Dairy Policy Proposals in the Next Farm Bill
Randy Schnepf
Specialist in Agricultural Policy
January 8, 2013
Congressional Research Service
7-5700
www.crs.gov
R42736
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Dairy Policy Proposals in the Next Farm Bill
Summary
Current U.S. federal dairy policy is based on five major programs—the Dairy Product Price
Support Program (DPPSP), the Milk Income Loss Contract (MILC) Program, Federal Milk
Marketing Orders, Dairy Import Tariff Rate Quotas, and the Dairy Export Incentive Program—
which together are designed to provide price and income support and market stability for dairy
producers. In addition, several smaller programs aid the U.S. dairy sector with market promotion,
research, price reporting, risk management, and disaster assistance.
In recent years, dairy producers have argued that a simple price-based system fails to reflect the
sharp increases in milk production costs, especially feed costs, that have occurred since the mid-
2000s. In response to producer concerns and to the volatile dairy price and margin developments
of the past decade, the 112th Congress spent substantial time and effort during 2012 reviewing
existing farm programs, consulting with stakeholders, and preparing new legislation to serve as
the next five-year version of omnibus farm legislation—the anticipated 2012 farm bill. The
Senate passed its version of the farm bill, S. 3240, on June 21, 2012. The House Agriculture
Committee approved its version, H.R. 6083, on July 11, 2012.
Both bills proposed replacing the current U.S. dairy programs that rely on a simple price trigger
(DPPSP and MILC) with two programs—the Dairy Production Margin Protection Program
(DPMPP), a new income support program based on the monthly difference (i.e., the margin)
between the national average farm all-milk price and a formula-derived estimate of feed costs,
and the Dairy Market Stabilization Program (DMSP), which, under certain conditions, would
reduce payments to participating producers for their milk marketings when the margin falls below
proposed statutory thresholds. According to the Congressional Budget Office (CBO), eliminating
DPPSP and MILC would generate enough savings to more than offset the cost of implementing
the proposed joint dairy programs, DPMPP and DMSP.
The American Taxpayer Relief Act of 2012 (ATRA)—signed into law by President Obama on
January 2, 2013—extends the 2008 farm bill (P.L. 110-246) for one additional year until
September 30, 2013, or, in the case of the farm commodity programs that are on a different
calendar, through crop year 2013. Many of the provisions of the 2008 farm bill had expired on
September 30, 2012, including the Milk Income Loss Contract (MILC) program. The Dairy
Product Price Support Program (DPPSP) expired on December 31, 2012, but has been extended
one full year to December 31, 2013, by ATRA. However, the farm bill extension included in
ATRA forestalls a restructuring of the farm commodity programs that was envisioned in both the
House-reported (H.R. 6083) and Senate-passed (S. 3240) versions of the next farm bill. The 113th
Congress is expected to write a new farm bill in 2013, and might be expected to use H.R. 6083
and S. 3240 as starting points.
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Contents
Introduction ...................................................................................................................................... 1
One-Year Farm Bill Extension ......................................................................................................... 1
Current U.S. Dairy Policy ................................................................................................................ 2
Dairy Product Price Support Program (DPPSP) ........................................................................ 2
Milk Income Loss Contract (MILC) Program ........................................................................... 4
Federal Milk Marketing Orders (FMMOs) ............................................................................... 7
Dairy Export Incentive Program (DEIP) ................................................................................... 7
Dairy Import Tariff Rate Quotas (TRQs) .................................................................................. 8
New Dairy Policy Proposed in the Next Farm Bill ........................................................................ 10
Current Dairy Programs That Are Eliminated or Retained...................................................... 11
Dairy Production Margin Protection Program (DPMPP) ........................................................ 11
Effective Date and Implementation Specifics ................................................................... 12
Signing Up for DPMPP—BMP, SMP, or Both? ............................................................... 13
Basic Margin Protection (BMP) ........................................................................................ 15
Supplemental Margin Protection (SMP) ........................................................................... 16
Dairy Market Stabilization Program (DMSP) ......................................................................... 19
Effective Date and Implementation Rules ......................................................................... 20
Implementing the DMSP ................................................................................................... 20
Turning Off the DMSP ...................................................................................................... 22
USDA Study of the DMSP Market Effects ....................................................................... 23
Debate Over the Market Stabilization Proposal ................................................................ 23
Summary of Dairy Policy Differences: S. 3240 and H.R. 6083 of the 112th Congress ........... 24
Study Results of DPMPP and DMSP ...................................................................................... 25
Uncertainties ..................................................................................................................... 26
And Questions for Policymakers ....................................................................................... 26
Figures
Figure 1. Milk Prices Have Moved Well Above Support Levels Since Late 1980s ........................ 3
Figure 2. Feed Prices, Led by Corn, Have Risen Sharply Since 2006 ............................................. 4
Figure 3. MILC Price and Payment Parameters Since 2002............................................................ 5
Figure 4. The Dairy Operating Margin: (All-Milk Price) Minus (Average Feed Cost) ................. 14
Tables
Table 1. U.S. Dairy Programs, Historical and Projected USDA Outlays......................................... 9
Table 2. Annual Administrative Fee for Basic Margin Protection ................................................. 14
Table 3. Premium Rates per cwt. for Supplemental Margin Protection ......................................... 17
Table 4. DMSP Milk Payment Reduction Factors ......................................................................... 21
Table 5. Hypothetical Example of One- and Two-Month Average Margins
and Their Relation to DPMPP and DMSP Triggers.................................................................... 21
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Table 6. DMSP Suspension Thresholds ......................................................................................... 23
Appendixes
Appendix. Historical Dairy Supply Management Programs ......................................................... 27
Contacts
Author Contact Information........................................................................................................... 28
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Introduction
The American Taxpayer Relief Act of 2012 (ATRA)—signed into law by President Obama on
January 2, 2013—extends the 2008 farm bill (the Food, Conservation, and Energy Act of 2008,
P.L. 110-246) for one additional year until September 30, 2013, or, in the case of the farm
commodity programs that are on a different calendar, through crop year 2013.1 Many of the
provisions of the 2008 farm bill had expired on September 30, 2012, including the Milk Income
Loss Contract (MILC) program. The Dairy Product Price Support Program (DPPSP) expired on
December 31, 2012, but has been extended one full year to December 31, 2013, by ATRA.2
The 112th Congress spent substantial time and effort during 2012 reviewing existing farm
programs, consulting with stakeholders, and preparing new legislation to serve as the next five-
year version of omnibus farm legislation—the anticipated 2012 farm bill.3 The Senate passed its
version of the 2012 farm bill—the Agriculture Reform, Food, and Jobs Act of 2012 (ARFJA; S.
3240)—on June 21, 2012. The House Agriculture Committee approved its version—the Federal
Agricultural Reform and Risk Management Act of 2012 (FARRM; H.R. 6083)—on July 11,
2012.4 Both bills proposed replacing existing U.S. dairy price and income support programs with
a new margin-based support program and an accompanying market stabilization program.
However, the farm bill extension included in ATRA forestalls a restructuring of the farm
commodity programs that was envisioned in both the House-reported (H.R. 6083) and Senate-
passed (S. 3240) versions of a 2012 farm bill.
The 113th Congress is expected to write a new farm bill in 2013, and might be expected to use
H.R. 6083 and S. 3240 as starting points. This report describes proposed changes to existing dairy
programs and the new margin-based support and stabilization programs. The report first briefly
describes existing U.S. dairy programs. Then it focuses on the dairy programs proposed under
both the Senate-passed and House Agriculture Committee-reported farm bills in the 112th
Congress. In addition to describing the major features of the proposed new programs, this report
also covers differences between the two bills, as well as cost estimates of historical program
outlays compared with recent Congressional Budget Office (CBO) projections of the proposed
new dairy programs.5 In addition, several examples of how these proposed dairy programs might
operate for an individual dairy operation are provided in the text.
One-Year Farm Bill Extension
The ATRA extension of the 2008 farm bill extends both the MILC program through September
30, 2013, and the DPPSP program through December 31, 2013, while avoiding a reversion to
1 A crop year refers to the year in which a commodity is harvested.
2 For information on U.S. farm program expiration, see CRS Report R42442, Expiration and Possible Extension of the
2008 Farm Bill.
3 See CRS Report RS22131, What Is the Farm Bill?
4 For a detailed comparison of current U.S. dairy policy provisions within the two farm bill proposals—as passed by the
Senate (S. 3240) and approved by the House Agriculture Committee (H.R. 6083), see CRS Report R42552, The 2012
Farm Bill: A Comparison of Senate-Passed S. 3240 and the House Agriculture Committee’s H.R. 6083 with Current
Law.
5 See Table 1.
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1949 permanent law that would have involved federal dairy price supports of nearly double
current market levels.6 The MILC program parameters have been reset (retroactively as of
October 1, 2012) to the pre-September 1, 2012, values that were in effect throughout the life of
the 2008 farm bill up to that point; however, they are set to return to more restrictive levels on
September 1, 2013, such that MILC payments will require more stringent market conditions to be
triggered after that point.7
There is no net cost to the extension of the 2008 farm bill because funding to continue most of the
major programs was already in the budget baseline, such as for the farm commodity,
conservation, trade, and nutrition programs.8 However, to extend the Milk Income Loss Contract
(MILC) for one year at the higher support rate that existed in the 2008 farm bill before September
2012, an additional $110 million was needed. The offset for this authority was a reduction of $110
million from a nutrition education program.9
Current U.S. Dairy Policy
Current federal dairy policy is based on five major programs—the Dairy Product Price Support
Program, the Milk Income Loss Contract Program, Federal Milk Marketing Orders, Dairy Import
Tariff Rate Quotas, and the Dairy Export Incentive Program—which together are designed to
provide price and income support and market stability for dairy producers.10 In addition, several
smaller programs aid the U.S. dairy sector with market promotion, research, price reporting, risk
management, and disaster assistance.11
Dairy Product Price Support Program (DPPSP)
Established by federal law in 1949 and modified in subsequent legislation (most recently the 2008
farm bill, P.L. 110-246), DPPSP indirectly supports the farm price of fluid milk at $9.90 per
hundred pounds (i.e., hundredweight or cwt.) through government purchases of dairy products
from dairy processors at statutorily set prices.12 The program is countercyclical, in that
government purchases occur when product prices are low, and cease as product prices rise above
6 For a discussion of the issues involved in reverting to 1949 Permanent Law, see CRS Report R42442, Expiration and
Possible Extension of the 2008 Farm Bill.
