the level of the national milk-feed price ratio (a measure of the farm milk price relative to feed
costs), as specified in the bill (see Table 3). Producers who sell more than their allowable milk
marketing or expand their operations would pay a “market access fee” into a pool that would be
redistributed to producers who do not exceed their allowable milk marketings. The program
would not be a rigid quota system; producers could sell as much milk as they want, provided they

12 Office of Representative Jim Costa, “Rep. Costa Introduces Legislation to Strengthen Dairy Industry,” press release,
May 12, 2010, http://www.costa.house.gov/index.php?option=com_content&task=view&id=631&Itemid=82.
Additional background information is available from the Milk Producers Council, at
http://www.milkproducerscouncil.org; and from Holstein Association USA, Inc., at http://www.holsteinusa.com/pdf/
DSPS/DPSP_plan_v18_01152010.pdf.
13 For background on dairy programs and pricing, see CRS Report R40205, Dairy Market and Policy Issues; and CRS
Report R40903, Dairy Pricing Issues.
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pay any applicable fees. Producers could transfer (sell) their marketing base to another individual
or entity who purchases the dairy facility.
Under H.R. 5288, the Secretary of Agriculture would consult with a 30-member board consisting
of 24 dairy producers (with diverse geographic representation) and six other members, two each
representing consumers, fluid milk bottlers, and dairy product manufacturers. (A dairy economist
would be an adviser to the board.) Every three months the Secretary of Agriculture, in
conjunction with the board, would announce the allowable annual growth in marketings (a
national rate applied at the farm level) and the market access fee for excessive milk marketings.
See Table 3 for the growth rate and fee schedule contained in the bill. Some discretion for
deviating from the schedules would be allowed, but only if at least two-thirds of the board
approves. Proponents expect that the growth rate and fee would be set at levels to exact the
necessary change in milk production and prevent a sharp decline in farm milk prices.
S. 3531 is very similar to H.R. 5288. Importantly, the parameters for determining allowable milk
marketings (production growth) and the fee schedule are the same.
The major difference between H.R. 5288 and S. 3531 is that Senate bill mandates the supply
management program, while H.R. 5288 requires producer approval before its implementation.
The remaining differences deal mostly with voting procedures, producer board composition, and
establishing the initial marketing base.
• Both bills require a producer referendum within three years to continue the
program. Members are allowed to vote separately from their cooperative.
However, S. 3531 contains special provisions for two rounds of voting on the
continuation. The first round requires producers to vote directly (i.e., no bloc
voting). The second round allows coops to vote on behalf of producers who did
not vote in the first round.
• The producer board consists of only 15 members in S. 3531, compared with 30 in
the House bill, but the proportions of producers and various representatives are
the same in both bills. Also, the Secretary appoints the members in H.R. 5288,
while dairy producers elect the board members in S. 3531.
• When establishing the initial marketing base, the Senate bill differs from the
House bill in two ways:
• During the first quarter of program operation, S. 3531 contains
provisions for producers to select either (1) the corresponding quarterly
average of 2007, 2008, and 2009; or (2) the corresponding quarter of
2009. In contrast, H.R. 5288 uses the highest annual total among
calendar years 2007, 2008 and 2009.
• S. 3531 allows the Secretary to establish bases for producers who did not
produce milk during 2007, 2008, and 2009. (The House bill has no
provision for this; producers without a base would simply pay the access
fee on all production.)
• S. 3531 includes several additional factors for the Secretary to consider when
deviating from the specified schedules for the allowable milk marketing growth
rate and market access fee. The costs of feed, labor, and machinery, and other
economic forces, are among the factors listed for consideration.
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Table 3. Comparison of Dairy Supply Management Provisions in Current Proposals
Dairy Price Stabilization Program Act (H.R. 5288) and

