Dairy Policy Issues

Order Code RL33475 Dairy Policy Issues Updated May 2, 2007 Ralph M. Chite Specialist in Agricultural Policy Resources, Science, and Industry Division Dairy Policy Issues Summary Two federal programs that support the price and income received by dairy farmers are expiring in 2007 — the dairy price support program and the Milk Income Loss Contract (MILC) program. The reauthorization of these and other farm commodity price and income support programs is being debated by the 110th Congress in the context of a pending omnibus 2007 farm bill. The MILC program allows participating dairy farmers to receive a government payment when the farm price of milk used for fluid consumption falls below an established target price. The MILC program is generally supported by milk producer groups in the Northeast and the Upper Midwest. Large farmers, particularly in the West, contend that the program payment limit is biased against them. In its original authorization in the 2002 farm bill (P.L. 107-171), the MILC program was scheduled to expire in 2005. However, the FY2006 budget reconciliation act (P.L. 109-171) extended MILC program authority for two years, through September 30, 2007. As a cost-saving measure, P.L. 109-171 prohibits any MILC payments for the last month (September 2007). Under budget rules, this means that the program will have no baseline budget spending allocated to it beyond its expiration date. The conference agreement on the FY2007 supplemental appropriations bill (H.R. 1591), which was vetoed by the President on May 1, 2007, would have amended the authorizing statute to allow MILC payments to be made in September 2007, thus creating baseline beyond its expiration date. A similar provision could be included in a future compromise supplemental measure. The dairy price support program indirectly supports the farm price of milk at $9.90 per hundredweight (cwt.) until December 31, 2007, through government purchases of surplus dairy products from dairy processors. In order to achieve the support price, USDA has a standing offer to dairy processors to purchase surplus manufactured dairy products at stated prices. Consequently, the government purchase prices usually serve as a floor for the market price of these products, which in turn indirectly supports the farm price of milk at $9.90 per cwt. Government purchases and costs have been relatively small in recent years. Most dairy farm groups view the program as a necessary safety net in a market that is frequently characterized by volatile prices. Dairy processors consider the price support and MILC programs to operate at cross-purposes, which they say contributes to surplus milk production. Others are concerned that dairy support might have to be modified in order to comply with our trade obligations in the World Trade Organization. On January 31, 2007, the Administration released a comprehensive 2007 farm bill proposal that included recommendations for both the dairy price support program and the MILC program. The Administration supports the extension of the price support program at the current level of $9.90 per cwt., viewing the program as a lowcost stabilizing influence on farm milk prices. It also supports a continuation of MILC payments at the current target price of $16.94 per cwt. In order to defray the cost of MILC program extension, the Administration recommends that the payment rate be gradually reduced over a five-year period. Annual payments to any producer would continue to be restricted to 2.4 million lbs. under the proposal. Contents Milk Income Loss Contract (MILC) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 MILC Program Mechanics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 MILC Payment History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Federal Cost of MILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 MILC Issues in the 2007 Farm Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 MILC Provisions in the Vetoed FY2007 Supplemental . . . . . . . . 5 Administration’s Farm Bill Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Regional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Dairy Price Support Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Farm Bill Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Federal Milk Marketing Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Milk Regulatory Equity Act (P.L. 109-215, S. 2120) . . . . . . . . . . . . . . . . . . 