A Farm Bill That Milks Dairy
by Stephen Barlas

The first thing to note about the Bush administration’s farm bill proposal is that Agriculture Secretary Mike Johanns spent one short paragraph explaining a very limited dairy-reform proposal when he appeared before the Senate Agriculture Committee on February 7.
So the dairy price support, Milk Income Loss Contract (MILC) and milk marketing order programs are very low down on the USDA’s reform agenda.
“The Bush administration punted on dairy,” says Chip Kunde, senior vice president of Washington, D.C.-based International Dairy Foods Association (IDFA). “They moved every other commodity program to a revenue-based, counter-cyclical basis, and made them more compliant with World Trade Organization rules.”
Kunde agrees that the White House has proposed some good changes in the MILC program. “But those do not go far enough,” he argues. The milk price support and milk marketing orders would not change at all.    
The milk price support program is kind of silly when you think about it. The USDA buys mostly nonfat dry milk when milk’s price dips below $9.90 per hundredweight for milk testing 3.67 percent butterfat. But right now, milk prices are high, so not much milk is being purchased.
However, just keeping the program in place hurts dairy product manufacturers, and in two ways. First, few suppliers of such things as high-grade milk protein concentrate are available locally because they are worried the federal government could jump into the market as a competitor at any time. So makers of ice cream and cheese have to go overseas to find some of those types of ingredients.
Second, the World Trade Organization considers milk price supports an unfair federal subsidy, and that makes it harder for the United States to argue for more access to foreign markets for dairy products.
While it is refusing to budge on price supports, the Bush administration would make changes to the MILC program by limiting payments to farmers earning less than $200,000 in adjusted gross income. The current limit is $2.5 million a year. And the size of those payments would decline from 34 percent of the difference between $16.94 per hundredweight and the Class I price in Boston in fiscal 2008 to 20 percent in FY 2013-17.
However, just maintaining the MILC program, even at a reduced level, maintains the crazy relationship between it and the price support program, where the USDA buys heavy quantities of nonfat dry milk, butter and cheese (mostly NFDM) when the price of milk is low at the same time it is making direct payments to those same milk producers via the MILC program. That spells milk price volatility, which is doubly dangerous to proprietary dairy processors because they are not allowed to forward contract with milk suppliers.
Kunde thinks a better safety net for milk producers would be one where the price support program was eliminated entirely, and the MILC program replaced with a different direct payment program based on two components: a milk producer’s revenue, as the administration has proposed to do with other commodity programs, perhaps tied to the number of cows on a farm; and a milk producer’s nutrient management plan.
Another idea is for the USDA to underwrite a milk producer’s income insurance program, as it does for other commodities. Lastly, the USDA could formalize on a national level the pilot program it ran in 2000-04 that allowed cheese and ice cream makers to forward contract for milk.
Instead of endorsing these kinds of farsighted reforms, the Bush administration has proposed a farm bill that will continue to milk dairy processors.
Stephen Barlas has been a full-time freelance Washington editor for business and trade magazines since 1981.