7 See the section entitled “Milk Income Loss Contract (MILC) Program” later in this report for details.
8 CRS Report R42484, Budget Issues Shaping a 2012 Farm Bill.
9 CBO score of H.R. 8, footnote “e,” at http://cbo.gov/sites/default/files/cbofiles/attachments/
American%20Taxpayer%20Relief%20Act.pdf.
10 For greater discussion of the policy issues surrounding major U.S. dairy programs, see Dairy Policy Issues for the
2012 Farm Bill, Dairy Policy Analysis Alliance (DPAA), Univ. of Wisconsin and the Food and Agricultural Policy
Research Institute (FAPRI), April 2010—hereinafter referred to as Dairy Policy Issues for 2012 Farm Bill, DPAA,
April 2010—at http://www.fapri.missouri.edu/outreach/publications/2010/Dairy_Policy_Issues_April2010.pdf.
11 For details of current U.S. dairy programs, including authorizing legislation and issues related to their
implementation, see CRS Report RL34036, Dairy Policy and the 2008 Farm Bill.
12 The original program—named the Dairy Price Support Program—had a statutorily determined support price for fluid
milk (e.g., $9.90 per cwt. in the mid-2000s). The program was renamed by the 2008 farm bill when direct fluid milk
price support was shifted to indirect support via government purchases of manufactured products including butter,
cheese, and milk powder at statutorily established prices. See the USDA DPPSP fact sheet at http://www.fsa.usda.gov/
Internet/FSA_File/dppsp_en_fact_sheet.pdf.
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support levels. Also, when purchases exceed certain statutory levels, USDA is required to make
temporary price adjustments (reductions) to avoid the accumulation of excess government
inventories. The DPPSP expires December 31, 2013, and would be eliminated and replaced with
new policy under the Senate-passed and House Agriculture Committee-reported farm bills.
Since the mid-1990s, the annual farm price of milk has trended higher, albeit subject to an
increasingly volatile pattern (Figure 1), whereas the federal support rate has been flat at $9.90 per
cwt. Volatile milk prices have made planning more difficult and have made dairy producers more
vulnerable to unexpected or sustained increases in the cost of feed (the major cost component of
dairy production). Analysts at the Dairy Policy Analysis Alliance (DPAA) have noted:
The ability of price supports to maintain an effective price floor diminished as the support price
was lowered and as dairy product manufacturers became increasingly reluctant to sell product to
the government. In some cases, price supports have impeded U.S. dairy exports, distorted
domestic markets, and constrained dairy product innovation.13
Figure 1. Milk Prices Have Moved Well Above Support Levels Since Late 1980s
$/hundredweight (cwt)
$25
Annual average all-milk farm price*
$20
$15
Class III
price
$10
Milk price support**
$5
$0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: U.S. Dept. of Agriculture; World Agricultural Supply and Demand Estimates (WASDE), December 11, 2012.
Notes: * National average price received by farmers, all milk, and the announced Class III price, are USDA data;
2012 and 2013 are USDA forecasts. ** The national price support for milk was statutorily established at $9.90
per cwt. from 1998 until 2008. Beginning in 2008, government purchase prices were established for individual
dairy products, but with essentially the same effect as supporting raw milk at $9.90 per cwt.
13 Dairy Policy Issues for 2012 Farm Bill, Dairy Policy Analysis Alliance (DPAA), April 2010, p. 1.
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Milk producers argue that in recent years support levels have become too low, relative to current
market prices and costs of production, to provide meaningful support (Table 1). Further, milk
producers contend that support based strictly on the price of milk fails to account for the sharp
escalation of feed costs that has occurred since 2006 (Figure 2).
Figure 2. Feed Prices, Led by Corn, Have Risen Sharply Since 2006
$/bushel
$8
Annual corn price
$6
From 1970 through 2005, U.S. corn
prices averaged $2.27 per bushel.
$4
$2
$0
1970 1975 1980 1985
1990 1995 2000
2005 2010
Source: USDA, WASDE, December 11, 2012. The national average price received by farmers for corn for 2012
is forecast by USDA at $7.40 per bushel.
Notes: Corn is the principal feed grain used in the United States. Prices for other feed grains and hay are closely
correlated with the price of corn.
Since the emergence of the U.S. ethanol industry as a major source of corn demand in 2006, U.S.
feed grain markets have surged to new price levels that are two to three times above the levels
that persisted during the previous four decades. Rising feed costs are of particular concern to
dairy producers because they represent a substantial portion of the cost of milk production—in
2011, feed costs accounted for 80% of operating costs and 54% of total costs of milk
production.14
Milk Income Loss Contract (MILC) Program
First established by the 2002 farm bill and reauthorized in 2008, MILC provides farm income
support by giving participating dairy farmers nationwide a government payment whenever the
14 USDA, Economic Research Service (ERS), Commodity Costs and Returns data, retrieved on July 23, 2012, from
http://www.ers.usda.gov/data-products/milk-cost-of-production-estimates.aspx.
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farm price of milk used for fluid consumption (Class I) falls below a target price (adjusted for
feed costs) for Class I farm milk sold to processors in the Boston market (Figure 3).15
Figure 3. MILC Price and Payment Parameters Since 2002
$/cwt.
$25
Boston Class I
MILC Price
Price
Trigger = $16.94
$20
$15
MILC Adjusted
Price Trigger
$10
Weighted Feed Cost
$5
Feed Cost
Trigger = $7.35
MILC Payment Rate
$0
2002
2004
2006
2008
2010
2012
Source: Northeast Marketing Area for Boston Class I price data, USDA for prices received by farmers for
various feed components, latest update WASDE, December 11, 2012; margin calculations by CRS.
Notes: The MILC price trigger of $16.94/cwt. is adjusted upward by formula whenever a weighted feed-cost
estimate exceeds $7.35/cwt. On September 1, 2012, the feed-cost trigger rose to $9.50/cwt. The feed-cost
trigger was reset retroactively to $7.35/cwt. starting on October 1, 2012, by the American Taxpayer Relief Act
of 2012 (ATRA), but will again rise to $9.50/cwt. on September 1, 2013, before expiring on September 30, 2013.
Under the 2002 program, all dairy producers participating in MILC were paid an amount per cwt.
of milk production equal to 45% of the difference between the MILC target price of $16.94 and
the lower market price.16 Starting in 2008, an adjustment factor was added to the MILC target
whenever a weighted formula of dairy feed costs exceeded an established threshold of $7.35/cwt.
Thus, the per unit payment rate would rise with rising feed costs. MILC payments were made on
the first 2.985 million lbs. of annual milk production per farm (equivalent to annual production
from about 150 dairy cows). The MILC production limitation effectively limited MILC protection
to about 30% of U.S. milk production.17 As a result of this payment limitation, the MILC program
15 See the USDA MILC fact sheet at http://www.fsa.usda.gov/Internet/FSA_File/milc2011.pdf.
16 The MILC program initially expired on September 30, 2005, ahead of all other farm support programs in the 2002
farm bill. The Deficit Reduction Act of 2005 (P.L. 109-171) extended MILC for two years, through September 30,
2007, but dropped the payment rate to 34% through August 31, 2007, and to 0% for September 2007, so that it had no
cost beyond the two-year extension. The 2008 farm bill reauthorized the program at 45% with the drop back to 34% in
the last month (September 2012) to lower costs.
17 Foundation for the Future, National Milk Producers Federation (NMPF), June 2010, p. 14.
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has not been popular among large dairy producers and has generated strong opposition from
regions with predominantly larger herds.18
Most MILC payments occurred during the 2002 farm bill period (FY2002-FY2007) due to
sustained low milk prices. In 2004, milk prices rose briefly, temporarily ending MILC payments,
before restarting again in 2006. In 2007, milk prices rose sharply as part of a widespread
commodity boom that lasted through most of 2008. In 2009 the U.S. dairy industry was especially
hard hit by a combination of low milk prices and high feed costs that put exceptional financial
pressure on many dairy producers and generated large MILC payments (Table 1). Milk prices
recovered through 2010, but by early 2012, the incorporation of feed-cost adjustments driven by
high corn prices pushed the MILC-adjusted price trigger above the price of Boston Class I milk,
once again triggering MILC payments.
From April through August 2012, MILC payments average nearly $1.40 per cwt. However, on
September 1, 2012, several MILC program parameters were lowered in advance of the program’s
original expiration date of September 30, 2012.19 The altered MILC parameters resulted in the
payment rate falling to zero for the month of September 2012. Had MILC continued to operate
under the original parameters during September 2012, then the payment rate would have been
approximately $0.59/cwt.
The ATRA extension of the 2008 farm bill both extends the MILC program through September
30, 2013, and resets the MILC program parameters to the pre-September 1, 2012, values that
were in effect throughout the life of the 2008 farm bill up to that point. Furthermore, the MILC
program parameter reset is made retroactive to September 30, 2012. Thus, MILC operated with
the more restrictive program parameters (see footnote 19) only during the month of September
2012. MILC program parameters are scheduled to return again to the more restrictive levels on
September 1, 2013, such that MILC payments will require more stringent market conditions to be
triggered after that point.
As mentioned in this report’s introduction, the Congressional Budget Office (CBO) scored the
extension of MILC for one year (through September 30, 2013) at the higher support rate that
existed in the 2008 farm bill before September 2012, at an additional $110 million. This
additional budget authority was offset by a reduction of $110 million from a nutrition education
program.20
MILC would be eliminated immediately under the 112th Congress’s House Agriculture
Committee farm bill proposal (H.R. 6083), whereas the 112th Congress’s Senate farm bill
proposal would extend MILC (using the 45% payment factor rather than reverting to the 34%
factor) for about nine months (through June 30, 2013, assuming that a farm bill was signed into
law in September 2012) prior to its elimination.
