Dairy Price Support Program

1
Dairy Price Support Program

• Bob Cropp
• Dairy Marketing Policy Specialist
• University of Wisconsin-Madison
• October 9, 2001

2
I will cover

• Brief history of support programlessons learned
• Major issues with the support program
• Price support options---Implications
• Summary

3
History CCC Purchase Type Support Programs

• More than 70 years of history
• Original objective Price Stability
• - At a higher level
• - Seasonally
• Several amendments over time
• 1996 Farm Bill called for termination end of 1999
• -Replaced with recourse loans
• Extended under agricultural appropriation bills
• Wide producer support to continue support program

4
Roots lie in market intervention experiment

• Jan 9, 1930, federal Farm Board made a loan to
  LOL to purchase surplus butter
• -LOL purchased 5 million pounds during the
  spring sold it back in fall at a profit
• Agricultural Adjustment Act of 1933
• - Secretary of Ag authorized LOL to purchase
  surplus butter
• - 11 million pounds/ donated it to Federal food
  program
• - Increases price from 18 cents to 24 cents a
  pound

5
The 1933 Act, as amended, is the authorizing
legislation for the dairy price support program.

• Directs the Secretary of Agriculture to support
  the price of manufacturing grade milk through CCC
  purchases
• In setting the support price, the Secretary of
  Ag. Is
• required to insure an adequate supply of milk.

6
Agricultural Act of 1949

• First formalized support program
• Required Secretary of Ag. to support the price of
  manufacturing grade milk between 75 90 of
  parity.

7
In 1973, Agr. Act of 1949 amended to raise
minimum support price from 75 to 80

• Agricultural and Consumer protection Act of 1977
• - continued 80 of parity minimum
• -support price to be adjusted semi-annually (Oct
  1 and Apr. 1)
• These two Acts shifted the objective from price
  stabilization to income enhancement and as a
  result, was the beginning of problems.

8
Problems

• Cheap feed
• Parity ignored productivity due to genetics and
  management
• Support price went from 4.66 in 1970 to 13.10
  by 1980
• Surplus dairy products
• 1983, CCC purchased 16.8 million pounds of
  surplus milk (12 of marketings) at a cost of
  2.5 billion

9
Figure 1 Federal Dairy Support Price, 1970-2001
14
13
12
11
10
9
Dollars Per Hundredweight
8
7
6
5
4
3
2
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
10
Figure 2 Net Government Expenditures and CCC
Purchases Under Support Program, 1970-2000
3,000
18
16
Net Purchases, Million s
2,500
CCC Purchases, Billion Lbs
14
2,000
12
10
Net Expenditures, Million
CCC Purchases, Billion
Lbs Fat Equiv
s
1,500
8
1,000
6
4
500
2
0
0
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
Year
11
Agricultural Act of 1981

• First major change in support programdeparted
  from parity concept
• Support price would be tied to
• 1. Level of CCC purchases
• 2. Net government costs
• 1982 Omnibus Budget Reconciliation Act
• Established producer assessments

12
1983 Dairy and Tobacco Adjustment Act

• Lowered support to 12.60
• Dairy Diversion Program
• - First, voluntary dairy supply management
  program
• - Operated for 15 months
• Established 15 cents per hundredweight producer
  check-off for generic dairy promotion, research
  and nutrition education

13
The Food Security Act of 1985

• Established dairy policy 1986-1990
• Authorized Dairy Termination Program
• Required 0.25 per hundredweight cuts in support
  level on both 1986 1987
• Formalized a trigger mechanism for changing
  support level in 1988, 1989, and 1990
• - Prior to Jan 1, Secretary of Ag projected CCC
  purchases
• - If exceeded 5 billion pounds, reduce support
  0.50
• - If less than 2.5 billion pounds, increase
  support 0.50

14
The 1990 Farm Bill

• Established support price at 10.10
• The 1996 Farm Bill
• Ended producer assessments
• Initially raised support price to 10.35 and then
  phased down to 9.90 for 1999
• 2000 CCC purchase program terminated and replaced
  by recourse loan program
• And you know the rest of the story.