9 Regulation of Certain Interstate Milk Shipments . . . . . . . . . . . . . . . . 10 Producer-Handler Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Nevada Exclusion from Federal Milk Marketing Orders . . . . . . . . . . 11 List of Tables Table 1. Monthly Milk Income Loss Contract (MILC) Payment Rates . . . . . . . . . 3 Table 2. MILC Payments Ranked by State, FY2003-FY2007 . . . . . . . . . . . . . . . . 4 Table 3. Dairy Price Support Purchases and Costs, 1980/81-2006/07 . . . . . . . . . 8 Dairy Policy Issues Milk Income Loss Contract (MILC) Payments Background In FY1999-FY2001, Congress provided just over $32.5 billion in emergency spending for USDA programs, primarily to help farmers recover from low farm commodity prices and natural disasters. The majority of these funds were for supplemental direct farm payments made to producers of certain commodities, primarily grains and cotton, but also including soybeans, peanuts, tobacco, and milk. Of this amount, dairy farmers received supplemental “market loss” payments of $200 million in FY1999 under the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (P.L. 105-277), $125 million under the FY2000 agriculture appropriations act (P.L. 106-78), and $675 million under the emergency provisions in the FY2001 agriculture appropriations act (P.L. 106-387). Some dairy farmer groups sought a permanent direct payment program for dairy farmers to be included in the 2002 farm bill as a means of supplementing dairy farm income when farm milk prices are low. Prior to the emergency payments made each year on an ad-hoc basis in FY1999 through FY2001, dairy farmers generally were not recipients of direct government payments. However, some groups contended that farm milk prices had been volatile in recent years and that dairy farmers needed more income stability. Separately, the Northeast Dairy Compact, which provided price premiums to New England dairy farmers when market prices fell below a certain level, expired on September 30, 2001. These premiums were funded by assessments on fluid milk processors, whenever fluid farm milk prices in the region fell below $16.94 per hundredweight (cwt.). Supporters of the Northeast Compact had sought for an extension of the compact; the southeastern states were seeking new authority to create a separate compact. However, dairy processors and Upper Midwest producers strongly oppose regional compacts. MILC Program Mechanics Section 1502 of the Farm Security and Rural Investment Act of 2002 (P.L. 107171, the 2002 farm bill) authorized a new counter-cyclical national dairy market loss payment program. (Upon implementation, USDA dubbed the program the Milk Income Loss Contract (MILC) program.) This program did not replace the dairy price support program or federal milk marketing orders, other current federal milk pricing policy tools. Instead, it was created as an alternative to regional dairy compacts and ad-hoc emergency payments to farmers, by authorizing additional federal payments when farm milk prices fall below an established target price. Authority for the MILC program expired on September 30, 2005, as required by the CRS-2 2002 farm bill. However, the Deficit Reduction Act of 2005 (P.L. 109-171, S. 1932, enacted February 8, 2006) authorized a two-year extension of the program until September 30, 2007. (See “MILC Program Reauthorization” below for details.) Under the MILC program, dairy farmers nationwide are eligible for a federal payment whenever the minimum monthly market price for farm milk used for fluid consumption in Boston falls below $16.94 per hundredweight (cwt.). In order to receive a payment, a dairy farmer must enter into a contract with the Secretary of Agriculture. Under the original farm bill authority, a producer received a payment equal to 45% of the difference between the $16.94 per cwt. target price and the market price, in any month that the Boston market price falls below $16.94. As a cost-saving measure, P.L. 109-171 reduced the payment rate from 45% to 34% effective for MILC payments in any month from October 2005 through August 2007. Under the law, a producer can receive a payment on all milk production during any month, but no payments are made on any annual production in excess of 2.4 million pounds per dairy operation. The MILC program is akin to the Northeast Dairy Compact, which was in effect in the six New England states from 1997 until its expiration on September 30, 