Dairy Market Stabilization Act of 2010 (S. 3531)
Dairy Market Stabilization Program (DMSP)
Comments
Concept and Discourages milk production by requiring a farm to pay a
Discourages production and encourages consumption when national
H.R. 5288 and S. 3531 affect supply only.
key
market access fee when the national milk-feed price ratio is
margin (milk price minus feed costs) is low by redirecting farm revenue DMSP affects both supply and demand.
economic
low and the farm’s output is above “allowable marketings.” A
on a portion of all milk production to dairy product purchases and
The penalty for excess production
provision
smal fee is assessed on all production or a higher fee is
promotion activities. Major penalty is assessed on “marginal production”; appears to be more severe for DMSP
assessed on “marginal production” (i.e., above allowable level).
i.e., farmers do not receive income for certain amounts of base when
than for H.R. 5288 and S. 3531.
These funds go to farms who do not exceed their allowance.
program is activated.
Control
Market access fee rises when milk price falls and/or feed costs Producers are paid for only a portion of their production when the
H.R. 5288 and S. 3531 could be
mechanism
rise (as measured by milk price divided by feed price).
margin (milk price minus feed costs, $ per cwt.) is low:
activated for longer periods than DMSP
Assessment on all production:
and at potential y lower supply impact
Milk-feed price ratio
Fee per cwt.
Margin
% of base paid
Max share* levels than DMSP.
> or = 3.00
$0.03
< $6 (2 consecutive mos.)
98%
6%
2.50 – 2.99
$0.13
< $5 (2 consecutive mos.)
97%
7%
2.00 – 2.49
$0.25
< $4 (1 month)
96%
8%
< or =1.99
$0.50

Alternative schedule: producer pays five times the fee on
*Maximum share of monthly marketings for which the producer does
production in excess of allowable milk marketings.
not receive income.
Approving
Yes for H.R. 5288; no for S. 3531. Both bills require producer No initial producer referendum. However, USDA may hold

referendum
referendum within three years to continue the program.
referendum one year after program has been fully implemented.
USDA
Farm Service Agency collects fees from handlers who deduct
Agricultural Marketing Service collects funds using same framework for More administrative setup costs for H.R.
agency
appropriate amounts from farm checks. A protected account
collecting promotion funds (i.e., farmer sees a reduction in milk check). 5288 and S. 3531 because framework is
is used for distributing market access fee dividends to farmers.

not in place.
Program
Quarterly activation.
Monthly activation; reduction in milk check occurs 30 days after
DMSP would be activated and
timing
program is activated.

