Dairy Policy in the 2007 Farm Bill
Ed JesseUW-Madison/Extension
Dairy Policy in the 2007 Farm Bill:
Constraints
Budget
Trade Negotiations
Federal Budget Receipts and Expenditures, Constant (2000) Dollars
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
*20
07*20
08*20
09*
Fiscal Year
$Bill
ion
*Congressional Budget Office Projections, April 2006
Receipts
Expentitures
Composition of Federal Budget Expenditures, FY2005 (Billion Dollars)
Net interest180
Mandatory1,295Defense*
506
Other Discretionary430
*Includes Homeland Security. Source: Congressional Budget Office
Government Farm Program Expenditures
0
5
10
15
20
25
30
35
1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007E
$Bill
ion
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
$Bill
ion
FY 2006 and 2007 areApril 2006 projections
U.S. WTO Proposalon Agricultural Trade Reform
• Market access:– Cut tariffs 55 to 90 percent– No tariff greater than 75 percent
• Export Subsidies:– Eliminate completely by 2013
• Domestic support:– Reduce “Amber Box” subsidies by 60 percent
United States Permitted Aggregate Measure of Support (AMS) Under WTO
0
2
4
6
8
10
12
14
16
18
20
Current U.S. Proposal
$Bill
ion
Dairy
All OtherCommodities
Dairy Policy in the 2007 Farm Bill:
Options
• Mandatory Supply Control?– No way
• Voluntary Supply Control?– CWT will continue, but no government program like
Milk Diversion or Whole Herd Buyout
• Compacts?– Interest, but opposition too strong
Dairy Policy in the 2007 Farm Bill:Options
• MILC?– Not in current form
• Milk Price Support Program?– Maybe, especially if Farm Bill completed before new
WTO agreement is completed
• Countercyclical payments?– Maybe, depends on details
Milk Price SupportsVersus
Dairy Countercyclical Payments
CongressPolitical
MilkSupport
Price
USDAMechanical*
ProductPurchase
Prices
Operation of Milk Price Support Program
$9.90/Cwt. @ “Average” BF$9.80/Cwt. @ 3.5% BF
Butter: $1.05/Lb.Nonfat Dry Milk: $0.80/Lb.Block Cheddar: $1.1314Barrel Cheddar: $1.1014
*Exception: Allocation of butter-powder value (tilts)
Dairy Price Support Program:How its Supposed to Work
$9.80
Market Price
Support Price
Dairy Price Support Program:How it Actually Works
$9.80
Market Price
Support Price
$8.57
Class III, Class IV, and Support Prices
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
21.00
22.00Ja
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prM
ay Jun
Jul
Aug Se
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ov Dec
Jan
Feb
Mar
Apr
May Jun
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Aug Se
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ov Dec
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pO
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May Jun
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Feb
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May Jun
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Aug Se
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ov Dec
2000 2001 2002 2003 2004 2005 2006
$/C
wt.
Class IIIClass IVSupport Price @ 3.5% BF
Block Cheddar Cheese Prices: NCE minus CCC
-0.13
-0.12
-0.11
-0.10
-0.09
-0.08
-0.07
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0.00
1/3/20
00
4/2/20
00
7/1/20
00
9/29/2
000
12/28
/2000
3/28/2
001
6/26/2
001
9/24/2
001
12/23
/2001
3/23/2
002
6/21/2
002
9/19/2
002
12/18
/2002
3/18/2
003
6/16/2
003
9/14/2
003
12/13
/2003
3/12/2
004
6/10/2
004
9/8/20
04
12/7/
2004
3/7/20
05
6/5/20
05
9/3/20
05
12/2/
2005
3/2/20
06
5/31/2
006
$/L
b
Weeks since January 1, 2000 when Chicago Mercantile Exchange price fell below CCC purchase price
Can the Milk Price Support Program Work under Current Marketing Conditions?
• The assumption is that a large number of cheese plants make independent sales decisions.
• The reality is that a small number of large block and barrel plants have their entire volume of production committed to an even smaller number of buyers.
• Can the Milk Price Support Program survive a 60 percent reduction in permitted AMS?
Should the Milk Price Support Program Work under Current Marketing Conditions?