2001. However, under the expired dairy compact, dairy processors were required to pay the full difference between the $16.94 per cwt. fluid milk target price and any market price shortfall for fluid use milk in the compact region. The MILC program shifted the responsibility of the payment from the processor (and ultimately the consumer) to the federal government. Although the MILC program originally expired on September 30, 2005, and was not extended until several months after that date, P.L. 109-171 allowed for USDA to make MILC payments retroactively for December 2005 through May 2006. For FY2006, USDA accepted applications in two phases. Eligible milk producers had until May 17, 2006 to sign up for payments to begin with one of the retroactive payment months (December 2005 through May 2006). After May 17, retroactive payments were no longer available, and a producer could only choose to begin receiving payments in the current month or a future month. (For a USDA fact sheet on the extended MILC program, referred to as the MILC-X program, see [http://165.221.16.19/dafp/psd/MILC.htm]). MILC Payment History USDA began accepting applications for the original MILC Program on August 15, 2002. (See Table 1 for MILC payment history.) Monthly market prices were sufficiently low between December 2001 and August 2003 that MILC payments were made in every month during this period. Beginning in the late summer months of 2003, market farm milk prices greatly improved, rebounding from a 25-year low that prevailed throughout most of the early months of 2003. Hence, no MILC payments were required in September through December 2003. However, farm milk prices began to decline again in the latter part of 2003. Consequently, MILC payments resumed in January and February 2004. Market farm milk prices reversed their course in the late winter months and early spring of 2004, increasing to record high levels by the spring of 2004. Market prices remained sufficiently high from May 2004 through May 2005 so that no MILC payments were required over that time period. Market prices declined to the point that a small MILC payment ($0.03 per CRS-3 cwt.) was made for June 2005 milk production, the only payment that was made in all of FY2005. However, market prices declined in late 2005, triggering payments in each month from December 2005 through February 2007, which to date is the last month that MILC payments have been required. Table 1. Monthly Milk Income Loss Contract (MILC) Payment Rates December 2001 January 2002 Payment (per hundredweight) $0.77 $0.78 February 2002 March 2002 $0.78 $0.93 March 2004 April 2004 $0.79 $0.02 April 2002 May 2002 June 2002 July 2002 August 2002 September 2002 $1.00 $1.09 $1.20 $1.38 $1.45 $1.45 May 2004-May 2005 June 2005 July-November 2005 December 2005 Jan.-Feb. 2006 March 2006 $0.00 $0.03 $0.00 $0.04 $0.105 $0.41 October 2002 November 2002 December 2002 January 2003 February 2003 March 2003 April 2003 $1.59 $1.39 $1.43 $1.41 $1.56 $1.75 $1.82 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 $0.84 $0.925 $1.00 $0.80 $0.925 $0.965 $0.43 May 2003 June 2003 $1.79 $1.78 November 2006 December 2006 $0.44 $0.43 July 2003 August 2003 Sept.- Dec. 2003 $1.76 $1.22 $0.00 January 2007 February 2007 March-May 2007 $0.03 $0.10 $0.00 Month Month January 2004 February 2004 Payment (per hundredweight) $0.83 $0.95 Source: USDA, Agricultural Marketing Service (AMS). Federal Cost of MILC For the first 4½ years of the MILC program, its cumulative cost was just under $2.5 billion — $1.8 billion in FY2003, $221 million in FY2004, $8.8 million in FY2005, $350.5 million in FY2006, and $114.7 million to date in FY2007. The FY2003 total includes two fiscal years worth of payments, since retroactive payments for FY2002 were made over the course of FY2003. FY2004 and FY2005 outlays were significantly lower because market farm milk prices were much stronger than in the two previous years, reaching a record high in the summer of 2004. Five states have accounted for just over one-half of the total payments made over the time period (see Table 2). CRS-4 Table 2. MILC Payments Ranked by State, FY2003-FY2007 FY2003 Wisconsin $372,042,880 New York 169,423,978 Pennsylvania 160,673,846 Minnesota 147,400,075 California 122,764,930 Michigan 75,828,865 Ohio 68,772,479 Iowa 60,686,427 Texas 38,793,821 Vermont 40,826,421 Idaho 33,211,800 Missouri 36,267,942 Illinois 34,170,687 Washington 30,869,213 Indiana 30,180,470 