18 Dairy Policy Issues for 2012 Farm Bill, DPAA, April 2010, p. 1.
19 For purposes of limiting projected costs over the 10-year (FY2008-FY2017) baseline the 2008 farm bill reset the
MILC payment parameters one month prior to the expiration of the 2008 farm bill. Starting on September 1, the MILC
payment rate was lowered to 34% (down from 45%) of the difference between the feed-cost-adjusted price trigger and
the lower market price, the feed cost threshold was raised from $7.35/cwt. to $9.50/cwt. and MILC payments were only
to be made on the first 2.4 million lbs. of annual milk production, instead of 2.985 million lbs.
20 CBO score of H.R. 8, footnote “e,” at http://cbo.gov/sites/default/files/cbofiles/attachments/
American%20Taxpayer%20Relief%20Act.pdf.
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Federal Milk Marketing Orders (FMMOs)
An FMMO is a geographically defined fluid milk demand area. Established by federal law in the
1930s, the FMMO system regulates milk marketing across state lines but within explicitly defined
and geographically aligned multi-state regions.21 Ten FMMOs are currently in operation today,
down from a peak of 83 in 1962. Nine states have their own separate internal marketing orders
that are state-regulated. FMMOs are designed to provide both price support and market stability
for dairy producers. Producers delivering milk to FMMOs are affected by two fundamental
FMMO provisions: classified pricing of milk according to end use, and pooling of receipts to pay
all farmers within an FMMO a blended or weighted-average price.
Within each FMMO, dairy processors or handlers (i.e., milk buyers) are required to pay a
minimum price for farm milk depending on its end use—for fluid consumption (Class I) or for
manufactured products such as yogurt, ice cream, and sour cream (Class II), cheese (Class III),
and butter and powdered milk (Class IV). This is referred to as “classified pricing.”
An end-product price formula uses the wholesale prices of storable dairy products (butter,
cheddar cheese, whey, and powdered milk) to calculate the value of milk components—protein,
butterfat, non-fat solids, and other solids. Another formula adjusts for processing costs (referred
to as the make allowance) and for the yield of milk components in the end products. Finally, a
constructed price for fluid milk (Class I) is derived that varies by region. Within each FMMO, the
value of all milk sales are “pooled” to generate a uniform average price—the blend price—paid to
all dairy farmers that deliver milk within that FMMO. The farm price of approximately two-thirds
of U.S. milk production is regulated under FMMOs.22
FMMOs are permanently authorized, and are therefore not subject to reauthorization in periodic
omnibus farm bills. FMMOs are established and amended through a formal public hearing
process that allows interested parties to present evidence regarding marketing and economic
conditions in support of or in opposition to instituting or amending an order. Most changes are
made administratively by USDA through the rulemaking process and approved by farmers in a
referendum, although other legislation can address issues related to the FMMO system.
Dairy Export Incentive Program (DEIP)
Established by the 1985 farm bill with subsequent reauthorizations, DEIP subsidizes dairy
product exports by providing per-unit cash payments to exporters.23 The subsidy helps higher-
priced U.S. dairy products compete in international markets. As a result, DEIP provides support
through enhanced export competitiveness. Originally intended to counter foreign (mostly the
European Union) dairy subsidies, DEIP has been rarely used in recent years as the use of dairy
export subsidies has declined globally (Table 1). DEIP (as extended by ARTA) expires on
December 31, 2013. DEIP would be eliminated immediately under both the Senate-passed and
House Agriculture Committee-reported farm bills of the 112th Congress.
21 For historical references on FMMO origins, see USDA, AMS, Dairy Programs, “Federal Milk Marketing Orders,”
listed under “Programs and Services” at http://www.ams.usda.gov/AMSv1.0/dairy.
22 USDA, Agricultural Marketing Service, Milk Marketing Order Statistics, “Table 2—Measures of Growth in Federal
Milk Order Markets, Years, 1947-2010” at http://www.ams.usda.gov/AMSv1.0/FederalMilkMarketingOrders.
23 See USDA, Foreign Agricultural Service (FAS), DEIP, at http://www.fas.usda.gov/excredits/deip/deip-new.asp.
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Several Smaller Dairy Support Programs
Dairy Forward Pricing Program. Allows farmers to voluntarily enter into forward price contracts with milk
handlers for pooled milk used for manufactured products (Classes II, III, and IV) under the FMMOs. The program
allows regulated handlers to pay farmers in accordance with the terms of a forward contract instead of paying the
minimum FMMO blend price for pooled milk. The price paid by milk handlers under the contracts are deemed to
satisfy the minimum price requirements of FMMOs. The program expires September 30, 2013, when the last contract
can be signed, but would be extended under both H.R. 6083 and S. 3240.
Dairy Indemnity Payment Program (DIPP). Under DIPP, payments are made to dairy producers when a public
regulatory agency directs them to remove their raw milk from the commercial market because it has been
contaminated by pesticides, nuclear radiation or fal out, or toxic substances and chemical residues other than
pesticides through no fault of their own. Payments also are made to manufacturers of dairy products, but only for
products removed from the market because of pesticide contamination. DIPP expires December 31, 2013, but would
be extended under both H.R. 6083 and S. 3240.
Dairy Promotion and Research Program. A generic dairy product promotion, research, and nutrition education
program, funded by a mandatory $0.15/cwt. assessment on milk produced and marketed in the 48 contiguous states.
Importers in all 50 states, the District of Columbia, and Puerto Rico must also pay an assessment rate of $0.075/cwt.
on imported products. USDA issues regulations on the time and method of importer payments. This program expires
September 30, 2013, but would be extended under both H.R. 6083 and S. 3240.
Fluid Milk Processor Promotion Program. Established by the 1990 farm bill (P.L. 101-624), with subsequent
reauthorizations, the national Fluid Milk Processor Promotion Program develops and finances generic advertising
programs designed to maintain and expand markets and uses for fluid milk products produced in the contiguous 48
states and the District of Columbia. The program is funded through a 20¢/cwt. assessment on all milk processed for
fluid consumption. The fluid milk order was approved by a referendum among fluid milk processors and became
effective December 10, 1993. The program originally required periodic congressional reauthorization; however, the
2002 farm bill gave it permanent authority.
Dairy Product Mandatory Reporting Program. Requires manufacturers to report to USDA the price, quantity,
and moisture content of dairy products sold. Quarterly audits are to be undertaken to ensure compatibility between
submitted information and related dairy market statistics.
Livestock Gross Margin (LGM) Insurance for Dairy. A pilot program available for purchase from private
insurers through USDA’s permanently authorized federal crop insurance program. LGM provides protection to dairy
producers when feed costs rise or milk prices drop. Gross margin is the market value of milk minus feed costs. LGM
Dairy uses futures prices for corn, soybean meal, and milk to determine the expected gross margin and the actual
gross margin. Under S. 3240, participation in the proposed dairy margin program (see below) makes a dairy producer
ineligible for LGM. Under H.R. 6083, dairy operators that participate in the proposed dairy margin program are
eligible for LGM, but only after operations that are not participating in the production margin protection program are
enrolled in LGM.
Sources: USDA’s dairy programs home page at http://www.ams.usda.gov/AMSv1.0/DairyLandingPage; USDA DIPP
fact sheet at http://www.fsa.usda.gov/Internet/FSA_File/dipp10.pdf; USDA LGM Dairy fact sheet at
http://www.rma.usda.gov/pubs/rme/lgmdairy.pdf.
Dairy Import Tariff Rate Quotas (TRQs)
TRQs protect higher-priced domestic dairy products by limiting the importation of lower-priced
foreign dairy products.24 A quota level is established for selected dairy products such that under-
quota import volumes enter the United States at a zero or reduced duty, whereas above-quota
volumes are charged a prohibitive duty. By limiting competition, TRQs provide price support to
the domestic dairy industry while protecting less efficient operations and raising consumer prices.
Dairy TRQs are unaffected by proposed changes to the farm bill. DPAA states:
24 For details by product, see the Harmonized Tariff Schedule of the United States (2012) (rev. 2), Chapter 4, pp. 2-7.
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U.S. dairy trade policy does not directly affect milk prices in the same way as marketing
orders or the MILC program, but trade policy does influence the competitive environment
for U.S. exports and imports of dairy products. Greater exposure to world markets has
brought an added element of milk price instability to U.S. dairy markets. At the same time,
foreign demand for dairy products is expanding more rapidly than U.S. demand, offering
growth in U.S. milk production.25
USDA outlays for the major dairy support programs have trended downward since the 1980 farm
bill period (Table 1). The outlook for strong dairy product prices in the Congressional Budget
Office (CBO) baseline accounts for the relatively small net outlay projection of $248 million for
the FY2013-FY2017 period, assuming an extension of current dairy policy.
Table 1. U.S. Dairy Programs, Historical and Projected USDA Outlays
($ millions)
Market Loss
Farm Bill
Fiscal Years
DPPSP
Assistance
MILC DEIP Total
1980
FY1981 - FY1985
10,592
—
—
—
10,592
1985
FY1986 - FY1990
6,221
—
—
8
6,229
1990
FY1991 - FY1996
1,388
—
—
544
1,932
1996
FY1997 - FY2002
2,284
1,000
—
481
3,765
2002
FY2003 - FY2007
1,120
—
2,538
90
3,748
2008a
FY2008 - FY2012
280
290
1,091
28
1,688
CBO 5-year Projections for FY2013-FY2017
CBO Baselineb
FY2013 - FY2017
46
14
163
26
248
S. 3240c
FY2013 - FY2017
107
H.R. 6083c
FY2013 - FY2017
60
CBO 10-year Projections for FY2013-FY2022
CBO Baselineb
FY2013 - FY2022
94
27
258
52
432
S. 3240c
FY2013 - FY2022
373
H.R. 6083c
FY2013 - FY2022
394
Sources: Historical data are assembled by CRS using various USDA data sources; projected data for FY2013-
FY2017 and FY2013-FY2022 are from the Congressional Budget Office (CBO).
