The Dairy Subtitle of the Food,

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The Dairy Subtitle of the Food, Conservation and
Energy Act of 2008
2008 Farm Bill Education Conference Brian W.
Gould Associate Professor Department of
Agricultural. and Applied Economics University of
Wisconsin-Madison July 8, 2008
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http//future.aae.wisc.edu
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Dairy Subtitle of the 2008 Farm Bill

• Dairy Subtitle General Characteristics
• Dairy not the cause of lengthy delay
• In contrast to last 2 Farm Bills
• No major changes from current programs
• Reconciliation of House and Senate versions were
  relatively harmonious
• Delay in enactment benefited dairy interests
• Change in MILC program with more realistic target
  for triggering payments via feed cost adjuster
  added in Conference Committee
• Jesse, Cropp and Gould (2008) Briefing Paper on
  Dairy Subtitle Available from UW Website

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Dairy Product Price Support Program

• Milk Price Support Program (MPSP)
• Established by the Agricultural Act of 1949 and
  used to support manufacturing milk price
• 75-90 parity based on relationship between milk
  price and farm costs over 1910-14
• Parity used in setting support price over
  1950-1981
• Milk price supported by CCC purchases of cheddar
  cheese, NFDM and butter
• 1981 support price was 13.10, 9.90 since 1999
• MPSP Accounted for 25 of WTO Aggregate Measure
  of Support (AMS) for U.S. Agriculture

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Dairy Product Price Support Program

• Dairy Product Price Support Program (DPPSP)
• Under 2008 Farm Bill, MPSP renamed Dairy Product
  Price Support Program
• CCC purchases dairy products to support commodity
  prices not manufacturing milk price
• Support prices
• Cheddar Blocks 1.13 Barrels 1.10
• Butter 1.05 NFDM 0.80
• USDA can sell back CCC inventories
• 110 of current CCC purchase price
• DPPSP is an attempt to reduce dairys
  contribution to the U.S. AMS
• No longer supporting a particular milk price

No Change From 2007 Level
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Dairy Product Price Support Program

• Implications of Supporting Dairy Commodity Prices
• The issue of butter-powder tilts no longer a
  problem
• Butter and NFDM considered joint products
• Under previous program if butter support price ?
  than NFDM support price would be ? in order to
  maintain milk support price
• Allow Sec. of Agriculture to Reduce Support
  Prices
• If CCC 12-month net removals exceed certain
  levels
• A policy option but not required to be undertaken

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Dairy Product Price Support Program
Conditions Under Which Support Prices Can be
Reduced
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Dairy Product Price Support Program

• Implications of Supporting Dairy Commodity Prices
• Low probability that net removals will reach
  levels triggering possible price reductions
• CCC purchase prices are so low ? farm milk prices
  well below cost of production ? supply response
• Except for a few years, CCC annual purchases have
  been well below trigger levels

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Dairy Product Price Support Program
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Milk Income Loss Contract Program

• Milk Income Loss Contract (MILC) Program
• Similar to initial MILC program and subsequent
  MILCX extension
• Differences between new MILC and previous
• A variable target price system established
• Price deficiency payment rate ( of difference
  between target and market price paid)
• The cap on annual eligible milk marketings
• The following table provides a summary of MILC
  program characteristics under 2008 Bill

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Milk Income Loss Contract Program
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Milk Income Loss Contract Program

• Milk Income Loss Contract (MILC) Program
• Major change is the ability to adjust target
  price according to changes in feed cost
• Feed cost Cost of 16 protein dairy ration used
  by USDA in its milk-feed price ratio
• 51 corn, 41 alfalfa hay, 8 soybeans
• National Base Feed Cost is set at 7.35/cwt of
  feed
• Increases to 9.50 in Sept. 2012

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Milk Income Loss Contract Program

• MILC Price Deficiency Rate
• Original MILC payment rate 45 of difference
  between 16.94 and actual Class I Boston price
• MILC-X extension 34 starting in Oct. 2005
• 2008 Farm Bill 45 from Oct. 2008 Aug. 2012
• 34 thereafter
• MILC Annual Eligible Milk Production
• Original MILC Payments limited to 2.4 mil. lbs
• Producers can not opt out of program once
  participation starts
• 2008 Farm Bill Limit ? to 2.985 mil. lbs.