Kentucky 31,094,215 Virginia 29,876,611 Tennessee 24,469,076 South Dakota 20,355,578 Maryland 18,132,857 Oregon 16,295,432 Utah 15,782,707 Georgia 15,764,327 Kansas 15,747,021 North Carolina 15,395,265 Nebraska 14,835,308 Puerto Rico 12,388,197 New Mexico 11,493,657 Oklahoma 12,519,405 Louisiana 11,430,924 Florida 9,783,286 Maine 10,250,302 Colorado 8,754,312 Arizona 7,641,285 North Dakota 8,964,621 Mississippi 8,916,963 Arkansas 7,499,823 Massachusetts 6,877,027 Connecticut 6,143,097 New Hampshire 5,095,796 Montana 4,901,714 South Carolina 4,779,476 Alabama 4,286,766 West Virginia 3,942,927 New Jersey 4,012,708 Nevada 2,014,582 Delaware 1,768,299 Wyoming 1,015,120 Hawaii 407,366 Rhode Island 451,901 Alaska 350,368 Virgin Islands 100,347 TOTAL 1,795,452,502 FY2004 $41,754,746 17,222,870 19,263,582 15,946,997 25,142,045 8,799,034 7,550,599 6,512,172 6,282,787 4,389,019 5,496,523 3,426,748 3,818,084 5,064,507 3,510,016 3,364,755 2,895,202 2,545,783 2,148,893 1,774,254 2,178,087 2,027,249 1,930,999 1,775,859 1,766,672 1,588,040 4,222,742 2,825,129 1,307,138 1,066,703 1,761,420 984,845 1,537,030 1,526,600 1,111,814 880,166 665,206 625,496 699,449 515,693 519,903 529,781 512,368 459,851 373,719 351,358 184,425 101,807 117,018 36,430 26,291 7,723 221,125,627 FY2005 $1,369,537 383,632 1,352,555 286,412 1,186,734 316,507 194,479 236,348 199,362 138,325 371,276 128,206 158,274 111,841 214,743 96,648 324,527 62,281 31,015 161,405 35,910 -18,216 31,078 57,526 35,218 121,518 381,336 127,273 50,983 31,415 31,601 13,481 52,001 163,838 56,389 66,520 27,202 8,973 8,509 11,031 21,112 52,581 3,719 13,707 2,101 25,597 2,947 2,655 46,913 390 358 83 8,789,854 FY2006 $71,838,550 32,257,023 27,082,715 27,169,579 34,913,717 15,563,328 11,922,216 11,629,909 9,024,192 8,126,455 8,719,484 6,204,901 6,144,976 7,539,782 5,255,495 4,508,582 5,174,178 3,853,946 3,738,836 3,184,670 4,036,387 3,419,809 3,136,152 2,765,443 2,764,319 2,544,254 966,771 3,354,332 1,958,338 1,517,821 2,342,573 1,904,303 2,051,322 2,138,679 1,291,575 1,189,543 1,011,333 1,113,219 1,145,967 973,494 1,023,945 914,359 593,777 614,441 596,928 589,067 310,154 205,252 52,150 58,558 35,340 8,682 350,480,820 FY2007 Total $23,906,505 510,912,218 10,605,556 229,893,059 10,659,170 219,031,867 9,941,499 200,744,562 10,878,010 194,885,436 5,234,795 105,742,529 4,117,464 92,557,237 4,216,210 83,281,065 2,833,816 57,133,978 2,358,159 55,838,379 1,699,743 49,498,825 1,954,645 47,982,442 2,098,120 46,390,142 1,855,240 45,440,583 1,548,957 40,709,680 1,553,071 40,617,271 1,588,842 39,859,361 1,389,069 32,320,156 1,073,656 27,347,977 919,536 24,172,721 1,163,919 23,709,736 742,235 21,953,784 1,041,666 21,904,223 822,813 21,168,662 662,802 20,624,275 857,155 19,946,274 1,006,833 18,965,879 1,095,265 18,895,657 597,487 16,433,350 449,378 14,496,240 677,334 14,596,214 585,737 13,738,668 595,154 12,989,820 540,790 12,011,193 514,520 11,938,920 370,512 11,423,703 242,656 9,446,219 294,619 8,919,334 307,292 8,304,314 306,335 6,902,350 239,646 6,706,320 275,777 6,551,974 131,026 5,527,655 173,187 5,204,113 233,424 5,218,879 56,619 3,037,224 132,339 2,398,163 50,521 1,375,356 13,763 637,210 24,271 571,550 14,114 426,472 0 116,835 114,651,255 2,490,500,058 CRS-5 MILC Issues in the 2007 Farm Bill Funding. The 2002 farm bill required the MILC program to expire on September 30, 2005, while all other major farm commodity support programs authorized by the farm bill are scheduled to expire at the end of the 2007 crop year. Proponents of the MILC program wanted program expiration to coincide with the expiration of all other commodity support programs. Hence, a provision in the FY2006 omnibus reconciliation act (P.L. 109-171, S. 1932) extends the MILC program through September 30, 2007. It also reduces the MILC payment rate so that a recipient receives 34% of the difference between the target price and the lower market price, instead of the 45% payment rate in the recently expired program. This payment rate reduction is effective from October 2005 through August 2007. The payment rate was reduced as a budget-saving measure in order to keep the two-year estimated cost of program extension just below $1 billion. (CBO estimated the two-year cost of the provision at $998 million, compared with $1.2 billion if the program had been extended without the payment rate reduction.) Also, in order to minimize the cost of program extension, P.L. 109-171 reduced the MILC payment rate to 0% in