Notes: USDA’s Commodity Credit Corporation (CCC) total outlays do not include the implicit costs to
consumers of tariff-rate quotas (TRQs), which limit access to cheaper international products. Also, there are no
federal outlays for FMMOs other than for their administration.
a. Data for FY2012 are not final.
b. Projections from the CBO March 2012 baseline, assuming continuation of current law. DPPSP includes net
receipts of $8 million from sales of dairy products.
c. CBO Cost Estimates for S. 3240 and H.R. 6083 of the 112th Congress, as scored against CBO’s March 2012
baseline.
25 Dairy Policy Issues for 2012 Farm Bill, DPAA, April 2010, p. 2.
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New Dairy Policy Proposed in the Next Farm Bill
The farm bill extension included in the American Taxpayer Relief Act of 2012 (ATRA) forestalls
a restructuring of the farm commodity programs that was envisioned in both the House-reported
(H.R. 6083) and Senate-passed (S. 3240) versions of the next farm bill during the 112th Congress.
The 113th Congress is expected to write a new farm bill in 2013, and might be expected to use
H.R. 6083 and S. 3240 as starting points. Both of these bills propose replacing the current dairy
programs that rely on a simple price trigger (DPPSP and MILC) with the Dairy Production
Margin Protection Program (DPMPP)—a new income-support program based on the margin
between the national average all-milk farm price and a formula-derived estimate of feed costs
(Figure 4). The proposed margin protection program is linked to a supply stabilization program—
the Dairy Market Stabilization Program (DMSP)—that reduces payments to participating
producers for their milk marketings when the margin falls below proposed statutory thresholds.
The two proposed new programs—DPMPP and DMSP—are nearly identical in both the House
and Senate bills. The proposed dairy margin and stabilization programs originated with a proposal
published in June 2010 by the National Milk Producers Federation (NMPF) called the
Foundation for the Future (FTF).26 A version of FTF was introduced in the 112th Congress as
H.R. 3062, The Dairy Security Act (DSA), by House Agriculture Committee Ranking Member
Collin Peterson on September 23, 2011. A modified version of DSA appears as “Subtitle D—
Dairy,” in Title I of both the House-reported (H.R. 6083) and Senate-passed (S. 3240) farm bills.
Although S. 3240 and H.R. 6083 contain very similar versions of the proposed margin protection
and market stabilization programs and provide important structure and direction concerning the
application of the new programs, substantial detail would need to be worked out by USDA in
order to implement the new programs. As a result, this report is “preliminary” in the sense that
neither the next farm bill nor the USDA implementing regulations have yet been developed.
Instead, this report relies on the program details of S. 3240 and H.R. 6083, supplemented by
several related studies and reports produced by prominent U.S. dairy economists and market
experts of how the new margin protection and market stabilization programs are expected to
function, to produce a preliminary description of the main features of the proposed new dairy
programs.27 Changes to current U.S. dairy policy as well as the main differences between H.R.
6083 and S. 3240 are described below.28
Note that the texts of both H.R. 6083 and S. 3240 assume that a final farm bill would have been
passed at some point prior to the expiration of the 2008 farm bill on September 30, 2012.
Obviously, any new farm bills proposed by the 113th Congress would necessarily use different
dates reflective of the changed timing.
26 See the NMPF Foundation for the Future website at http://www.futurefordairy.com/.
27 Citations and references are used to signify source material.
28 For an overview of the proposed dairy programs, see “Dairy Provisions of the Senate Agriculture Reform, Food, and
Jobs Act of 2012,” PDMP Information Letter 12-03, by Andrew Novakovic and Mark Stephenson, April 2012;
hereafter referred to as “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012.
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Current Dairy Programs That Are Eliminated or Retained
The current price-based Dairy Product Price Support Program (DPPSP) and Milk Income
Loss Contract (MILC) programs, as well as the Dairy Export Incentive Program (DEIP), are
eliminated under both S. 3240 and H.R. 6083. The elimination of DPPSP and DEIP would have
been effective October 1, 2012, under both bills. MILC is eliminated immediately under H.R.
6083, but is extended for about nine months under S. 3240 to provide income support for a
transitional period of time while dairy producers, who might otherwise be hesitant to switch to the
new programs, have extra time to better understand and evaluate them.
The S. 3240 extension of MILC would be done using the MILC program parameters that were in
place through August 31, 2012 (i.e., the MILC payment rate equals 45% of the difference
between the adjusted target price and the actual Boston Class I milk price). If, at any time during
the MILC interim period (the first nine months following enactment), a producer opts for margin
protection (DPMPP) in lieu of MILC, the decision is irrevocable. Also, if dairy producers sign up
for DPMPP, they become ineligible for the Livestock Gross Margin (LGM) Insurance for Dairy
program under S. 3240, and may sign up only after non-participants of DPMPP have signed up
(assuming funds remain) under H.R. 6083. See the box on page 8 for LGM details.
According to the Congressional Budget Office (CBO), eliminating DPPSP and MILC generates
enough savings to more than offset the cost of implementing the new dairy proposals. The
budgetary outlays for the House and Senate versions of the new dairy proposal over the FY2013-
FY2017 period are $60 million (H.R. 6083) and $107 million (S. 3240), respectively. In
particular, the proposed supply management program (described below under “Dairy Market
Stabilization Program (DMSP)”) is expected to raise milk prices, which, in turn, would lower the
cost of the proposed margin protection program (described in the section on “Dairy Production
Margin Protection Program (DPMPP)”) by passing the costs on to consumers. The combination
of instituting the new dairy programs and revoking the current ones results in projected five-year
savings of $141 million under S. 3240 and $188 million under H.R. 6083 (Table 1).
The Dairy Forward Pricing, Dairy Indemnity, and Dairy Promotion and Research Programs
are extended through the next farm bill period until September 30, 2017, by both bills. S. 3240
also requires increased reporting frequency (to at least a monthly basis) for wholesale dairy
product prices or commercial stocks of bulk dairy commodities or any product information that
may “significantly aid price discovery” under the Dairy Product Mandatory Reporting
provisions of current law.
Federal Milk Marketing Orders (FMMOs), which exist under permanent authority, are left
unchanged by H.R. 6083. In contrast, S. 3240 recommends two minor adjustments—first, to
establish an information clearinghouse for the purpose of educating the public about the FMMO
system and any FMMO referenda, and second, to require USDA to analyze the effects of
replacing the use of end-product price formulas with other milk pricing alternatives.
Dairy Production Margin Protection Program (DPMPP)
The newly proposed DPMPP would provide milk producers with protection from low operating
margins in place of the DPPSP and MILC programs. Unlike the MILC program, DPMPP would
not have an explicit cap related to size of operation—that is, there is no production or dollar
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payment limitation associated with the dairy margin program. Instead, DPMPP payments would
be limited by how much of a producer’s historical and/or current milk production is covered.
A producer’s decision to participate in DPMPP is voluntary; however, once a producer elects to
participate in DPMPP, he is also electing (by mandate) to subject his dairy operation to the rules
of the Dairy Market Stabilization Program (DMSP) as described in a later section.
A key aspect of the proposed DPMPP program is creating a timely and transparent measure of a
dairy production margin that will be useful across all dairy production regions. The DPMPP
program proposes using USDA-reported monthly national average price data for all classes of
milk (the all-milk price) and the cost of three feeds that represent the bulk of purchased feeds in
dairy rations (corn, soybean meal, and alfalfa hay) to construct an estimate of the margin between
the price for 100 pounds (i.e., a hundredweight or cwt.) of milk produced and the cost of an
average feed ration used to produce a hundredweight of milk (see box below).
This formulation is used, in part, because the data are both transparent and readily available at the
national level, thus facilitating its routine and timely calculation, and also because feed costs are
traditionally the most variable component of dairy production operating margins. It is noteworthy
that important milk production costs are necessarily excluded from this formula, including labor,
utilities, depreciation, capital, veterinary services, and nutritional supplements. Thus, this
operating margin formula is a crude indicator of dairy profitability. The excluded operating cost
items vary greatly across individual operations and will likely be addressed by individual
producers when determining their desired level of margin coverage.
Operating “Margin” = Milk Returns over Feed Costs
The operating margin is defined as the difference between the average national “all-milk” farm price and an average,
formula-derived monthly value for the cost of a representative dairy feed ration.29
Margin per cwt. = (All-Milk Price per cwt.) – (Feed Cost per cwt.)
Weighted Feed Cost Formula
The national average price paid for feed used by a dairy operation to produce a cwt. of milk is based on price data for the
three major feed ingredients—corn, soybean meal, and alfalfa hay. Monthly price data for these three feedstuffs are
combined into a weighted feed cost estimate per cwt. of milk production using the following formula.30
Feed Cost per cwt. = (1.0728 x corn price) + (0.00735 x soybean meal price) + (0.0137 x alfalfa hay price)
where the corn price is in $/bushel and the soybean meal and alfalfa hay prices are in $/ton.
Effective Date and Implementation Specifics
Assuming that a final version of the next farm bill passes both the House and Senate, then the
farm bill would become “effective” when it is signed into law by the President. Under both bills,
29 Monthly prices received by farmers for all-milk, corn, and alfalfa hay are published monthly in Agricultural Prices,
National Agricultural Statistics Service (NASS), USDA. The average wholesale price for soybean meal, Central
Illinois, is reported in Market News, Agricultural Market Service (AMS), USDA.
30 For a detailed description of the feed cost formula derivation, see Foundation for the Future, NMPF, June 2010, pp.
16-19; at http://www.futurefordairy.com/.