deactivated more quickly.
Producer
Yes; provides input on program operation, particularly on the No; a margin trigger would be established and USDA would have
DMSP appears to have less discretion to
board fee schedule and growth factor.
limited discretion to alter it.
make program adjustments.
Base amount “Allowable milk marketings” is a farm’s quantity produced in
Producer chooses either the three-month rolling average of the most
Base would be an asset (i.e., would have
the corresponding quarter during the previous year, adjusted
recent milk marketings or the amount from the same month in
value).
by a growth rate.
previous year.
Growth
After consulting the producer board, USDA adjusts al owable According to NMPF, rolling average would result in a continuously
Discretion for growth factor provides
factor for
milk marketings based on:
updated base and provide for expansion.
flexibility for H.R. 5288 and S. 3531.
base
Milk-feed price ratio
% growth
DMSP base and trigger combination
> or = 2.00
3.00
appears to eliminate the need for
1.75-1.99
0.00
mechanism to adjust base.
< or = 1.74
-3.00
Source: Congressional Research Service.
Note: H.R. 5288 was introduced on May 12, 2010. S. 3531 was introduced on June 24, 2010. As of early September 2010, the Dairy Market Stabilization Plan by the
National Milk Producers Federation had not been introduced as legislation in Congress.
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Under both H.R. 5288 and S. 3531, the program would be self-financed, with payments to
producers who limit their production funded by assessments on producers who do not. Although
existing dairy programs would continue to operate, the federal cost of DPPSP and MILC would
likely be minimal if the new program effectively constrains excess milk production and keeps the
farm milk price above the target price.
As for market impacts, preliminary analysis by researchers at the University of Wisconsin
indicates that the proposed legislation would reduce price volatility and not necessarily enhance
prices.14
At the farm level, current dairy farmers who expanded in 2007, 2008, or 2009 could benefit more
than other producers because the base calculation is determined by production in those years.
New farmers or those wishing to expand production would be discouraged to the extent that (1) a
market access fee is relatively high at the time, and/or (2) the cost of buying a milk base from
another dairy producer is too high.
Potential dairy trade impacts include the possibility that the United States, assuming more stable
prices, could become a more consistent supplier to the world dairy market. However, higher
prices associated with the plan’s effective implementation could reduce U.S. price
competitiveness while potentially attracting more dairy imports.
Dairy Market Stabilization Program (DMSP)
The National Milk Producers Federation (NMPF) has proposed the Dairy Market Stabilization
Program (DMSP).15 The program is designed to slow milk production and boost prices during
times of low margins (milk prices minus feed costs). When activated, it would redirect farm
revenue on a portion of all milk production from farmers to activities designed to increase
demand for dairy products. For example, when the national margin drops below $6 per
hundredweight for two consecutive months, milk producers would receive payment on only 98%
of their base production. The remaining 2% of farm revenue would be used for dairy product
purchases and promotion activities. A larger share of revenue is redirected when margins are even
lower (see Table 3 for complete schedule). USDA’s Agricultural Marketing Service would collect
funds, with a dollar reduction appearing in a producer’s milk check.
The program would operate on a monthly basis, activating as soon as margins decline to
relatively low levels. According to NMPF analysis (and using a feed cost calculation that differs
from USDA’s method), the margin during the last 10 years dropped below the $6 level on
multiple occasions, including several months in 2002, 2003, 2006, 2008, and 2009. The NMPF
expects that the disincentive to produce additional milk—because producers receive no revenue

14 A similar supply management plan was analyzed by Cornell University in 2009 using a detailed dynamic model of
the U.S. dairy industry. The analysis found that the plan would increase farm milk prices and reduce farm price
variability, but it would also reduce sales of dairy products and might decrease processors’ revenues. Under a situation
where allowable milk marketings would be reduced (e.g., demand declines sharply and milk prices fall), the study
indicated that farm prices would not drop as low as under regular market conditions and that prices would recover more
quickly, thus providing benefits across the dairy farm sector. See Charles Nicholson and Mark Stephenson, “An
Analytical Review of a Growth Management Plan for Dairy Producers,” Cornell University, May 2009, p. 10,
http://www.cpdmp.cornell.edu/CPDMP/Pages/Publications/Pubs/GMP_Report.pdf.
15 National Milk Producers Federation, Foundation for the Future, Arlington, VA, http://www.nmpf.org/
washington_watch/ordersandpolicies/foundation_for_the_future.
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on that portion of production—would have a larger and more immediate impact on milk
production than simply assessing a fee on all or a portion of the production. The program would
deactivate once the national margin rises to at least $6 per hundredweight.
When the program is activated, producers would be paid on the base amount of milk produced,
which is defined as either the three-month rolling average of the most recent milk marketings or
the amount from the same month in the previous year to account for seasonality in milk output.
The base can be transferred only with the farm. The base would be an asset for the farm because
production would have no value when margins drop below trigger levels. According to
proponents, the rapidly updating nature of the base is expected to help reduce the constraining
aspects of the base on actual production levels.
Analysis by the Food and Agricultural Policy Research Institute (FAPRI) indicates that dairy
market conditions (milk and feed prices) over the next 10 years are expected to remain, on
average, above levels needed to trigger DMSP.16 However, DMSP would be triggered under low
margin scenarios to help correct a surplus milk production situation while allowing supply growth
to match growth in domestic and international markets. FAPRI concludes that the DMSP will
help reduce federal expenditures associated with a margin insurance payment plan by the NMPF
(see “Margin Insurance”) by limiting milk production when margins decline and trigger payments
to producers.
Views on Supply Management
Supporters of price stabilization and supply control say that inherent incentives to overproduce
need to be offset by a program to control supplies in a more measured way. The concern for
overproduction could be and has been applied to commodities such as corn and wheat. But dairy
generally is more susceptible to overproduction, some dairy producers and market observers say,
because current policy encourages producers to maximize production and they tend to add cows
even when prices are low to improve cash flow. Advocates also expect market volatility to
continue and possibly increase as the United States becomes a larger player in the international
markets. Supporters say a system to moderate some of the market shocks in the years ahead
would benefit the dairy industry and reduce the number of farms that go out of business when
profitability drops sharply.
Critics of supply management, including dairy processors, contend that supply control could
reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, raise
consumer prices, and decrease demand for dairy products because, they argue, a pricing system
based on supply control and/or cost of production potentially rewards inefficiency. Critics also
argue that administratively matching supply and demand can be difficult because these factors
can change quickly.
In general, as members of an industry competing in a global market, U.S. dairy farms would have
less incentive to reduce their cost of production because their individual shares of national
production would be protected when profitability declines below certain levels. In this case,
production would be reduced on all farms to avoid economic penalties. Currently, the production