September 2007, the last month of program authority. This means that when the 2007 farm bill is formulated, the MILC program will have no baseline budget spending allocated to it beyond August 2007. This does not necessarily preclude the possibility of the MILC program being extended in the 2007 farm bill. However, if the total spending allocated to the farm bill is no greater than the baseline budget, the cost of the MILC program might have to be offset with reductions in spending in other farm bill programs. MILC Provisions in the Vetoed FY2007 Supplemental. The conference agreement on the FY2007 Iraq war supplemental (H.R. 1591), which was vetoed by the President on May 1, 2007, would have amended the MILC authorizing statute so that MILC payments could be made at the current payment rate of 34% through September 30, 2007. This effectively would have created a budget baseline for the MILC program beyond its expiration date. CBO estimates that the projected total cost of the MILC program is approximately $1.24 billion for FY2008-FY2012, which is the expected timeframe of the next farm bill, or $2.4 billion over 10 years (FY2008-FY2017). If the language in the conference agreement is eventually adopted, these amounts would be added to the baseline budget, thus giving the agriculture committees the needed funds to extend the MILC program, or they could apply the funding to other initiatives. Administration’s Farm Bill Proposal. On January 31, 2007, the Administration released a comprehensive 2007 farm bill proposal that included several recommendations for the MILC program. The Administration supports a continuation of MILC payments at the current target price of $16.94 per cwt. In order to defray the cost of MILC program extension, the Administration recommends that the payment rate be gradually reduced over a five-year period. It proposes maintaining the payment rate at the current level of 34% through FY2008, and then reducing it to 31% in FY2009, 28% in FY2010, 25% in FY2011, 22% in FY2012, and 20% in FY2013-FY2017. Annual payments per operation would continue to be restricted to 2.4 million lbs. under the proposal. It also would base payments on CRS-6 historical production rather than current production in order to forestall potential challenges to the program in the World Trade Organization. Regional Issues. Since its inception, the MILC program has been generally supported by milk producer groups in the Northeast and the Upper Midwest. Producer groups in the Northeast region viewed it as an alternative to the Northeast dairy compact. Upper Midwest producers preferred the new program to state compacts since the new program shares the price premiums nationally. Large dairy farmers have expressed concern that the MILC program causes excess milk production that in turn decreases market farm milk prices. They contend that this negatively affects their income, since their annual production is well in excess of the 2.4 million lb. payment limit, and any production in excess of 2.4 million pounds receives the market price and no federal payments. (Annual production of 2.4 million pounds is roughly equal to the annual production of a herd of approximately 120 to 130 dairy cows.) Dairy Price Support Program The Agricultural Act of 1949 first established the dairy price support program by permanently requiring USDA to support the farm price of milk. Since 1949, Congress has regularly amended the program, usually in the context of multi-year omnibus farm acts and budget reconciliation acts. (See Table 3, below, for a recent history of spending on the dairy price support program and related activities.) Most recently, Section 1501 of the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, the omnibus 2002 farm bill) authorized a 5½-year extension of the program through December 31, 2007, at the then-current support price of $9.90 per hundredweight (cwt.) of farm milk. Reauthorization of the program will be debated in the context of a new omnibus farm bill this year. Historically, the supported farm price for milk is intended to protect farmers from price declines that might force them out of business and to protect consumers from seasonal imbalances of supply and demand. USDA’s Commodity Credit Corporation (CCC) supports milk prices by its standing offer to purchase surplus nonfat dry milk, cheese, and butter from dairy processors. Government purchases of these storable dairy products