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30 days after the farm bill has become effective, USDA must announce the establishment and
availability of a DPMPP program.31 H.R. 6083 allows for participation in DPMPP retroactive to
the effective date under certain conditions. S. 3240 has no provision for retroactive signup.32
According to S. 3240, 120 days after the act has been signed into law the DPMPP program must
be implemented.
Signing Up for DPMPP—BMP, SMP, or Both?
DPMPP offers two margin protection plans: Basic Margin Protection (BMP) and Supplemental
Margin Protection (SMP). BMP is a fully subsidized program, subject to an annual fee, that
insures at a single $4.00/cwt. margin. In contrast, SMP is a partially subsidized program, subject
to annual premiums, that provides additional margin protection coverage in $0.50/cwt. increments
from $4.50/cwt. to $8.00/cwt. See Figure 4 for a depiction of how often the monthly margin
would have fallen below the $8.00/cwt., $6.00/cwt., and $4.00/cwt. thresholds.
In general, all U.S. dairy producers are eligible to participate in the margin protection program.
USDA will announce a registration (or signup) period in the Federal Register including the
manner and form of registration (or signup). According to the Senate-passed S. 3240, producers
that elect to participate in BMP must register with USDA within the 15-month period beginning
on the initiation date of the USDA-announced registration period.33 In contrast, the House
Agriculture Committee-reported H.R. 6083 states that dairy producers seeking to participate in
BMP have a one-year period from the initiation date of the signup period to opt in or out.
Margin protection coverage is cumulative—a dairy operator must first sign up for BMP before
participating in SMP. The decision to participate in BMP is a one-time choice and lasts for the
duration of the next farm bill through September 30, 2017. The decision to participate in the
higher coverage levels of SMP is made on an annual basis (beginning with the initial signup)
whereby a producer may opt in or out of SMP in any given year irrespective of previous SMP
participation.
The annual administrative fee charged for participation in BMP (Table 2) is based on the dairy
producer’s volume of milk marketed during the previous calendar year. The two farm bill
proposals have different schedules for the administrative fee—H.R. 6083 proposes lower fees for
milk marketing levels above 5 million lbs. compared to the fees proposed under S. 3240. The
annual administration fee for BMP is paid at registration (or signup).
31 USDA is required to publish a notice in the Federal Register, to inform dairy producers and other stakeholders of the
availability of the new programs.
32 However, S. 3240 does include the extended MILC program (mentioned earlier) as an alternative through June 30,
2013.
33 S. 3240, Section 1412(c)(1).
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Figure 4. The Dairy Operating Margin: (All-Milk Price) Minus (Average Feed Cost)
$/cwt.
$16
$14
Margin
$12
$10
$8
$6
$4
$2
$0
2000
2002
2004
2006
2008
2010
2012
Source: Calculated by CRS based on USDA data (WASDE, December 11, 2012) and using the formula detailed
in S. 3240 and H.R. 6083 of the 112th Congress, Section 1401(4), in both bills.
Table 2. Annual Administrative Fee for Basic Margin Protection
If previous calendar year milk marketings (lbs.) are:
S. 3240
H.R. 6083
< 1 million lbs.
$100
$100
> 1 million lbs. but < 5 million lbs.
$250 $250
> 5 million lbs. but < 10 million lbs.
$350 $250
> 10 million lbs. but < 40 million lbs.
$1,000 $500
> 40 million lbs.
$2,500
$1,000
Source: ARFJA (S. 3240), Section 1412; and FARRM (H.R. 6083), Section 1412, of the 112th Congress.
H.R. 6083 also stipulates that within 30 days after the “effective” date of the farm bill, USDA
must publish a notice in the Federal Register (FR) of the availability of “retroactive” margin
protection covering the period from the “effective” date of the farm bill until a producer’s initial
signup for margin protection. To comply, producer signup must occur within 150 days of the
USDA FR announcement. The retroactive SMP margin coverage may not exceed $6.00/cwt.
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Milk Production Coverage Under Margin Protection
Each of the margin protection programs—BMP and SMP—has different costs, makes payments based on different milk
production histories, and has different limits on how much of a producer’s milk production is covered by the margin
protection program.
The Relevant Milk Production History
Under BMP, all participants receive the same coverage rate of 80% of Basic Production History (BPH). For dairy
operators who have a complete history of dairy operations, BPH is defined as the highest annual milk marketings
during any of the three years preceding the calendar year in which the participating dairy operation first signed up for
BMP. Special procedures for determining a BPH apply for new entrants and operators with incomplete data. The BPH
remains fixed for the duration of the next farm bill.
Under SMP, each producer elects a coverage level of between 25% and 90% of the Annual Production History (APH).
APH is equal to the actual milk marketings during the preceding calendar year. Unlike the BPH, which is fixed, the
APH may vary from year to year over the duration of the next farm bill. As a result, APH allows for margin
protection to be extended to any growth in annual dairy production that occurs during the farm bill period.
Because it is unlikely that BPH will equal APH, it wil generally be true that participating dairy operators will get paid
on different amounts of milk under the two programs—BMP and SMP.
Two-Month Period Average Margins
For purposes of determining both whether a DPMPP payment is triggered and the amount of the DPMPP payment,
average margins are calculated for specific two-month periods. Each calendar year is broken into the following two-
month periods: January-February, March-April, May-June, July-August, September-October, and November-
December.
Note that a low single-month average margin does not trigger a DPMPP payment if the two-month average is above
the trigger. For example, assume a producer has selected a $6.00 margin threshold (described below). Then a January
margin of $5.80 fol owed by a February margin of $6.30 produces a two-month average of $6.05, which would fail to
trigger the margin threshold.
USDA is instructed to determine a margin as soon as possible after the necessary prices are reported. NASS full-
month price estimates—not preliminary estimates—must be used for both months in calculating the two-month
average. As a result, the two-month average margin calculation will not be available until a full month after the two-
month period has expired.
One-Month Period Average Margins
Average margins are calculated for one-month periods for purposes of evaluating whether a Dairy Margin Stabilization
Program (DMSP) threshold has been triggered, as described later.
Both BMP and SMP have provisions for new entrants and procedures for transferring eligibility
and participation upon sales of a dairy. There are also provisions for owners of multiple
operations and multiple owners of one operation.34
Basic Margin Protection (BMP)
Basic Margin Protection (BMP) can be thought of as providing protection from catastrophic
losses due to low margins. Under BMP, whenever the average operating margin falls below $4.00
per cwt. during a two-month period, then a government payment equal to the difference between
$4.00 and the actual margin (up to a maximum per cwt. payment of $4.00) is triggered.35
34 “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 6.
35 The $4.00/cwt. cap on the BMP payment rate excludes negative margins where feed costs exceed the all-milk price.
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BMP Payment Rate per cwt. = the lesser of ($4.00 – actual margin) or $4.00
To determine the BMP payment for the specific two-month period in which a positive BMP
payment rate occurs, the BMP payment rate is applied to the lesser of 80% of the BPH prorated to
a two-month period (i.e., BPH divided by six), or the actual quantity of milk marketed during the
two-month period.
BMP Payment = (BMP Payment Rate) * Lesser of 80% of (BPH/6) or (actual 2-month milk production)
BMP payments will continue as long as the average margin is less than $4.00/cwt. for each
successive two-month period. BMP payments cease when the average margin reaches or exceeds
$4.00/cwt. during any two-month period.
Special Note on Margin Payments
Neither S. 3240 nor H.R. 6083 specifies a particular timetable for a BMP (or SMP) payment, but
it is reasonable to expect that payment would be as soon as is practicable. Since all payments are
based on data that are collected before a payment action is announced (i.e., coverage level and
base marketings), USDA would not have to wait for any new data or action on the part of a
producer.36
Supplemental Margin Protection (SMP)
Supplemental Margin Protection (SMP) can be thought of as providing protection from sustained
low operating margins but at levels above the $4.00/cwt. catastrophic level of BMP. Under SMP,
dairy producers already participating in BMP can elect to buy additional margin protection each
year in $0.50/cwt. increments from $4.50 up to $8.00 per cwt. The decision to participate in SMP
is a voluntary choice made annually. This is in contrast to BMP participation, which involves a
commitment for the lifetime of the 2012 farm bill.
In addition to selecting an SMP margin threshold ranging from $4.50/cwt. to $8.00/cwt., the
producer must elect a coverage level of between 25% to 90%. The coverage level determines the
portion of the farm’s milk production that will receive an SMP payment. As mentioned earlier,
under SMP, the relevant measure of historical milk production is referred to as the annual
production history (APH) and is equivalent to the previous year’s milk production. The coverage
level is also a key determinant in calculating the premium to be paid for supplemental margin
protection (described below).
36 “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 6.
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Calculating the SMP Payment
Whenever the operating margin falls below the selected SMP margin threshold for a consecutive
two-month period, a payment will be made to a portion of a participating producer’s APH. The
SMP payment rate per cwt. is equal to the difference between the selected SMP threshold and the
greater of the actual margin or $4.00.
SMP Payment Rate per cwt. = (Selected SMP Threshold) – greater of (actual margin) or $4.00
To determine the SMP payment, the SMP payment rate times the coverage level is applied to the
lesser of either the APH for which a producer contracted, but prorated to a two-month period (i.e.,
APH divided by six), or the actual quantity of milk marketed during the two-month period.
SMP Payment = (SMP Paymt. Rate) * (Coverage level) * lesser of (APH/6) or (actual 2-mo. milk prod.)
SMP payments will continue as long as the margin is less than the selected SMP margin threshold
for consecutive two-month periods. SMP payments cease when the margin reaches or exceeds the
selected SMP margin threshold for a two-month period.
Calculating the SMP Premium
In order to obtain SMP coverage, a participating farmer would be required to pay an annual
premium. The premium rate per cwt. (Table 3) varies with both the size of the participating dairy
operation (i.e., whether it has greater or less than 4 million lbs. of milk production per year) and
the level of margin protection selected ($4.50/cwt. to $8.00/cwt.). Under H.R. 6083, proposed
premium fees are slightly higher on small producers but significantly lower on large producers
than under S. 3240.