15
Major Issues

• Volatile and uncertain farm level milk prices
• 9.90 is a modest safety net
• Market forces determine dairy product and farm
  level milk prices most of the time
• For example, BFP/Class III
• 10.88 May 1998
• 17.34 December 1998
• 10.27 February 1999
• 16.26 September 1999
• 9.93 December 1999
• 8.57 November 2000
• 15.45 August 2001

16
Figure 3 BFP/Class III versus Support Price
1970-2001
17
15
13
11
Dollars Per Hundredweight
9
7
Support Price
BFP/CII
5
3
June
Jul-76
Jul-89
Oct-79
Oct-92
Jan-70
Feb-71
Mar-72
Apr-73
Jun-75
Sep-78
Dec-81
Jan-83
Feb-84
Mar-85
Apr-86
Jun-88
Sep-91
Dec-94
Jan-96
Feb-97
Mar-98
Apr-99
May-74
Aug-77
Nov-80
May-87
Aug-90
Nov-93
May-00
17
2) Low milk prices

• Lows in 2000 not seen since late 1970s
• 7 of the 12 months in 2000 the Class III price
  below 9.80 support price (3.5 fat)
• - higher of Class I mover partially isolated
  dairy producers in dominantly Class I markets
• - Two changes changes this
• 1. Jan 2001 higher of skim milk values
• 2. May 2001 butter-powder tilt

18
3) The loss of dairy farms

• Annual increase in production potential greater
  than annual increase in commercial disappearance
• Annual increases of 2 in production per
  cowmeans we need fewer cows
• Often new technologies require a larger farm size
  to justify costmeans fewer dairy farms
• Dairy farm numbers declining at an annual rate of
  4 to 5

19
4) Tilt of manufactured product support levels

• Price tilt Proper tilt between the support price
  of butter versus nonfat dry milk
• Product tilt The support price on butter/powder
  versus cheese
• By-product tilt Recognition of by-product values

20
Price Tilt

• 1990 Farm Bill instructed Secretary of Ag to tilt
  the support price from butter to nonfat dry milk
  to 1) reduce burdensome purchases of butter and
  2) reduce government costs.
• - 4 tilts between April 1990 July 1993
• - Butter price 1.0925 to 0.65
• -Nonfat dry milk price 0.79 to 1.034
• 1996 Agricultural Market Transition Act
  re-authorized butter-powder tilts twice a year as
  necessary
• Burdensome CCC purchases of nonfat dry milk
  developed 1999, but no tilts until May 31, 2001

21
Figure 4 CME Grade AA Butter Price Versus CCC
Purchase Price, 1990-2001
3.00
2.50
CME Grade AA Butter Price
CCC Butter Purchase Price
2.00
Dollars Per Pound
1.50
1.00
0.50
0.00
1/5/90
8/3/90
3/4/91
5/4/92
2/3/97
9/8/97
4/6/98
8/7/00
3/5/01
10/1/91
7/12/93
2/14/94
9/19/94
4/24/95
6/24/96
6/14/99
1/10/00
12/14/92
11/20/95
11/16/98
22
Figure 5 Central States Nonfat Dry Milk Price
versus CCC Purchase Price, 1990-2001
1.40
Central States Nonfat dry milk price
CCC support price
1.30
1.20
1.10
Dollars Per Pound
1.00
0.90
0.80
0.70
1/1/90
1/1/91
1/1/92
1/1/93
1/1/94
1/1/95
1/1/96
1/1/97
1/1/98
1/1/99
1/1/00
1/1/01
23
Figure 6 Government Stocks of Nonfat Dry Milk,
1990-2001
900,000
1998
800,000
1999
700,000
2000
2001
600,000
500,000
Pounds (1000s)
400,000
300,000
200,000
100,000
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
24
Product Tilt

• Used once, 1973
• In establishing CCC purchase prices cheese was
  favored relative to butter/powder
• An additional 0.25 was added to the support
  price for cheese and 0.25 was subtracted for
  butter/powder.
• With utilization of milk for cheese growing, can
  the objective of the support program be better
  achieved with a tilt towards cheese?