16 Scott Brown, Analysis of NMPF’s Foundation for the Future Program, Food and Agricultural Policy Research
Institute, FAPRI-MU Report #05-10, Columbia, MO, June 2010, http://www.fapri.missouri.edu/outreach/publications/
2010/FAPRI_MU_Report_05_10.pdf.
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adjustment is generally made by farmers who can no longer continue operating because their
costs are too high or they no longer have farm equity or bank credit to continue operating. In a
related issue for dairy processors, prospective constraints on the growth of milk production by
region would have impacts on processors interested in expanding or locating new processing
plants.
Economists note several unintended consequences of supply management, including the
incorporation of program benefits (i.e., higher and less volatile milk prices) into farm asset values
such as prices that farmers or investors would be willing to pay for land, cows, dairy facilities,
and the associated farm milk base. This development would likely drive up costs of producing
milk. Higher milk prices could also diminish the development and use of dairy ingredients in
manufactured products and encourage the use of lower-priced imported substitutes (e.g., milk
protein concentrates).
Market-Based Plans
In contrast to a supply management approach, market-based plans focus on managing price risk
rather than trying to influence prices. Other proposals that fall under this category address market
transparency issues or make changes in the federal milk marketing order system to improve dairy
pricing.
Promoters of market-based approaches say that price volatility will remain a part of the dairy
industry, as it is for other commodities. As such, they claim, the best approach to address that
volatility is to find ways for producers to manage price risks without limiting the industry’s
ability to capitalize on domestic and international demand opportunities.
Critics of a policy such as the NMPF margin proposal (described below) expect that incentives to
overproduce (e.g., maintain or boost production as prices fall in an attempt to maintain revenue)
will aggravate the financial woes of the dairy industry indefinitely; thus, controlling potential
price variability and combating depressed farm prices with supply management is necessary, they
say, for the long-term financial health of producers. The NMPF initially proposed the margin
program by itself but later added a supply management component due to interest by some of its
members.
Margin Insurance
The NMPF claims that the price targets in current dairy programs are too low to be effective and
do not adequately protect dairy farmers at today’s levels of input (feed) costs. They also contend
that the price support program creates artificial demand for a particular product (nonfat dry milk)
by guaranteeing a minimum purchase price, and that the production limit in the MILC program
discriminates against large farms. The NMPF recommends eliminating these two programs and
replacing them with the “Dairy Producer Margin Protection Program (DPMPP)” (and the Dairy
Market Stabilization Program (DMSP) described above).17