Table 3. Premium Rates per cwt. for Supplemental Margin Protection
Supplemental
S. 3240
H.R. 6083
Coverage
1st 4 million lbs.
Milk prod. > than
1st 4 million lbs.
Milk prod. > than
Threshold
of APH
4 million lbs. APH
of APH
4 million lbs. APH
$4.50 $0.010
$0.020
$0.010
$0.015
$5.00 $0.020
$0.040
$0.025
$0.036
$5.50 $0.035
$0.100
$0.040
$0.081
$6.00 $0.045
$0.150
$0.065
$0.155
$6.50 $0.090
$0.290
$0.090
$0.230
$7.00 $0.400
$0.620
$0.434
$0.434
$7.50 $0.600
$0.830
$0.590
$0.590
$8.00 $0.950
$1.060
$0.922
$0.922
Source: ARFJA (S. 3240), Section 1415(d), and FARRM (H.R. 6083), Section 1415(d), of the 112th Congress.
Note: APH = Annual Production History, which is equivalent to the previous year’s milk production.
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Example of BMP and SMP Payment Calculations
Suppose that for a particular two-month period the average al -milk price is $18.50/cwt. and the formula-determined
feed ration per cwt. is $15.50, such that the margin is $3.00/cwt. Consider a dairy producer that traditionally has
about 500 cows on his operation, but that is slowly expanding. The producer has selected a $6.50/cwt. SMP margin
threshold with a 90% coverage level. Assume his BPH is 10 million lbs. (or 100,000 cwt.), while the APH (i.e., the
actual milk production for the preceding year) is 110,000 cwt. and the actual milk production for the two-month
period is 18,000 cwt. Then the BMP and SMP payments for the two-month period will be calculated as follows.
The BMP payment rate would be based on the difference between $4.00 and the lower margin:
BMP Payment Rate per cwt. = $4.00 - $3.00 = $1.00
The BMP payment for the two-month period equals the payment rate times the relevant milk production determined
as the lesser of 80% of the pro-rated BPH (i.e., 100,000 cwt./6) or the actual milk production for the period:
BMP Payment = ($1.00) * [lesser of (80% of 16,667 cwt.) or (18,000 cwt.)] = $13,333
For the SMP payment, both the payment rate (equal to the SMP margin threshold less the greater of the margin or
$4.00) and the relevant milk production must be determined. The SMP payment rate is based on the difference
between the SMP protection threshold of $6.50 and the higher of the margin ($3.00/cwt. in this example) or $4.00:
SMP Payment Rate per cwt. = $6.50 - greater of ($4.00 or $3.00) = $2.50
SMP payments are made to the coverage level percentage of the relevant milk production. The selected coverage
level is 90%. The relevant milk production is the lesser of the pro-rated APH of 110,000 cwt. (i.e., 18,333 cwt.) or the
actual milk production for the two-month period of 18,000 cwt. The SMP payment for the two-month period equals
the payment rate times the relevant milk production, determined as:
SMP Payment = $2.50 * (90%) * (18,000 cwt.) = $40,500
Total Payments = BMP + SMP Payments = $13,333 + $40,500 = $53,833
Note that these BMP and SMP payment examples are for a specific two-month period and would have to be
recalculated for each succeeding two-month period based on any changes in the average margin. These two-month
payments are in contrast to the BMP annual fee and the SMP premium, which are only paid once in a year.
The annual SMP premium is calculated as the product of the premium rate per cwt., the coverage
level selected (25% to 90%), and the APH.
SMP Premium = (SMP Premium Rate) * (Coverage Level) * (APH)
For dairy producers with an APH in excess of 4 million lbs., they would be charged the lower
premium rate on the first 4 million lbs. and the higher premium rate on the amounts above that. In
2011, approximately 88% of U.S. dairy farms had annual milk production of 4 million pounds or
less and they produced about 25% of total U.S. milk volume.37
The timing and manner of SMP premium payments is something that USDA would have to
develop when it promulgates specific rules. Both bills simply instruct USDA to provide more
than one method of payment and to use a method that “maximizes dairy operation payment
flexibility and program integrity.”38
37 Farm-size shares are from “Farms, Land in Farms, and Livestock Operations,” NASS, USDA, February 17, 2012,
and total milk production is from “Milk Production, Disposition, and Income,” NASS, USDA, April 25, 2012.
38 “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 10.
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Example of SMP Premium Rate Calculation
Fol owing with the earlier example (and based on the H.R. 6083 premium schedule from Table 3), a dairy producer
with an APH of 110,000 cwt. that selects a $6.50/cwt. SMP margin threshold with a 90% coverage level will calculate
his premium as follows.
For the first 4 million lbs. (or 40,000 cwt.) of APH, use SMP premium rate of $0.09/cwt.:
SMP Premium1 = ($0.09) * (90%) * (40,000 cwt.) = $3,240
For all APH milk production above the first 4 million lbs. (or 110,000 cwt. – 40,000 cwt.) use SMP premium rate of
$0.23/cwt.:
SMP Premium2 = ($0.23) * (90%) * (70,000 cwt.) = $14,490
The total SMP premium is the sum: $3,240 + $14,490 = $17,730.
This SMP premium is in addition to the BMP annual fee of $500 associated with the APH of 110,000 cwt. or 11 million
lbs. of milk production for the previous year.
Dairy Market Stabilization Program (DMSP)
Participation in the Dairy Market Stabilization Program (DMSP) is obligatory with participation
in DPMPP. DMSP is described most commonly as a supply management program; however, it is
perhaps more accurately described as a production disincentive program—for dairy operations
that participate in DPMPP, under certain margin conditions, if their actual milk marketings
exceed their base marketings (described below), then they will receive a lower return on their
milk marketings. The reduction in milk revenues increases as the calculated margin declines
below statutorily established thresholds starting at $6.00/cwt.
When the DMSP margin trigger has been met, USDA will announce that the DMSP stabilization
program will be in effect (starting the month after USDA’s announcement) and that milk
purchasers (or handlers) are ordered to split their payments to milk producers with an increasing
portion of payments (ranging from 2% to 8%) directed to USDA and a declining portion of
payments (ranging from 98% to 92%) going to the milk producers. The funds diverted to USDA
from the reduced milk payments are to be used to purchase dairy products for donation to food
banks and other programs, and/or for expanding consumption and building demand for dairy
products.
DMSP includes no production limits or quotas. Dairy operators can continue to run their farms at
any production level; however, once DMSP is triggered, milk producers will not receive full
payment on their milk marketings if their actual marketings exceed their base (as described below
and shown in Table 4).
The concept behind the DMSP program is that payment reductions are intended to have one or
both of two basic effects, either of which is expected to result in a higher future farm price for
milk—a demand effect stimulated by USDA use of diverted milk payment funds, or a supply
effect as payment reductions encourage milk producers to reduce their milk deliveries.39 Payment
reductions can be avoided entirely by reducing milk production (via altered feed rations, early
39 Ibid., pp. 10-11.
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cull, etc.) and associated marketings to a volume that is below the DMSP base times the DMSP
payment reduction factor (described below).
Just as DMSP includes statutorily established threshold conditions or “entry triggers” that trigger
the announcement of a DMSP action, there are also “exit triggers” that determine the termination
of a DMSP action. Once a DMSP action is terminated, a new program cannot be announced until
at least two months have passed. The entry and exit triggers are described below.40
Effective Date and Implementation Rules
According to S. 3240, 120 days after the next farm bill has been signed into law, USDA must
establish and implement the DPMPP program. Although both the House and Senate bills provide
a framework for the DMSP, USDA would have to write rules to fully cover how the program
would work.
Implementing the DMSP
Any milk producer who registers for DPMPP is automatically covered by the provisions of
DMSP. As a result, when dairy producers sign up for DPMPP, they must also elect the method to
be used for calculating their dairy operation’s DMSP base to be used in the determination of
possible milk payment reductions. A producer’s DMSP base selection may be either (1) the
average volume of monthly milk marketings during the three months immediately preceding the
month that the stabilization program will become effective, or (2) the volume of monthly milk
marketings in the preceding year but for the same month that DMSP becomes effective. As a
result, the DMSP base will likely vary from month to month and year to year over the duration of
the next farm bill.
Two conditions could trigger DMSP payment reductions (Table 4): (1) the margin is equal to or
less than $6.00/cwt. for each month of any consecutive two-month period, or (2) the margin for
any single month is equal to or less than $4.00/cwt. If either of these conditions is met, then
USDA must announce that DMSP payment reductions will be in effect beginning on the first day
of the next month. As a result, for each consecutive two-month period, DMSP uses the higher
one-month average margin to assess whether the $6.00/cwt. threshold has been breached.
Each successive decline in the DMSP margin threshold (below $6.00, $5.00, and $4.00) has two
sets of payment reduction factors: a first set that is applied to the DMSP base and a second set
that is applied to the actual milk marketings for the period (Table 4). Milk payments are made on
whichever calculated product is greater—(Payment Reduction Factor 1) x (DMSP Base) or
(Payment Reduction Factor 2) x (Actual Production). However, no payment reduction is made if
the actual milk marketings for that period are less than the calculated product of the payment
reduction factor and the DMSP base.
40 Ibid., p. 11.
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Table 4. DMSP Milk Payment Reduction Factors
$5.00 < Margin < $6.00 for
$4.00 < Margin < $5.00
Margin < $4.00
Range =>
2 consecutive mos.
for 2 consecutive mos.
for 1 month
98% x (DMSP Base)a
97% x (DMSP Base)
96% x (DMSP Base)
Milk payments are
made to the greater of
or
or
or
these =>
94% x (Actual Marketings)
93% x (Actual Marketings) 92% x (Actual Marketings)
No payment reduction
Actual Marketings
Actual Marketings
Actual Marketings
is made if:
< (98% x DMSP Base)
< (97% x DMSP Base)
< (96% x DMSP Base)
Source: ARFJA (S. 3240), Section 1434, and FARRM (H.R. 6083), Section 1434, of the 112th Congress.
a. DMSP base is selected at signup as either (1) the average volume of monthly milk marketings during the
three months immediately preceding the announcement that the stabilization program is in effect, or (2) the
volume of monthly milk marketings for the same month in the year preceding the announcement.
