Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

 

February 11, 2002

 

Headline:  Senate Passes Farm Bill with Dairy Title

·        Uses counter cyclical payments

·        Extends price supports

·        Extends DEIP

·        New Johne’s Program

 

The National Milk Producers Federation (NMPF), a trade group that represents dairy cooperatives, announced the U.S. Senate passed a Farm Bill this week (www.nmpf.org).  The bill contains a dairy title that is very different from the House version.  The actual language of the Senate bill, which would reflect all of the various amendments, is not yet available.  According to NMPF, the dairy title includes:

·        Extending the dairy price support program at the current $9.90/cwt. level;

·        Authorizing a new national Johne's disease control program;

·        Extending the Dairy Export Incentive Program (DEIP);

·        Increasing Market Access Program (MAP) funds;

·        Fixing the statutory mandatory inventory and price reporting language by the USDA, and;

·        Requiring dairy importers to pay into the National Dairy Board for promotion and research projects.

 

The bill is unique in that it contains a counter-cyclical program that would provide direct payments to dairy producers whenever the price of milk falls below a certain level.  The payments, made on a hundredweight basis, are capped on the first 8 million pounds of milk a farm produces in a single year.  How many cows does 8 million pounds represent?  That’s equivalent to a farm with 400 cows producing 20,000 pounds of milk per cow per year.  Farms that ship more than 8 million pounds of milk a year would receive the same payment as the 400-cow farm.

 

According to NMPF, there are actually two counter-cyclical payment programs, depending on where a producer lives.  One program is for producers located in the 12 Northeast states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and West Virginia.  This program provides a federal payment each month equal to 45 percent of the positive difference between $16.94 and the Boston Class I price.  Thus the federal order Class I price--which rises and falls with market forces--is unaffected by this new program. 

 

For example, suppose the Class I price of milk in Boston in a given month is $15.94 per cwt.  The program payment would be equal to $0.45 (($16.94 - $15.94) X 0.45).  No program payments are made if the monthly Class I price for milk in Boston exceeds $16.94 per cwt.  Producers under this program face the same annual production caps outlined above (8 million pounds per farm per year).  The program also has a budget ceiling of $500 million over a 4-year period.

 

The other program is for the rest of the U.S.  It provides counter cyclical payments to producers whenever the all-milk price in any given quarter falls below a rolling 5-year average price.  The payment rate is equal to 40 percent of the amount by which the average price of milk in a given quarter falls below the average price of milk for the same quarter during the previous 5 years.  So, if the all-milk price in the current quarter is $13 per hundredweight (cwt) and the 5-year average all-milk price for the same quarter was $15 per cwt, the payment rate would be $0.80 per cwt (($15 - $13) X* 0.4).

 

The Senate version, since it is so different than the House version, is scheduled to go to conference where the differences will be worked out.  Thus at this stage, it is unclear how the final bill will turn out.

 

An economic analysis of this dairy title (previously called the “Daschle Compromise) is available on my website:

http://dairyoutlook.aers.psu.edu/reports/SenateDairyBill.pdf