Farm Bill Primer: Dairy Safety Net

Farm Bill Primer: Dairy Safety Net

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October 11, 2017
Farm Bill Primer: Dairy Safety Net
The 2014 farm bill (P.L. 113-79) made significant changes
federal dairy support shift away from price supports and
to the structure of U.S. dairy support programs by repealing
toward guaranteeing some portion of the margin between
the Dairy Product Price Support Program (DPPSP), the
milk prices and feed costs. This shift was formalized in the
Milk Income Loss Contract, and the Dairy Export
2014 farm bill.
Incentives Program. Instead, the bill established two new
programs—the Margin Protection Program (MPP) and the
Figure 2. Feed Costs Outpaced Milk Prices During
Dairy Product Donation Program (DPDP).
2008 to 2014
Many dairy stakeholders believe MPP has not functioned as
envisioned and are looking to the 2018 farm bill to adjust
the program or find alternatives that strengthen the safety
net for milk producers.
Prior Dairy Policy
The federal policy goal has been to support producer
incomes by supporting the farm price of fluid milk.
However, fluid milk is highly perishable. As a result,
federal programs have supported milk prices indirectly by
offering to buy storable dairy products (e.g., powdered
milk, butter, or cheese) at support prices set in fluid-milk
equivalents.

Federal dairy price supports were first established in 1949
Source: Compiled by CRS from USDA data.
and were modified in subsequent legislation, including the
2008 farm bill (P.L. 110-246), which established the
Dairy Margin Protection Program (MPP)
DPPSP, which indirectly supported the farm price of fluid
MPP is a voluntary program that makes payments to
milk at a fixed $9.90 per hundred pounds (hundredweight
participating farmers when a formula-based national
or cwt) through government purchases of dairy products
margin—calculated as the national average farm price for
from processors.
all milk minus a national average feed ration cost—falls
below a producer-selected insured margin that ranges from
Figure 1. Milk Prices Moved Well Above Previous
$4.00/cwt to $8.00/cwt in $0.50/cwt increments for two
Federal Support Level by 1990
months (Figure 3). MPP payments are based on farm-level
production history and a producer-selected coverage level
that ranges from 25% to 90% of production—the product of
these two items yields the covered production history
(CPH).
Producers must pay an annual administrative fee of $100
for each participating dairy operation and a premium that
rises steadily with higher margin protection levels, starting
at the $4.50/cwt margin level. The minimum $4.00/cwt
margin (considered catastrophic) is fully subsidized and has
no farmer-paid premium. Once producers sign up for MPP,
they are covered under the program through 2018 (the
duration of the farm bill) and must pay the administrative