17 The Livestock Gross Margin for Dairy Cattle insurance policy (LGM for Dairy Cattle) is available in many states to
help dairy producers manage price risk. LGM and a large array of crop insurance products are administered by USDA’s
Risk Management Agency (RMA). The policy provides protection against a loss in gross margin (market value of milk
minus feed costs). At the end of an 11-month insurance period, producers receive an indemnity if the actual gross
margin is less than the guarantee. The policy uses futures prices for corn, soybean meal, and milk to determine the
(continued...)
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The DPMPP would be a new safety net that protects a dairy farmer’s “margin,” that is, the
national farm price of milk minus feed costs. The DPMPP program is designed to be a margin
insurance program, with no payment limits, to address both catastrophic conditions and periods of
low margins, providing producers with additional income until markets improve.
A prospective move from program support at specified price levels (i.e., the MILC target price of
$16.94 per hundredweight and minimum purchase prices for dairy products) to margin insurance
is designed to protect dairy farmers regardless of current price levels. Market prices would
continue to fluctuate, rising or falling as far as necessary in order for milk to continue moving
through existing marketing channels. However, under certain market conditions, milk prices
could be affected by a supply management program, which is also part of the NMPF policy
package.
Under the DPMPP, producers would receive a base level of coverage with a margin guarantee
(fixed at 50% of the projected annual national margin) on 90% of a producer’s historical base
production. Producers would receive a payment when the actual margin, calculated quarterly,
drops below the guarantee. The base coverage would be completely subsidized by the
government. Additional coverage at higher margin guarantees would be available at subsidized
rates.
Potential Impacts
When margins are low, it would be possible for both of the NMPF proposed programs to be in
operation, with the DPMPP supporting farm revenue while the DMSP reduces farm revenue.
Government outlays would increase during times of low milk prices and/or high feed prices, with
the overall spending level depending on final program parameters and the price-supporting
feature of any supply management program that might be in effect. Elimination of the current
income and price support programs would result in some cost savings. Dairy program costs are
projected to average $104 million per year during 2011-2020, according to the Congressional
Budget Office’s August 2010 baseline.
The program would be scale-neutral, with farms of all sizes participating without payment limits.
Small-farm advocates might argue that such a program could still encourage expansion of large
dairies at the expense of smaller dairies.
Analysis by the Food and Agricultural Policy Research Institute (FAPRI) indicates that the
DPMPP could provide producers with more protection in times of low margins than current dairy
programs because the program would cover a greater share of production (and have no payment
limits).18 Also, the DPMPP in combination with the DMSP would provide larger payments when
margins are exceptionally low and as the margin situation deteriorates. However, the current