• Support program distorts prices for dairy products, especially nonfat dry milk. Creates fictitious market for powder and impedes developing capacity to produce other milk protein products with demonstrated demand (e.g., MPC).
• “Higher of” pricing for fluid milk results in the CCC sometimes setting fluid milk prices.
• USDA has authority to alter butter and nonfat dry milk purchase prices, but is unwilling to take the political heat.
Countercyclical Payments: A Better Alternative?
• Elements:
1) Set Target price in reference to Class III Price
2) 100 percent of monthly deficiency paid to all producers. No production caps.
3) Use payment limitation applicable to other farm programs ($50,000 annual limit)
Countercyclical Payments: A Better Alternative?
• Advantages:
1) Eliminates market distortions – milk moves to its highest and best use.
2) Promotes domestic production of MPC, other forms of milk protein, and other dairy products.
3) Promotes Exports
4) Provides absolute level of support
5) Reduces or eliminates the likelihood of the Class IV price moving the Class I price
Countercyclical Payments: A Better Alternative?
• Questions:
Would program stimulate production, even with low target price? ($10.00 - $10.50 Class III price is not profitable anywhere.)
At what levels would commodity markets clear without CCC purchases? (Doesn’t matter to producers, who are protected by payments)
Would processors lowball producer prices because direct payments would keep producers whole? (Cooperatives should be able to prevent this from happening.)
Countercyclical Payments: A Better Alternative?
• Questions (Continued):
Would cheese buyers lowball cheese prices? (May be possible in the short run, but with a payment limitation, the resulting producer pay price would force contraction in milk production and a market adjustment.)
Would such a program be WTO-legal? (Would add to AMS, but much less than the milk price support program. Would add even less if payments were decoupled from historical production).
Would such a program be a budget-buster? (Unlikely unless 2002-03 reoccurs.)
Month Target Price
($/cwt)
Class I Mover ($/cwt)
Def. Payment ($/cwt)
Mo. Prod.
(Mil Lbs)
Max MILC Payment ($Mil)
Oct '02 13.69 10.15 1.5930 13,897 221 Nov 13.69 10.60 1.3905 13,499 188 Dec 13.69 10.52 1.4265 14,247 203
Jan '03 13.69 10.56 1.4085 14,595 206 Feb 13.69 10.23 1.5570 13,444 209 Mar 13.69 9.81 1.7460 15,048 263 Apr 13.69 9.64 1.8225 14,642 267 May 13.69 9.71 1.7910 15,014 269 Jun 13.69 9.74 1.7775 14,340 255 Jul 13.69 9.77 1.7640 14,264 252 Aug 13.69 10.97 1.2240 14,024 172 Sep 13.69 13.71 0.0000 13,473 0
Total Maximum Cost 2,504 Total Actual Cost 1,148 Maximum Farm
Payment ($) 43,740
How much would it Cost?MILC Cost – FY2003
How much would it Cost?Countercyclical – FY2003
Imputed Countercyclical Payments, FY2003
Target Price (Class III Reference) $/cwt
$10.00 $10.50 $11.00 $11.50 Total Program Cost ($Mil)
MILC 1,148 1,148 1,148 1,148
Countercyclical:
No Payment Limitation 195 646 1,340 2,126
$50,000 Payment Limit 195 535 937 1,263
How Much would Farmers Get?Countercyclical – FY2003 with $50K Limit
Imputed Countercyclical Payments, FY2003
Target Price (Class III Reference), $/cwt
$10.00 $10.50 $11.00 $11.50 MILC
Total Farm Payment ($)
100 cows 2,006 6,712 14,028 22,324 26,398 200 cows 4,339 14,519 30,343 48,286 35,000 500 cows 11,442 38,282 50,000 50,000 35,000 1,000 cows 25,855 50,000 50,000 50,000 35,000
Farm Payment per cwt ($)
100 cows 0.11 0.37 0.78 1.23 1.46 200 cows 0.11 0.37 0.78 1.23 0.89 500 cows 0.11 0.37 0.48 0.48 0.34 1,000 cows 0.11 0.21 0.21 0.21 0.15
MILC Maximum payment based on 2.4 million pounds times average payment rate for FY2003