fee each year and any premium for coverage beyond
Source: Compiled by CRS from USDA prices.
$4.00/cwt.
Escalating Feed Costs Worry Producers
The premium structure is further divided based on the
Federal dairy price supports were moderately effective until
volume of CPH: Lower premiums are charged for the first 4
about 1990, when the farm price of milk began to trend well
million pounds of CPH, and higher premiums are charged
above the fixed support price (Figure 1). This left milk
on CPH above 4 million pounds. As an incentive to
producers vulnerable to volatile milk prices and rapid rises
encourage participation by smaller dairy operations with
in feed costs—the primary cost component of milk
CPH under 4 million pounds, Congress reduced premiums
production (Figure 2). Following a severe decline in milk
by 25% across the board for all margin protection levels
prices in 2009 that caused widespread economic hardship in
except the $8.00/cwt level during calendar years 2014 and
the U.S. dairy sector, the dairy industry advocated that
2015.
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Farm Bill Primer: Dairy Safety Net
Figure 3. Milk Price-Feed Ration Margin
Section 728 of the Senate-reported 2018 appropriations bill
(S. 1603) adjusts provisions of MPP to make it cheaper for
producers. The proposal would lower the premium discount
for the first 5 million pounds and raise premium-free
coverage to $5.00/cwt (see Table 1). Also, premiums for
fewer than 5 million pounds would be significantly
lowered. MPP payments would be based on the monthly
average margin instead of the current two-month average.
The intent behind these adjustments is to provide more
support for milk producers.
The National Milk Producers Federation has proposed that
the feed calculation be revised to restore the original
calculation. The original formula was reduced by 10% to
contain potential costs. Estimates show that the original
formula would have resulted in a $1.00/cwt narrower
margin and more payments during 2015 and 2016. Also,
some have argued that the national feed value does not
Source: Compiled by CRS using USDA data.
capture the true value of feed costs in many states and that
Notes: The margin is the national average al -milk price per cwt
local or regional feed costs should be used. However,
minus the average cost of a feed ration needed to produce 1 cwt of
analysis shows that using local feed costs would raise MPP
milk.
costs substantially. H.R. 4896 (114th Congress), introduced
in the House in 2016, would have required feed cost
MPP Effectiveness
computations for each state.
Since MPP was implemented, the margin has remained
The American Farm Bureau Federation has proposed that
mostly above $8.00/cwt (Figure 3). In 2015 and 2016, milk
the USDA Risk Management Agency establish an
producers paid almost $96 million in administrative fees
insurance revenue protection program for dairy. Milk
and premiums and received about $12 million in MPP
producers would choose a level of revenue to protect and,
payments. Given expected milk and feed prices through
as with other crop insurance, USDA would provide a
2018, the margin is expected to remain above $8.00/cwt,
premium subsidy. The details have yet to be worked out
again resulting in no MPP payments. As a result, 93% of
and presented in bill form. Such a program could
dairy operations shifted coverage to the $4.00/cwt level in
complement any adjustments Congress might enact to make
2017, up from 44% in 2015. Many producers are
MPP more effective as a safety net.
dissatisfied with the program. Preliminary U.S. Department
of Agriculture (USDA) data indicate that many have not
Dairy Product Donation Program
selected a coverage level, which is reflected in lower
(DPDP)
enrollment in 2017. In addition, on August 31, 2017, when
DPDP requires USDA to procure and distribute to targeted
MPP enrollment and coverage selection opened for 2018,
individuals from low-income groups certain dairy products
USDA announced that producers could opt out of MPP.
when the milk price-feed cost margin falls below $4.00/cwt
Table 1. MPP Proposal in Senate Appropriations
for two consecutive months. Products could not be resold
into commercial markets. DPDP is intended to enhance
Premiums per cwt
dairy demand while strengthening milk prices and operating

margins. To date, there have been no purchases under
Current Law
Proposed
Proposed
DPDP.
Margin
4M lbs
5M lbs
>5M lbs
$4.00
$0
$0
$0
Other Dairy Support Programs
$4.50
$0.01
$0
$0.02
The 2014 farm bill extended several other dairy programs
from the 2008 farm bill through FY2018, including the
$5.00
$0.03
$0
$0.04
Dairy Forward Pricing Program, the Dairy Indemnity
$5.50
$0.04
$0.01
$0.10
Program, and the budget provisions to develop export
$6.00
$0.06
$0.02
$0.16
markets under the National Dairy Promotion and Research
$6.50
$0.09
$0.04
$0.29
Program (i.e., the dairy check-off program). Other dairy
$7.00
$0.22
$0.07
$0.83
programs not authorized under the farm bill—such as the
Federal Milk Marketing Orders and dairy tariff-rate
$7.50
$0.30
$0.09
$1.06
quotas—continue. For program details, see CRS Report
$8.00
$0.48
$0.15
$1.36
R43465, Dairy Provisions in the 2014 Farm Bill (P.L. 113-
Source: S. 1603, §728.
79).
Notes: In current law, premiums for coverage over 4 mil ion pounds
are the same as for premiums over 5 mil ion pounds in the proposal.
Joel L. Greene, Analyst in Agricultural Policy
IF10750

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Farm Bill Primer: Dairy Safety Net

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