For example, consider the hypothetical data in Table 5. The January-February two-month average
margin of $5.95/cwt. would trigger a DPMPP payment at a $6.00 threshold; however, it would
not trigger the DMSP because both months were not below the $6.00 threshold. The February-
March, March-April, and April-May two-month combinations would trigger the DMSP because,
in each case, both consecutive months are below $6.00.
Table 5. Hypothetical Example of One- and Two-Month Average Margins
and Their Relation to DPMPP and DMSP Triggers
Is DPMPP at
1-mo. Ave.
Is DMSP
2-mo. Ave.
$6.00/cwt
Month
Margin
Triggered?a
DPMPP Marginb
Triggered?
Dec. $6.50
—
—
—
Jan. $6.10
no
(Dec.-Jan.)
Feb.
$5.80
no (Jan.-Feb.)
$5.95
yes (Jan.-Feb.)
Mar. $5.80
yes
(Feb.-Mar.)
Apr.
$5.80
yes (Mar.-Apr.)
$5.80
yes (Mar.-Apr.)
May $5.80
yes
(Apr.-May)
Jun.
$6.25
no (May-Jun.)
$6.025
no (May-Jun.)
Source: Based on data from “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 12.
Notes: Revised by CRS to accommodate text.
a. For evaluating if a DMSP trigger has been breached, use the higher one-month average margin for each
consecutive two months. For calculating the DMSP payment reduction, a two-month rolling average is used.
b. For purposes of calculating and evaluating the DPMPP two-month average margins, the relevant periods are
the January-February, March-April, May-June, July-August, September-October, and November-December
combinations.
Once the DMSP program has been triggered, then the payment reduction is calculated for each
succeeding month that the program is in effect, using a rolling two-month average margin to
determine which payment reduction factors are to be used. Increasingly larger DMSP payment
reductions are required as the margin falls below $6.00/cwt. and $5.00/cwt. for any two
consecutive months or $4.00/cwt. for any one month. The DMSP payment reduction factor
remains at the largest reduction level reached during the period that DMSP operates, even if the
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margin rises above the lower $4.00 and $5.00 thresholds. For example, suppose that the margin
fell below $4.00/cwt., triggering the maximum DMSP payment reduction (i.e., 96% of DMSP
base or 92% of current marketings). As the margin climbs back up to $6.00/cwt., the payment
reduction factor remains at the maximum level until the margin exceeds $6.00/cwt. for two
consecutive months, whereupon the DMSP is shut off.
Example of a DMSP Reduction in Milk Revenues
Refer to the hypothetical data from Table 5 where the margin falls below $6.00 for each of two consecutive months
in February and March. In April, USDA would announce the implementation of DMSP payment reductions beginning
in May. Suppose that the margin of $5.80 was the result of an all-milk price of $20.00/cwt. and feed costs of
$14.20/cwt. The $5.80 margin fits within the $5.00 < margin < $6.00 margin range from Table 4. Suppose also that a
hypothetical participating dairy producer has a DMSP base of 8,200 cwt. per month and actual milk deliveries of 8,400
per month. Then the relevant comparative reduction factor products are:
98% of DMSP Monthly Base = 98% of 8,200 = 8,036
or
94% of Actual Milk Marketings for Month = 94% of 8,400 = 7,896
Milk payment reductions would be based on the greater of the above two factor products. Then, the handler
payments to the producer on the total volume of milk marketed for the month (i.e., 8,400 cwt.) would be broken into
two components as follows:
Total Value of Monthly Milk Payment = $20.00/cwt.41 * 8,400 cwt. = $168,000
Value of Monthly Milk Payment to Producer = $20.00/cwt. * 8,036 cwt. = $160,720
Reduction = Value of Monthly Milk Payment to USDA = $168,000 - $160,720 = $7,280
Turning Off the DMSP
Under both bills, once triggered, a DMSP payment reduction stays in place until one of a set of
possible market conditions (referred to as suspension thresholds) is met—either the margins
improve relative to certain criteria, or U.S. prices for two basic dairy commodities (cheddar
cheese or nonfat dry milk) exceed world prices by certain relative amounts, or a combination of
higher margins and price relationships occur simultaneously (Table 6).
H.R. 6083 includes an additional set of enhanced suspension thresholds that would apply if the
stabilization program, DMSP, has been in effect for six consecutive months or more. These
enhanced suspension thresholds use a set of lower U.S.-to-world price ratios to assess whether the
DMSP should be suspended.
According to Andrew Novakovic and Mark Stephenson, the logic of the DMSP design hinges on
the expectation that the DMSP, either through a demand effect or a supply effect, may cause the
price of farm milk, and consequently the price of exportable dairy products, to increase. To
prevent unintended negative consequences for U.S. dairy exports, exit triggers are arranged to
terminate the program when the U.S. price gets too high relative to the world price.42
41 This price would not necessarily be the USDA, NASS, reported all-milk price, but would be the relevant market
price for fluid milk being offered by the particular handler receiving the milk deliveries.
42 “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 14.
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Table 6. DMSP Suspension Thresholds
(DMSP payment reductions are suspended if, for any margin trigger range, the U.S.-to-world price share
of selected dairy products is equal to or greater than the designated %)
Margin Trigger Range ($/cwt.)
U.S.-to-World
Margin > $6.00
$5.00 < Margin < $6.00
$4.00 < Margin < $5.00
Margin < $4.00
Price Share:a
for 2 cons. mos.
for 2 cons. mos.
for 2 cons. mos.
for 1 month
Suspension Threshold Criteria
U.S. Cheddar Cheese
any %
> 100%
> 105%
> 107%
U.S. Nonfat Dry Milk
any %
> 100%
> 105%
> 107%
Enhanced Suspension Threshold Criteriab
U.S. Cheddar Cheese
any %
> 97%
> 103%
> 106%
U.S. Nonfat Dry Milk
any %
> 97%
> 103%
> 106%
Source: ARFJA (S. 3240), Section 1436, and FARRM (H.R. 6083), Section 1436, of the 112th Congress.
a. U.S.-to-World-Price Share = ratio of U.S. product price to international product price expressed as a %.
b. The “Enhanced Suspension Threshold Criteria” are applicable if the DMSP program has been in effect for
six months or more; FARRM (H.R. 6083), Section 1436(c).
USDA Study of the DMSP Market Effects
The Senate-passed bill directs USDA to conduct and report on a study of two specific potential
effects of the DMSP program: first, the economic impact of DMSP throughout the dairy product
value chain, and second, the impact of DMSP on the competitiveness of the U.S. dairy industry in
international markets. A report based on the study is due no later than December 1, 2016, to both
the House and Senate Agriculture Committees.
Debate Over the Market Stabilization Proposal
The DMSP market stabilization proposal has generated considerable interest as a dairy supply
management program and is being debated by dairy producer groups, which generally support it,
and dairy processors who oppose it. The National Milk Producers Federation (NMPF), the largest
U.S. dairy producer organization,43 is a principal proponent of the dairy market stabilization
concept. NMPF describes the purpose and need for DMSP as follows:44
What is the purpose of the DMSP? The purpose of the DMSP is to reduce margin volatility for
dairy producers. The DMSP acts as an early warning system that sends strong and timely signals
to producers participating in the margin protection program that small temporary adjustments in
their milk production need to be made to stave off long-term reductions in their overall margins.
The DMSP is designed to act swiftly and infrequently to address brief market imbalances.
Why is any type of supply management needed in the U.S. dairy industry? The DMSP does
not fit the traditional definition of a supply management program. However, market stabilization
is part of this proposal because there are times when imbalances occur in the marketplace that
negatively impact dairy farmer margins. In 2009, dairy farmers did not overproduce their way
43 NMPF represents over 32,000 U.S. dairy producers and their 30 member-based cooperatives. See http://nmpf.org/.
44 See Foundation for the Future (FTF), NMPF, “Questions About Dairy Market Stabilization Program,” at
http://www.futurefordairy.com/faqs/dairy-market-stabilization-program.html
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into extremely low margins, but demand, both domestically and internationally, collapsed with
the global recession. The low milk prices combined with high feed costs resulted in the lowest
margins most producers have ever experienced. Situations like this ultimately correct themselves,
but without timely and effective intervention, they can drag on too long and drag down too many
farmers along the way.
The International Dairy Foods Association (IDFA), representing the nation’s dairy manufacturing
and marketing industries and their suppliers,45 is a principal opponent of the dairy market
stabilization program. IDFA argues that
A new government “Dairy Stabilization” program would routinely increase our domestic prices
above international prices and make our dairy industry less competitive.... Government supply
management programs thwart export growth. That’s why no other U.S. commodity has limits on
production.46
During the House Agriculture Committee markup of H.R. 6083, Representatives Goodlatte and
Scott introduced an amendment (No. 085) that would have removed the market stabilization
program from the dairy subtitle D while retaining the dairy producer margin protection program.
In a “Dear Colleague” letter dated July 10, 2012, they argued that
A government supply management program arbitrarily penalizes consumers and dairy product
manufacturers who respond to consumer demands, by uniformly requiring milk supply
contraction and raising milk prices above not [sic] market clearing levels. The Dairy Market
Stabilization Program, which our amendment eliminates, is the only U.S. commodity program
that would allow this level of government market intervention in domestic commodity supply
decisions.
In addition to removing the DMSP proposal, the Goodlatte-Scott amendment also would have
modified the DPMPP by (1) folding the BMP program into the SMP program and eliminating the
BMP annual fee—that is, expanding the margin threshold choice to include a minimum
$4.00/cwt. option free for the first 4 million lbs. of annual milk production; (2) allowing an
annual participation decision for the expanded SMP—unlike the BMP of both S. 3240 and H.R.