indirectly support the price of milk for all dairy farmers. Prices paid to the processors are set administratively by USDA at a level that should permit them to pay dairy farmers at least the federal support price for their milk. In order to achieve the support price of $9.90 per cwt. of milk, USDA has a standing offer to processors to purchase surplus manufactured dairy products at the following prices: $1.05 per lb. for butter, $0.80 for nonfat dry milk, $1.1314 per lb. for block cheddar, and $1.1014 per lb. for barrel cheese. Whenever market prices fall to the support level, processors generally make the business decision of selling surplus product to the government rather than to the marketplace. Consequently, the government purchase prices usually serve as a floor for the market price, which in turn indirectly supports the farm price of milk at $9.90 per cwt. CRS-7 Government purchases of surplus dairy products have been relatively small since late 2003, as market prices have remained above the support price during that period. In the early 1980s, the support price was $13.10 per cwt. and government purchases peaked at $2.6 billion in 1983. A gradual decline in the support price to the current level of $9.90 has significantly reduced the cost of the program from peak levels. (See Table 3 for a history of government purchases and costs since the 1981 marketing year.) Farm Bill Issues At issue in Congress this year is whether the dairy price support program should be extended beyond its December 31, 2007, expiration date. Funding is available in the budget baseline to extend the program at the current $9.90 per cwt. level of support. In its January 31, 2007, farm bill proposal, the Administration recommended the extension of the program, viewing it as a low-cost stabilizing influence on farm milk prices. It stated that many dairy producers see the need for a floor to be kept under farm milk prices to maintain an adequate milk supply and provide a safety net. Dairy processor groups have expressed concern that the dairy price support program in combination with MILC payments work at cross-purposes, by artificially stimulating milk production and causing persistent surpluses. They also question whether having the government as a guaranteed buyer of surplus products discourages investment to produce dairy ingredients (e.g. milk protein concentrates) that are increasingly in demand in the market. Separately, some policymakers are concerned that because of the way domestic price support programs are viewed under our trade obligations in the World Trade Organization (WTO), modifications to dairy support might be required under a new trade agreement. Although federal outlays for the dairy price support program have been relatively small (under $100 million) in recent years (see Table 3), the WTO measures the level of support differently. Under our current trade obligations, the aggregate measure of support for dairy is based on how much higher the domestic support price is set above a fixed world reference price, and this imputed subsidy is applied to all domestic milk production. Using this formula, the WTO views the aggregate measure of support for the dairy price support program to be more than $4.5 billion annually, and classifies it as “amber box” or the most trade-distorting category. The current U.S. proposal in the Doha Round is to reduce its total amber box support from the current $19.1 billion to $7.6 billion. With dairy support such a large percentage of the proposed new maximum, some have expressed interest in shifting future policy away from price support to some type of WTO-compliant direct payment that is decoupled from price and production. CRS-8 Table 3. Dairy Price Support Purchases and Costs, 1980/81-2006/07 Marketing Yeara Net Removals Milk Equivalent (billion lbs.)b 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 12.7 13.8 16.6 10.4 11.5 12.3 5.4 9.7 9.6 8.4 10.4 10.1 7.6 4.2 2.9 0.1 0.7 0.7 0.3 0.8 0.3 0.2 0.5 NA NA NA NA Net Outlays (million $) 1,975 2,239 2,600 1,597 2,181 2,420 1,238 1,346 712 505 839 232 253 158 4 -98 67 291 280 569 465 622 699 74 - 104 60 22 CCC Support Price ($ per cwt.) 13.10 13.49-13.10 13.10 13.10-12.60 12.60-11.60 11.60 11.60-11.35 11.10-10.60 10.60-11.10 10.60-10.10 10.10 10.10 10.10 10.10 10.10 10.10-10.35 10.20 10.20-10.05 10.05-9.90 9.90 9.90 9.90 9.90 9.90 9.90 9.90 9.90 CCC Purchases as Percentage of Production 9.6 10.2 12.0 7.6 8.2 8.5 