25
By-product tilt

• How should by-products be recognized in CCC
  purchase price calculations?
• Should nonfat whey solids be recognized in CCC
  purchase price for cheese?
• Or, should dry buttermilk be recognized in CCC
  purchase price for butter/powder?
• Technology has added value to by-products

26
These tilt questions can

• Influence the utilization of milk and milk
  components
• Have implications to the Class I mover

27
5) Achieving the established support price

• The make allowance issue
• Higher make allowance, higher CCC purchase prices
  and manufacturing profits and vice versa
• Should make allowances for support program be
  identical to those in federal order component
  formulas?
• May 2001, the Secretary of Ag announced new CCC
  purchase prices to reflect make allowances used
  in federal order reform

28
6) Imports of ultra-filtered milk and milk
proteins

• Imports have been growing
• Imports can displace domestic milk products and
  interfere with support program.
• Was one factor in the butter/powder tilt decision.

29
Dairy Price Support Options

• Continuation of current dairy purchase support
  program at 9.90 per hundredweight
• Elimination of the dairy price support program
• A higher but flexible price support program
• A higher fixed price support program

30
Continuation at 9.90

• Modest safety net
• Dairy product and farm level prices continue to
  be volatile and uncertain
• Trends continue
• - fewer and larger dairy operations
• -regional shifts in milk production
• Regional impacts on agribusiness
• Consumers enjoy relatively low but less stable
  prices
• CCC purchases, if appropriate tilts, relatively
  small most yearsnot costly to taxpayers
• Imports and exports remain relatively small

31
What about WTO implications?

• WTO rules score government programs as to impact
  on world trade.
• Green Box programs (conservation programs)
  dont impact trade
• Amber Box programs which are subsidy programs
  linked to production, have potential to distort
  tradethus, amount of money a government can
  spend in amber box is capped.
• Dairy support program contributes to cap by
  difference in world milk price (7.00) and
  support price (9.90)

32
Elimination of support program

• Timing of elimination importantcurrent prices
  above support or near/below support
• Over time, however, not major differences in
  impacts from continuation at 9.90
• Prices a little more volatile and could go a
  little lower
• Farm structural changes and regional shifts in
  milk production perhaps a little faster
• Not much impact on dairy exports, product prices
  stay above world priceshowever, milk powders and
  milk proteins may experience some growth
• No taxpayer cost
• WTO would view this as reducing amber box
  expenditures

33
Higher, but flexible price support

• Support price initially set at higher level
• Secretary of Agr. Would be authorized under a
  trigger mechanism to adjust support price
  upward or downward.
• Would be a major challenge to forecast upcoming
  supply and demand situation and CCC purchases.
• Can provide producers with a higher safety net,
  on the average
• Decline in smaller dairy operations could slow
  but expansion accelerate (some uncertainty,
  however)
• Consumers experience higher but more stable
  prices
• If flexible program successful in avoiding large
  CCC purchases, taxpayer costs low
• Perhaps greater amber box contribution

34
Higher fixed support price

• High support price shifts objective from safety
  net to income enhancementsupport effective
  price.
• If support above 11.50, would be effective farm
  level milk price for some months most years
• An average All Milk Price between 13.00 and
  14.00 will provide an adequate milk supply.
• Burdensome milk surplus would develop
• Taxpayer costs go up
• Consumers pay more but have stable prices
• Higher prices become capitalized into value of
  cows or dairy facilities.

35
Higher fixed continued

• Dairy expansions would accelerate and exiting of
  smaller, higher leveraged or inefficient dairies
  would slow
• Would delay smaller and/or obsolete dairy
  operations from modernization and investing in
  new technologies.
• Regional shifts in milk production would slow but
  continue
• Long run, farm structure will end up in the same
  place as continuation or elimination
• But growth in total U.S. dairy business volume
  would slowreduce domestic consumption, attract
  more imports, reduce exportsDEIP less effective
• WTO implications greater.

36
Summary

• 70 year history of purchase type of support
  program.
• Relatively high support levels run into milk
  surplus problems and high government cost.
• The 9.90 support price provides a modest safety
  net at relatively low taxpayer cost.
• Strong producer interest in continuing the
  support program.

37
Summary continued

• Careful consideration needs to be given to price
  and product tilts, and make allowances.
• Yes, supply management can address surplus and
  cost problems associated with relatively high
  supportScott Brown will discuss the supply
  management issue.
• A support program does have WTO implications.

38
Summary continued

• Higher support levels attract dairy product
  imports---butter, cheese, ultra-filtered milk and
  milk proteins-- and lessen dairy exports.
• A CCC purchase type of support program will not
  preserve the existing dairy farm structure or
  regional shares in milk productionit can only
  influence the rate of change.