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

 Dairy Subtitle General Characteristics  Dairy not the cause of lengthy delay In contrast to last 2 Farm Bills 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 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 Dairy Subtitle of the 2008 Farm Bill

 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 % parity based on relationship between milk price and farm costs over Parity used in setting support price over Parity used in setting support price over  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 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 Support prices Cheddar: Blocks $1.13 Barrels $1.10 Cheddar: Blocks $1.13 Barrels $1.10 Butter: $1.05NFDM: $0.80 Butter: $1.05NFDM: $0.80  USDA can sell back CCC inventories ≥ 110% of current CCC purchase price ≥ 110% of current CCC purchase price  DPPSP is an attempt to reduce dairy’s contribution to the U.S. AMS No longer supporting a particular milk price No longer supporting a particular milk price Dairy Product Price Support Program No Change From 2007 Level

 Implications of Supporting Dairy Commodity Prices  The issue of butter-powder tilts no longer a problem Butter and NFDM considered joint products 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 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 Dairy Product Price Support Program

Product 12-Month Net Removal Triggers Maximum Per Lb. Decrease Cheddar Cheese Cheddar Cheese > 200 mil. lbs and 200 mil. lbs and < 400 mil. lbs10¢ > 400 mil. lbs 20¢ Butter Butter > 450 mil. lbs and 450 mil. lbs and < 650 mil. lbs10¢ > 650 mil. lbs 20¢ Nonfat Dry Milk > 600 mil. lbs and 600 mil. lbs and < 800 mil. lbs5¢ > 800 mil. lbs 10¢ Conditions Under Which Support Prices Can be Reduced

 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 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 Except for a few years, CCC annual purchases have been well below trigger levels Dairy Product Price Support 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 A variable target price system established Price deficiency payment rate (% of difference between target and market price paid) Price deficiency payment rate (% of difference between target and market price paid) The cap on annual eligible milk marketings The cap on annual eligible milk marketings  The following table provides a summary of MILC program characteristics under 2008 Bill Milk Income Loss Contract Program

CharacteristicValue Base Class I Boston ($/cwt) Class I Payment Rate (%) Oct. 1, 2007 – Sept. 30, 2008 Oct. 1, 2008 – Aug. 31, 2012 After Aug. 31, National Average Dairy Feed Cost ($/cwt) Jan. 1, 2008 – Aug. 31, 2012 After Aug. 31, Feed Cost Adjustment Rate (%) 45 Annual Payment Quantity Limit (1,000 lbs) Oct. 1, 2007 – Sept. 30, 2008 Oct. 1, 2008 – Aug. 31, 2012 After Aug. 31, ,4002,9852,400 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 Feed cost: Cost of 16% protein dairy ration used by USDA in its milk-feed price ratio 51% corn, 41% alfalfa hay, 8% soybeans 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 Increases to $9.50 in Sept 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  2008 Farm Bill: 45% from Oct – Aug % thereafter 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 mil. lbs. Milk Income Loss Contract Program

 Eligible Milk Production  Using 2007 average U.S. milk yield mil. lb produced by 118 cows mil. lb produced by 118 cows mil. lb produced by 147 cows 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 Account for 22% of U.S. milk production  2,890 additional farms fully covered w/ higher limit 7.5 billion additional milk covered 7.5 billion additional milk covered 4% more of both farms and production 4% more of both farms and production  We estimate that 44% of U.S. milk production could be covered by new limit Milk Income Loss Contract Program

Herd Size (No. of Cows) No. of Herds % of Herds % of Milk Prod. Avg. Prod/Cow (lbs/Year) Max Cows Covered by 2.4 Mil. Lb. Limit Max Cows Covered by Mil. Lb. Limit , , , , , , , , , , , , ,000-1, , , All Herds 71, , Milk Income Loss Contract Program Maximum No. of Cows Covered by MILC Program by Herdsize

 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 Calculate % difference between current vs. base Multiply % difference by 0.45 Multiply % difference by 0.45 The resulting % used to increase $16.94 Boston Class I target The resulting % used to increase $16.94 Boston Class I target  Spreadsheet Model Available: future.aae.wisc.edu/collection/software/MILC_Cost_Adjuster.xls Milk Income Loss Contract Program

 Feed Cost Adjuster Calculation Example #1  Based on May 2008 data  USDA’s Agricultural Prices report is data source Corn ($/bu): $5.12 Corn ($/bu): $5.12 Alfalfa ($/ton): $ Alfalfa ($/ton): $ Soybeans ($/bu): $12.30 Soybeans ($/bu): $12.30  → Dairy ration cost ($/cwt) of $9.93  % diff. over base = ($9.93 – $7.35)/$7.35 =  → MILC target adjuster = *0.45 = 0.16  New MILC Price Target = 1.16*$16.94 = $19.65  May Class I Boston price: $ = $19.87 → No MILC payment → No MILC payment Milk Income Loss Contract Program May Class I Mover Boston Differential

 Feed Cost Adjuster Calculation Example #2  We simulate system over August ′08 – May ′09  Use June 24 th futures market data to evaluate potential for MILC payments over next 11 months Corn, Soybeans and Class III Corn, Soybeans and Class III Interpolate across months with no futures 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 Milk Income Loss Contract Program

Simulated Feed Costs and MILC Targets: Aug. 08-May 09 Date Corn ($/bu) Soy ($/bu) Hay ($/ton) Feed Cost ($/cwt) Feed Cost – Target ($/cwt) % Diff Over Target MILC Target ($/cwt) Class I Mover Target ($/cwt) Projected Class I Mover ($/cwt) Aug Sep Oct Nov Dec Jan Feb Mar Apr May

 Renews the Pilot Forward Pricing Program  Voluntary program  Applied to milk marketed under FMMO’s  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 Contracts allowed to be in effect until Sept. 30, 2015 Dairy Forward Pricing Program

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

 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 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 Request information from petitioners to use in making decision whether to hold a hearing Deny the request 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 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 USDA requests further information from petitioners Allows lengthy time for filing comments and exceptions to recommended decision Allows lengthy time for filing comments and exceptions to recommended decision Federal Milk Marketing Order Amendment Procedures

 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 Enhance future competitiveness of dairy products Ensure transparency in dairy pricing Ensure transparency in dairy pricing Simply FMMO system Simply FMMO system Evaluate whether FMMO’s serve interests of producers, processors and consumers Evaluate whether FMMO’s serve interests of producers, processors and consumers Determine costs/benefits of adjusting milk composition standards Determine costs/benefits of adjusting milk composition standards  14 member commission  Report within 2 years after 1 st meeting. Federal Milk Marketing Order Review Commission

 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 Other Legislation

Contact Information  Jesse, Cropp and Gould, Dairy Subtitle: Food, Conservation and Energy Act of 2008, Department of Ag. and Applied Economics, U. of Wisconsin  Univ. of Wisconsin Dairy Marketing Website:  Brian W. Gould Dept. of Agricultural and Applied Economics