3.8 6.7 6.7 5.7 7.0 6.7 5.0 2.8 1.8 0.1 0.4 0.4 0.2 0.5 0.2 0.1 0.3 NA NA NA NA Source: U.S. Department of Agriculture, Farm Service Agency, selected publications. a. The marketing year is October 1-September 30. b. The milk equivalent is the pounds of fluid milk used to manufacture cheese and butter, on a milkfat basis. NA = Not Available CRS-9 Federal Milk Marketing Orders Background The farm price of approximately two-thirds of the nation’s fluid milk is regulated under federal milk marketing orders. Federal orders, which are administered by the U.S. Department of Agriculture (USDA), were instituted in the 1930s to promote orderly marketing conditions by, among other things, applying a uniform system of classified pricing throughout the market. Some states, California for example, have their own state milk marketing regulations instead of federal rules. Producers delivering milk to federal marketing order areas are affected by two fundamental marketing order provisions: the classified pricing of milk according to its end use, and the pooling of receipts to pay all farmers a blend price. Proponents of federal orders argue that orders are necessary because dairy farmers have a competitive disadvantage vis-à-vis dairy handlers (processors) when it comes to determining prices that farmers receive for their raw, perishable milk. Federal orders regulate handlers who sell milk or milk products within a defined marketing area by requiring them to pay not less than established minimum class prices for the Grade A milk they purchase from dairy producers, depending on how the milk is used. This classified pricing system requires handlers to pay a higher price for milk used for fluid consumption (Class I) than for milk used in manufactured dairy products such as yogurt, ice cream, and sour cream (Class II products), cheese (Class III), and butter and dry milk products (Class IV products). These differences between classes reflect the different market values for the products. Blend pricing allows all dairy farmers who ship to the market to pool their milk receipts and then be paid a single price for all milk based on order-wide usage (a weighted average of the four usage classes). Paying all farmers a single blend price is seen as an equitable way of sharing revenues for identical raw milk directed to both the higher-valued fluid market and the lower-valued manufacturing market. Manufactured class (Class II, III and IV) prices are the same in all orders nationwide and are calculated monthly by USDA based on current market conditions for manufactured dairy products. The Class I price for milk used for fluid consumption varies from area to area. Class I prices are determined by adding to a monthly base price, a “Class I differential” that generally rises with the geographical distance from milk surplus regions in the Upper Midwest, the Southwest, and the West. Class I differential pricing is a mechanism designed to ensure adequate supplies of milk for fluid use at consumption centers. The supply of milk may come from local supplies or distant supplies, whichever is more efficient. However, local dairy farmers are protected by the minimum price rule against lower-priced milk that might otherwise be hauled into their region. Milk Regulatory Equity Act (P.L. 109-215, S. 2120) On April 11, 2006, the President signed into law the Milk Regulatory Equity Act (P.L. 109-215, S. 2120), which addressed several federal milk marketing order issues relevant to the western United States. Among the milk marketing order issues CRS-10 addressed in H.R. 4015/S. 2120 are (1) the regulation of fluid milk processors who operate a plant in a federal order area, are not regulated by that order, and ship packaged milk into a state marketing order (not a federal order); (2) the regulation of fluid processors who produce, package and distribute their milk, also known as producer-handlers or producer-distributors; and (3) the exclusion of Nevada from federal milk marketing orders. Regulation of Certain Interstate Milk Shipments. P.L. 109-215 affects any processor (handler) of Class I (fluid-use) milk who operates a plant that is located in a federal milk marketing order area, is not regulated by the federal order because it has no sales in the federal marketing area, and has packaged fluid milk deliveries to a state that is regulated by a state marketing order. Such a plant is not currently paying a regulated price for the