(...continued)
actual and guaranteed margins (local milk prices are not used for the calculations). LGM for Dairy Cattle became
available in 2008. Observers say participation remains low because producers are still learning how to use it. Another
concern has been the policy price, which has not been subsidized (unlike most other RMA products). On August 25,
USDA announced it would begin subsidizing policy premiums and make other changes to encourage its use.
18 Scott Brown, Analysis of NMPF’s Foundation for the Future Program, Food and Agricultural Policy Research
Institute, FAPRI-MU Report #05-10, Columbia, MO, June 2010, http://www.fapri.missouri.edu/outreach/publications/
2010/FAPRI_MU_Report_05_10.pdf.
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program might provide more support when margins are somewhat higher than the trigger levels in
the NMPF’s plan. According to FAPRI, the overall market effect is expected to be small given
current expectations for average margins over the next 10 years, which are forecast above trigger
levels specified in the NMPF’s proposal.
Supporters of the margin insurance proposal include the International Dairy Foods Association
(IDFA), a group representing dairy manufacturers that has been at odds with dairy producers in
the past. According to IDFA, the concept promoted by NMPF, as embodied in better risk
management tools for farmers and changes to the marketing order systems, would improve
market transparency and help farms and companies to better manage responses to market
changes.19 IDFA supports NMPF’s proposal for margin insurance because it is expected to result
in a “more reliable income” for dairy producers and replaces “outdated programs.” In contrast, to
NMPF, however, IDFA strongly opposes any form of supply management that could result in
higher costs for processors and possibly limit demand for their products.20
Improved Price Discovery
The Dairy Policy Action Coalition (DPAC), a producer organization based in Pennsylvania,
advocates improved price discovery and market transparency.21 DPAC contends that current
USDA price reporting of dairy products—which is used for setting minimum milk prices in
FMMOs—does not reflect broad supply and demand factors, and that reporting should be
expanded to include more products, with its frequency increased from weekly to daily reporting.
According to USDA, the department has authority under the 2008 farm bill to expand dairy price
reporting, but Congress has not provided sufficient funding. DPAC says that expanded reporting
would pave the way for simplifying the FMMO system, including a reduction in the number of
milk classes from four to two.
Current authority for mandatory price reporting of dairy products expires September 30, 2010.
Pending legislation (H.R. 5852 and S. 3656) would reauthorize mandatory price reporting
programs until September 30, 2015. The bills would also require “electronic” reporting for dairy
products (a change from the somewhat manual process currently employed). They would also
require the publication each Wednesday of prices for the preceding week, two days earlier than
the current schedule. The bills do not require daily price reporting, as some had advocated,
apparently owing to the cost of implementation and cost to the industry. However, a new
electronic system (as is currently employed for livestock and meat) might facilitate in the future
more frequent dairy price reporting or a different mix of products.
Separately, to develop a more dynamic and transparent pricing system that “compensates
producers fairly,” the NMPF proposes to reform FMMOs by eliminating the use of current
product pricing formulas (except Class IV—milk used for butter and powder). The NMPF and
others argue that the current product pricing mechanism and revenue pooling system of FMMOs

19 Connie Tipton, “Unleashing Our Potential: Creating Certainty in Uncertain Times,” Dairy Forum Breakfast Keynote
Speech, Phoenix, AZ, January 18, 2010, http://www.idfa.org/files/
2010%20Dairy%20Forum%20CET%20Speech%20FINAL.pdf.
20 International Dairy Foods Association, “IDFA Commends Proposals for Dairy Policy Reform, But Opposes Supply
Management Plan,” press release, June 10, 2010, http://www.idfa.org/news—views/news-releases/details/4826/.
21 Rob Barley and Dennis C Wolff, Presentation to the Dairy Industry Advisory Committee, Washington, DC, June 3-4,
2010, http://www.fsa.usda.gov/Internet/FSA_File/4_barley_wolff_dpac_diac_jun.pdf.
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compensates handlers for lower-valued products and encourages overproduction. Also, the
pricing formulas set fixed margins (“make allowances”) for dairy manufacturers which, according
to the NMPF, unfairly creates winners and losers within the dairy industry.
Instead of product pricing, the NMPF recommends using a competitive pay price (prices of
raw/producer milk paid in actual market transactions) for establishing minimum prices for Class I
(fluid consumption) and Class II (soft products). The competitive pay price would be based on
regional surveys of both regulated and unregulated cheese plants. Importantly, a minimum price
would no longer be established for Class III (milk used for cheese). The NMPF expects the
FMMO changes to improve price discovery for the dairy industry and reduce price volatility
compared with the current system of product price formulas.
Tiered Pricing
Tiered pricing is a term used to describe a pricing system that sets a higher price for a portion of
production (sales) and a lower price for the remaining portion. Sellers of agricultural commodities
can benefit from such an arrangement because consumers, at times, may be little affected by the
price of the product (e.g., in buying milk for children). Because consumers tend to be reluctant to
give up consumption of important products when small price increases occur, overall producer
revenue can increase if higher prices are charged for this portion of demand, more than offsetting
reduced revenue from lower prices charged on remaining sales. The FMMO system is built on
this concept, ensuring that higher minimum prices are paid by processors for raw milk used for
fluid consumption and lower minimum prices are paid for milk used in manufactured products.
The Federal Milk Marketing Improvement Act of 2009 (S. 1645)
Some believe a change in federal milk marketing orders could be used to stabilize the milk
market and boost dairy farm returns. One bill in the 111th Congress, the Federal Milk Marketing
Improvement Act of 2009 (S. 1645, first introduced as S. 889), is designed 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.22 The bill would move current FMMO pricing from
a market-based system to a production-cost-based system. The bill also contains provisions for
USDA to administratively reduce prices received by farmers in an effort to limit milk production
if the Secretary of Agriculture determines that an excess amount is being produced for the
national domestic market.
To set minimum federal order prices, S. 1645 would replace the use of current market prices with
quarterly estimates of the national average cost of production for milk used for manufactured
products. The bill would allow USDA to administratively reduce prices received by producers on
up to 5% of all milk produced in the 48 contiguous states should the Secretary of Agriculture
determine that there is excess milk production. Adjustments would be allowed only if there is a
positive trade balance (exports greater than imports) for dairy products.