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Milk Income Loss Contract Program

• Eligible Milk Production
• Using 2007 average U.S. milk yield
• 2.400 mil. lb produced by 118 cows
• 2.985 mil. lb produced by 147 cows
• 83 of farms have their entire milk production
  covered by MILC
• Account for 22 of U.S. milk production
• 2,890 additional farms fully covered w/ higher
  limit
• 7.5 billion additional milk covered
• 4 more of both farms and production
• We estimate that 44 of U.S. milk production
  could be covered by new limit

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Milk Income Loss Contract Program
Maximum No. of Cows Covered by MILC Program by
Herdsize
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Milk Income Loss Contract Program

• How is Feed Cost Adjuster Used to Set Target
  Price?
• At the end of each month, USDA calculates
  National Average Dairy Feed Cost
• Compare value with current 7.35 base
• If current average feed cost 7.35
• Calculate difference between current vs. base
• Multiply difference by 0.45
• The resulting used to increase 16.94 Boston
  Class I target
• Spreadsheet Model Available future.aae.wisc.edu/
  collection/software/MILC_Cost_Adjuster.xls

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Milk Income Loss Contract Program

• Feed Cost Adjuster Calculation Example 1
• Based on May 2008 data
• USDAs Agricultural Prices report is data source
• Corn (/bu) 5.12
• Alfalfa (/ton) 177.00
• Soybeans (/bu) 12.30
• ? Dairy ration cost (/cwt) of 9.93
• diff. over base (9.93 7.35)/7.35
  0.3512
• ? MILC target adjuster 0.35120.45 0.16
• New MILC Price Target 1.1616.94 19.65
• May Class I Boston price 16.623.25 19.87
• ? No MILC payment

May Class I Mover
Boston Differential
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Milk Income Loss Contract Program

• Feed Cost Adjuster Calculation Example 2
• We simulate system over August '08 May '09
• Use June 24th futures market data to evaluate
  potential for MILC payments over next 11 months
• Corn, Soybeans and Class III
• Interpolate across months with no futures
• Alfalfa Hay 20 over Aug. '07 through May '08
  values to account for higher costs due to weather
  and flooding conditions

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Milk Income Loss Contract Program
Simulated Feed Costs and MILC Targets Aug.
08-May 09
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Dairy Forward Pricing Program

• Renews the 2000-2004 Pilot Forward Pricing
  Program
• Voluntary program
• Applied to milk marketed under FMMOs
• Does not apply to Class I milk
• Producers continue to be able to receive minimum
  FMMO price if not forward priced
• For handlers not cooperatives, the program
  terminates Sept. 30, 2012
• Contracts allowed to be in effect until Sept. 30,
  2015

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Dairy Export Incentive Program

• Dairy Export Incentive Program (DEIP)
• Authorized by 1985 Farm Bill
• Dairy export subsidy program designed to
• Promote dairy product exports
• Facilitate international market development
• Provide a way to remove surplus dairy products
• Activity level depends on relative international
  dairy product prices
• When U.S. prices above world prices, very active
  subsidy program
• Recently no activity given increased
  international prices

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Federal Milk Marketing Order Amendment Procedures

• Sets Procedures for USDA to Accelerate FMMO
  Hearings
• 30 days after receiving hearing request
• Must issue a timeline for actions that result in
  completion of hearing within 120 days
• Request information from petitioners to use in
  making decision whether to hold a hearing
• Deny the request
• Post-hearing briefs filed within 60 days of
  hearing
• Must issue recommended decision within 90 days of
  deadline for filing post-hearing briefs
• Must issue final decision within 60 days of
  deadline for receiving comments and exceptions to
  decision

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Federal Milk Marketing Order Amendment Procedures

• The Entire Process for Amending an Order
• Would still require at least 1 year under
  expedited rules
• Could be longer if
• USDA requests further information from
  petitioners
• Allows lengthy time for filing comments and
  exceptions to recommended decision

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Federal Milk Marketing Order Review Commission

• Establish an FMMO Review Commission to Review
  Federal and Non-Federal Marketing Order Systems
• Consider legislative and regulatory procedures
  to
• Enhance future competitiveness of dairy products
• Ensure transparency in dairy pricing
• Simply FMMO system
• Evaluate whether FMMOs serve interests of
  producers, processors and consumers
• Determine costs/benefits of adjusting milk
  composition standards
• 14 member commission
• Report within 2 years after 1st meeting.

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Other Legislation

• Dairy Promotion and Research Program
• Reauthorized Dairy Check-Off Program
• Now includes all states, Puerto Rico and D.C
• Authorized 7.5 assessment per milk equivalent
  for imported dairy products
• USDA Reports to Congress Within 90 Days
  Concerning NFDM Price Reporting Procedures and
  Procedure Impacts on FMMO Pricing
• Strengthens Mandatory Reporting of Dairy-Related
  Sales and Inventory
• Establish electronic reporting system

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Contact Information

• Jesse, Cropp and Gould, 2008. Dairy Subtitle
  Food, Conservation and Energy Act of 2008,
  Department of Ag. and Applied Economics, U. of
  Wisconsin
• Univ. of Wisconsin Dairy Marketing
  Website http//future.aae.wisc.edu
• Brian W. Gould
• Dept. of Agricultural and Applied Economics
• [phone]
• bwgould_at_wisc.edu