raw milk that is used for these dispositions or sales. The bill would require any such processor to pay into the federal order pool the minimum federal milk marketing order price for the raw milk that went into the shipments sold into the state order. This provision is targeted at a large fluid processor who is located in Yuma, Arizona (which is part of the Arizona-Las Vegas milk marketing order area), but ships all of its packaged milk into California. Under current law and regulations, this plant’s interstate shipments to California are not regulated by either the Arizona-Las Vegas order or the California state order. This provision is supported by other processors and milk producers who contend that this processor’s current exclusion from paying the minimum regulated price is a “loophole” in the current federal order system, which they say provides that processor with an unfair price advantage. Opponents of this provision contend that it would adversely affect their operations and raise the price of milk to consumers. They also contend that Congress and USDA should hold hearings on the issue before any legislative changes are considered. Producer-Handler Exemption. As defined by USDA, producer-handlers are dairy farmers who process milk from their own cows in their own plants and market their packaged fluid milk and other dairy products themselves. Producer-handlers sometimes are referred to as producer-distributors, or P-Ds. Producer-handlers may sell products directly to consumers through their own stores, directly to consumers on home-delivery routes, or to wholesale customers such as food stores, vendors, or institutions. Current regulations exempt producer-handlers from the minimum price requirements of federal milk marketing orders, but minimal reporting is required. P.L. 109-215 requires the full regulation of any producer-handler with distribution of fluid milk in the Arizona-Las Vegas order area in excess of 3 million pounds in the previous month. The act primarily affects the same producer-handler in Arizona that is affected by the interstate milk shipment provision discussed above. Meanwhile, USDA has published a final regulation effective April 1, 2006, that establishes a 3 million lb. per month route disposition limit for a producer-handler exemption, both in the Pacific Northwest and the Arizona-Las Vegas order areas. The final USDA regulation affects at least three large producer handlers in the Pacific Northwest, as well as the Arizona producer-handler. (For USDA’s final rule, see [http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/ CRS-11 2006/06-1587.htm].) The Arizona producer-handler (Hein Hettinga) is challenging the new USDA regulation in court. The producer-handler provision is a separate issue from the provision above relating to the interstate shipment of milk, but with similar implications. Producers of regulated milk want this unregulated milk to become regulated so it will increase the blend price received by all regulated dairy farmers. Regulated processors contend that it is unfair that they have to pay the regulated price while certain handlers are exempt. The producer-handlers who would become regulated argue that this is a tax being placed on independent family farms that would ultimately result in higher prices to consumers. Nevada Exclusion from Federal Milk Marketing Orders. Section 760 of the FY2000 agriculture appropriations act (P.L. 106-78) was intended to remove Clark County, Nevada from the Las Vegas-Arizona federal milk marketing order area so that the only handler in this county would be subject to the lower Nevada state order price for fluid milk. However, the enacted provision was phrased in a way that did not completely remove Clark County from the federal order system. The enacted language exempted any plant operating in Clark County from being subject to any federal milk marketing order. However, it did not remove Clark County from the Arizona-Las Vegas milk marketing order area. This means that milk that is currently shipped from California to Clark County is partially regulated and compensatory payments to the Arizona-Las Vegas order are required. Hence, a provision in P.L. 109-215 completely removes the state of Nevada from the marketing area definition of any order, which supporters say would end the required compensatory payments paid by California milk shippers and allow all of Nevada to be joined together in the state order.