22 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.
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The bill also allows for an additional price reduction if the basic reduction is not sufficient to
reduce excess supplies. This reduction would apply only to farms that increased their production
from the previous year. Federal and state milk marketing order administrators would collect the
value associated with price reductions from producers and remit it to the federal government to
help offset the cost of purchasing excess milk products. The Secretary of Agriculture would
collect amounts in all unregulated areas.
The change in the FMMO system to a cost-of-production basis for pricing implies higher prices
received by dairy farmers, at least initially. These price gains would likely help more farms cover
a greater share of their costs.
During periods of oversupply, when USDA may need to reduce the price received by farmers, the
bulk of the adjustment (i.e., lower prices received by farmers) would fall on all farmers. Any
additional price reductions needed to reduce excess supplies would apply only to farms that had
increased their production from the previous year. To the extent that small farms are generally
thought to not increase their production, the bill would favor small farmers.
Also, provisions in the bill are expected to assist new farmers by exempting them from price
reductions that may be required in the event of excess milk production.
Potential Impacts
While producers would likely see higher prices initially as minimum federal order prices are
adjusted upward, some analysts say that the long-run competitiveness and stability of the U.S.
dairy industry could be at risk because of the unknown effectiveness of provisions to discourage
overproduction, given limitations on USDA to make adjustments. For example, if the trade
balance in dairy products is negative, USDA could not reduce prices received by farmers,
possibly resulting in price levels that would continue to encourage excess milk production.
Similarly, the potential impact of the “additional” price reduction could be limited because it
would apply only to farms that have increased production from the previous year. Reducing
prices received by these farms may result in only a portion of the supply adjustment needed to
bring the market back into balance. Farms with steady production would have no incentive to cut
back.
The following scenario highlights the difficulty the industry might encounter. The retail price of
dairy products (e.g., butter) is determined in part by the price that manufacturers pay for farm
milk. If higher minimum milk prices were to push the retail price of dairy products above levels
many consumers are willing to pay, manufacturers would reduce farm milk purchases (and
production of dairy products) to bring their purchases in line with consumer demand. In the
meantime, excess milk would need to be removed from the market indefinitely, or until farmers
reduced milk output, motivated by the reductions in prices received.
For farmers, this process would likely result in higher per-unit costs as milk production declines
and farmers spread costs (defined in the bill as both operating and overhead costs) over fewer
pounds of milk produced, perpetuating the cycle of higher milk production costs, higher
minimum prices, lower overall manufacturing demand, lower milk production, and higher milk
production costs. The end result of embedding the cost of production into producer returns would
be to significantly reduce competitiveness of the U.S. dairy industry. If this scenario developed,
dairy farmers and manufacturers would see declining sales in both domestic and foreign markets.
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Finally, some critics of using cost of production as the basis of farm support have long argued that
a pricing system based on cost of production has the potential to reward inefficiency and
encourage additional imports.
Cooperative Marketing Initiative
The National Farmers Organization, a farm group that negotiates prices and sales terms with
commodity buyers for farmer-members, is promoting a Cooperative Marketing Initiative (CMI)
to improve farm milk prices.23 It would be a private industry approach, working alongside the
National Milk Producers Federation’s Cooperatives Working Together (CWT) program (see
“Privately Run Dairy Herd Buyout”). The CMI would set national production levels consistent
with national usage and assign each cooperative a production level consistent with their share of
usage (and further distributed to the producer level). The CMI would also set target prices at
values necessary for members to produce milk profitably. Farmers would receive the target price
(minus marketing expenses) on their assigned milk volume. Excess milk production would be
assessed a penalty, which would be redistributed to producers who did not exceed their allocation,
or used to cover any losses incurred by the cooperative.
Supporters say the plan would effectively deal with changes in the dairy industry. Opponents
point out that, while cooperatives represent the majority of those producing milk in the United
States, a voluntary program such as this would be difficult to implement because any price
enhancement resulting from the program could be quickly offset by actions of non-cooperative
producers or by lax enforcement by the cooperatives themselves.
Ration-all Milk Pricing Program
The “Ration-all Milk Pricing Program” has been developed by a dairy nutrition consultant and is
supported by some farmers in Pennsylvania and Ohio.24 The concept is to set the farm milk price
for a quantity representing 90% of historical milk production at a five-year moving average price.
The remaining amount of milk would be priced using bids received from processors in each
FMMO. The program would be mandatory in all states and would require legislation.
Supporters of the plan expect that prices received by producers would be considerably less
volatile because only about 10% of a producer’s output would be based on current prices.
Supporters also expect that the market signal provided by the blend price (weighted average of
the historical and current prices) would be sufficient to bring about the necessary change in
supply to match current or expected demand for milk.
Opponents point out that such a blend price would do little to encourage the necessary supply
adjustments in times of falling prices. For example, if the five-year average price for Class III
milk was $17.47 per hundredweight in February 2009, the blend price to the farmer would have
been at least $15.72 per hundredweight (0.9 times $17.47). This price, dairy economists say,

