Dairy margin proposal would cut spending in a 2013 farm bill, MU economist reports

WASHINGTON – Dairy producers will seek a new safety net when farm bill discussions restart in Congress, said a University of Missouri dairy economist at the recent USDA Agricultural Outlook Forum. Current proposals look more like insurance than price programs of the past.

But with financial binds in Washington, there are no easy answers, said Scott Brown of the MU Department of Agricultural and Applied Economics.

“With rapidly rising feed costs, dairy interest turned to a margin insurance plan,” said Brown. That’s a shift by milk producers from years of price-support programs in the federal act.

One thing is certain: There will be less federal money for any new policy compared to past levels. “Projected CCC (Commodity Credit Corporation) outlays for current dairy policy declines yet again,” Brown said.

He added that it is too early in the 2013 farm bill process to know where dairy policy might fit in.

Congress has many issues to settle before farm bill debate begins, Brown said. “Budget clarity is a big issue.”

With scant money, any federal dairy policy might have little impact in helping producers hard hit by economic turmoil in recent years.

To put dollar power in focus, Brown did the math. Last year, USDA estimated 2012 dairy cash receipts at $37 billion. A billion with a “B.”

For the expected 10-year farm bill, the Congressional Budget Office lays out dairy spending at $28.4 million a year. A million with an “M.”

Dairy spending compared to receipts is less than one percent: Actually, 0.08 percent.

Brown told policy analysts, “An effective program is hard with such small annual outlays.”

Policymakers seek a balance that attracts producers to the program yet doesn’t overspend federal dollars. If the first proposal fails, either way, that means reopening policy talks in 2014 or 2015.

Dairy groups know the situation and propose legislation based on margin protection instead of prices.

“Margin protection helps reduce government outlays,” Brown said. “They are triggered less often than price supports.”

The biggest threat to dairy profits remains high feed costs and price volatility, Brown said. Margins help producers, as that is what is left to pay all costs, beyond feed.

Margin protection is based on milk price less feed costs. The feed costs and milk production are negatively correlated. That is, as feed costs go up, producers tend to feed less. That cuts milk production. In turn, milk prices turn upward.

Economic adjustment by milkers helps ease demand on federal dollars.

For policymakers, calculating margin protection will be tricky, Brown said. Margins have fallen in recent years. That raises the question of the “correct” margin to use in the dairy bill.

Some margin proposals from 2012 could have led to surplus milk.

“We need to be careful to use correct triggers,” he added. “These are tough issues to score. It’s the difference between spending millions—or billions.

“Program details are always important,” Brown said. “This new margin program has many facets. But, done right, producers gain program flexibility.”

Like insurance, producers would gain options to buy supplemental coverage. This is both important and attractive to producers.

Dairy groups were first to come forth with plans to stabilize dairy prices—and reduce federal spending.

Both dairy producers and manufacturers were talking policy before farm bill work started in Congress. However, none of the spending-cut proposals made it into discussions in the congressional fiscal cliff vote.

“Dairy proposals represent a major policy shift. Change of this nature will be hard,” Brown said. “We should never lose sight that our goal is an adequate safety net for farmers.”

Visuals for the outlook are on Brown’s website at web.missouri.edu/~browndo in the MU Division of Applied Social Sciences, a unit of the College of Agriculture, Food and Natural Resources.