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

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2004

2005

2006

*

2007

*

2008

*

2009

*

Fiscal Year

$Bil

lion

*Congressional Budget Office Projections, April 2006

Receipts

Expentitures

Composition of Federal Budget Expenditures, FY2005 (Billion Dollars)

Net interest180

Mandatory1,295

Defense*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

$Bil

lion

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

$Bil

lion

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

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22.00Ja

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May

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2000 2001 2002 2003 2004 2005 2006

$/C

wt.

Class III

Class IV

Support 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

1/3/2

000

4/2/2

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7/1/2

000

9/29

/2000

12/2

8/200

0

3/28

/2001

6/26

/2001

9/24

/2001

12/2

3/200

1

3/23

/2002

6/21

/2002

9/19

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12/1

8/200

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3/18

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6/16

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9/14

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12/1

3/200

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/2005

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5/31

/2006

$/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