23 National Farmers Organization, “National Farmers Promotes Cooperative Marketing Initiative at Convention ’10 ,”
press release, January 21, 2010, http://www.nfo.org/Newsfolder/nr_1-21-2010b.html.
24 “Ration-all Milk Pricing Program,” Hoard’s Dairyman, not dated, http://www.hoards.com/dairyman_extras/Images/
Two_tiered_pricing_plan.pdf.
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Previewing Dairy Policy Options for the Next Farm Bill

would likely have resulted in increased production in 2009, further exacerbating the oversupply
situation and slowing the recovery in prices that occurred in the second half of 2009.
Concluding Remarks
Legislation for dairy programs will expire in 2012, with the exception of federal milk marketing
orders, which are permanently authorized. The financial stress experienced by dairy farmers in
2009, and into 2010 to some degree, has generated congressional and industry interest in
addressing price volatility and federal dairy programs in general.
Proposals reviewed in this report might be considered as the next farm bill debate unfolds, with
hearings starting in 2010 and a possible committee markup in the House in 2011. The fate of
these and other future proposals will likely depend on economic conditions in the dairy sector
over the next few years, the ability of various dairy interests to form a consensus, and budget
conditions. The status quo—that is, continuing programs for price support, direct payments,
federal marketing orders, export subsidies, import barriers, and periodic ad hoc emergency
assistance—is also a potential option. This report will be updated as additional proposals are
introduced.

Author Contact Information

Dennis A. Shields

Specialist in Agricultural Policy
dshields@crs.loc.gov, 7-9051


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