6083, which is fixed for the life of the farm bill; (3) fixing the production history base for the life
of the farm bill (i.e., no production growth is permitted) similar to the BPH under of both S. 3240
and H.R. 6083; (4) using premium rates similar to S. 3240 for SMP but with the elimination of
the BMP annual fee, and (5) contracting the coverage percent to a range of 25% to 80%. A CBO
score of the Goodlatte-Scott amendment (without DMSP) found savings of $47 million over the
10-year projection period (FY2013-FY2022), compared to $38 million in savings for H.R. 6083
(with DMSP). However, the amendment was defeated in committee by a vote of 17 to 29.
Summary of Dairy Policy Differences: S. 3240 and H.R. 6083 of the
112th Congress
There are several fairly minor differences between the Senate and House dairy proposals that
would have to be resolved in a conference agreement.
45 IDFA has a membership of 550 companies including 200 dairy processors and 330 companies that produce and
supply processing equipment and materials. See http://www.idfa.org/.
46 IDFA one-pager, “Why Give U.S. Competitors A Trade Advantage? Oppose Milk Supply Limits In The Farm Bill,”
at http://www.idfa.org/files/resources/trade_aspect.pdf.
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1. H.R. 6083 ends the MILC program immediately, whereas S. 3240 extends it for
about nine months (through June 30, 2013).
2. H.R. 6083 requires that USDA announce the establishment and retroactive
availability of a DPMPP program within 30 days of the next farm bill being
signed into law. S. 3240 has no retroactive option, but requires that USDA
establish and implement a DPMPP program within 120 days of being signed into
law.
3. H.R. 6083 has a slightly different fee structure for Basic Margin Protection that
lowers the cost to larger farms.
4. H.R. 6083 has a slightly different premium structure for Supplemental Margin
Protection that, in general, charges lower fees on bigger farms, and raises fees on
smaller farms.
5. H.R. 6083 adds a second “enhanced” suspension trigger for the Dairy Market
Stabilization Program that kicks in when DMSP has been in effect for six months
or more.
6. Unrelated to the newly proposed programs, H.R. 6083 makes no changes to
Federal Milk Marketing Orders, whereas S. 3240 mandates information
clearinghouses and a study of end-use milk pricing.
Study Results of DPMPP and DMSP
Several preliminary empirical studies of early versions of the proposed dairy programs—
including the elimination of current price and income supports and their replacement with the
margin-based protection programs (BMP and SMP) and the dairy market stabilization program
(DMSP)—have already been undertaken in an attempt to ascertain both the potential federal cost
and the potential effectiveness of the new programs for delivering timely assistance to dairy
operators while stabilizing dairy operating margins.47
The studies have generally concluded that
• compared to the current dairy price and income programs, DPMPP will make
payments less often, but will provide a stronger safety net in extremely low
margin events;
• the combination of DPMPP and DMSP appears to substantially mitigate the dairy
operating margin volatility;
• optimal program benefits are conferred for nearly all dairy farm sizes for
participation at the $6.50/cwt. supplemental margin protection level (this results
47 For market-scale results, see Charles Nicholson and Mark Stephenson, Market Impacts of the Dairy Security Act
(H.R. 3062) and the Dairy Provisions of the Rural Economic Farm and Ranch Sustainability and Hunger Act of 2011
(S. 1658), Dairy Markets and Policy (DMAP) Consortium, October 2011a; Scott Brown, The Effects of a Modified
Dairy Security Act of 2011 on Dairy Markets, FAPRI, April 2012; The Impacts on Dairy Farmers and Milk Markets of
a Standalone Dairy Producer Margin Insurance Program, Mark Stephenson, July 2012; and Analysis of NMPF’s
Foundation for the Future Program, FAPRI-MU Report #05-10, June 2010. For farm-scale results, see Charles
Nicholson and Mark Stephenson, Farm-Level Impacts of the Dairy Security Act (H.R. 3062) and the Dairy Provisions
of the Rural Economic Farm and Ranch Sustainability and Hunger Act of 2011 (S. 1658), Dairy Markets and Policy
(DMAP) Consortium, October 2011b; and Mark Stephenson and Andrew Novakovic, Program on Dairy Markets and
Policy Information Letter, PDMP Briefing Paper 120-05, April 2012.
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in large part because DMSP payment reductions will begin when the margin
drops below $6.00/cwt., so margin protection effectively needs to be at least at
the $6.00/cwt. level on average to offset milk payment reductions); and
• overall effects on milk supply, prices, and trade were relatively small; however,
contradictory trade results emerged where one study found that milk exports
declined slightly due to lower milk supply (Brown, April 2012), while another
study found that net milk exports expanded due in part to slightly lower milk
prices (Nicholson and Stephenson, October 2011b).48
A stand-alone margin insurance program without the market stabilization component
(Stephenson, July 2012) found that such a program could provide effective risk management
results, although costs and results varied under different participation assumptions.
Uncertainties
A key uncertainty across the various studies is the level of dairy operator participation in the new
programs. In general, the studies based on relatively high participation levels tend to find more
positive program outcomes—for example, lower cost to taxpayers, and greater success at
stabilizing operating margins.
Evaluating how dairy producers might respond or adjust their milk marketings under the market
stabilization program has proven particularly difficult given the unique nature of DMSP and the
lack of historical precedent regarding past supply management systems (see Appendix). Most
milk processors are strongly opposed to any form of supply management that might restrict milk
supplies, prevent full utilization of their investment in processing capacity, and limit their ability
to meet growth in consumer demand wherever it may occur. Free-marketers oppose any
government program that shelters the dairy sector from market forces, thus limiting flexibility and
locking current resources into place.
And Questions for Policymakers
Are high feed costs a permanent market condition and, if so, should the dairy sector be sheltered
from them by taxpayer intervention? On the other hand, if high feed costs are at least partly
driven by federal biofuels policy, to what extent does the federal government have an obligation
to protect milk producers from such high feed costs? Is supply management an essential part of a
margin-based strategy?49 If a margin-based dairy program were to achieve high rates of
participation, how costly could the program become in the absence of a supply management
component?
48 Ibid.
49 CBO’s score of the Goodlatte-Scott Amendment against the March 2012 baseline found a 5-year (FY2013-FY2017)
cost of $80 billion—midway between H.R. 6083’s $60 billion and S. 3240’s $107 billion from Table 1—and a 10-year
(FY2012-FY2022) cost of $385 billion, also midway between S. 3240’s $373 billion and H.R. 6083’s $394 billion.
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Appendix. Historical Dairy Supply Management
Programs
The goal of dairy supply management programs is generally to enhance and stabilize farm-level
milk prices by controlling the amount of milk marketed or to mitigate the increased production
that would be stimulated by policy that supports diary product markets at a higher-than-market-
equilibrium price. Unlike Canada and the European Union (EU), the United States has never
implemented a mandatory dairy supply management program; however, the 1990 farm bill had a
requirement that USDA implement a supply management program if federal dairy product
purchases exceeded 7 billion lbs.—this requirement was never implemented. Since the mid-1980s
there have been two government-sponsored and one industry-sponsored major voluntary supply
management dairy programs in the United States, all funded in part through dairy farmer
assessments.
U.S. Government-Sponsored, Voluntary Supply
Management Programs
In the mid-1980s Congress authorized two voluntary dairy supply management programs—the
1984-85 Milk Diversion Program and the 1987 Dairy Termination Program (Whole Herd
Buyout).50 Under the Milk Diversion Program, dairy farmers who reduced milk marketings 5% to
30% from a base level were paid $10/cwt. on the reduced marketings. The Milk Diversion
Program cut milk production sharply in 1985, but had no long-term effect. Under the 1987 Dairy
Termination Program, the government accepted bids from dairy farmers who were willing to
slaughter all their dairy cattle and remain out of the dairy business for at least five years. The
Whole Herd Buyout Program was more successful in moderating milk production trends, but the
induced slaughter of dairy cows negatively affected beef markets.
Novakovic and Stephenson have pointed out that, in contrast to the Milk Diversion Program and
Dairy Termination Program, which rewarded farmers for cutting back on milk production, the
DMSP program punishes farmers for increasing milk marketings relative to a base.51
U.S. Industry-Sponsored Supply Management Programs
An industry-sponsored voluntary supply management program—Cooperatives Working
Together (CWT)—was initiated in 2003 by the National Milk Producers Federation and remains
ongoing.52 Participating dairy farmers commit 2¢ per cwt. of milk marketed. Presently,
participants in CWT include dairy farmers from every state, producing almost 70% of the nation’s
milk. CWT funds have been used for both herd retirement (the last round was conducted in 2010)
and export assistance.
50 “Dairy Policy Brief #4: Voluntary Supply Management,” Food and Agricultural Policy Research Institute (FAPRI)
and the University of Wisconsin, Madison, Dairy Policy Briefs, June 2006.
51 “Dairy Provisions of ARFJA,” Novakovic and Stephenson, April 2012, p. 17.
52 For more information, see the Cooperatives Working Together website, at http://www.cwt.coop/about/
about_whatis.html.
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Foreign Government-Sponsored Mandatory Supply
Management Programs
Canada and the EU have used marketing quotas which explicitly specify the maximum amount of
milk that individual dairy farmers can sell and usually apply stiff economic penalties to any sales
in excess of the assigned farm quota. The EU will gradually increase its dairy quotas until an
entire phase-out of its milk quota system in April 2015 in accordance with implementation of its
2009 Health Check. Canada continues to maintain its milk quota system.
Potential Problems Associated With Supply Management Programs
Potential problems associated with voluntary supply management programs are adequate
participation and funding (which is linked directly to participation), free riders (i.e.,
nonparticipants benefit fully from the success of any supply management program but without the
supply limits), and some export market issues. Since CWT dairy product export support varies
with market conditions, exports under this program may not be viewed as a reliable source by less
price sensitive markets. In addition, there is some uncertainty about whether CWT export
subsidies are compatible with World Trade Organization obligations.
Author Contact Information
Randy Schnepf
Specialist in Agricultural Policy
rschnepf@crs.loc.gov, 7-4277
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