The federal dairy farm “safety net” needs some patches, dairy economists and a dairy cooperative leader told a House subcommittee recently.
The Margin Protection Program for Dairy (MPP-Dairy) garnered attention on Capitol Hill as the House Agriculture Committee wrapped up a series of six “Focus on the Farm Economy” hearings in late May. Hosted by the Subcommittee on Livestock and Foreign Agriculture, a “View from the Barnyard on the Farm Economy” hearing included input from dairy industry representatives.
Dr. Scott Brown, agricultural Extension economist at the University of Missouri, described the current dairy situation to put MPP-Dairy in context. The University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) analyzes potential consequences of policy changes at the farm level.
“One thing is clear when looking at the financial picture of the livestock sector; the highs have been breathtakingly high while the lows have been desperately low,” said Brown.
Specific to dairy, farmers received a record-high average milk price of $25.70 per hundredweight in September 2014. The latest USDA Agricultural Prices report estimates that the March 2016 U.S. all-milk prices fell to $15.30 per hundredweight. Given current domestic and global conditions, further declines will occur, pressuring milk prices to levels that have not been experienced since early 2010.
While the dairy industry wrestles with its inability to turn the spigot off when milk markets suggest supply contraction is needed, there’s growing concern that MPP-Dairy is not providing a strong enough safety net, Brown said. He conceded, however, that building a strong safety net within constraints of a tight federal budget is difficult.
The Congressional Budget Office estimates fiscal year 2016 (FY 2016) dairy Commodity Credit Corporation expenditures at $42 million. USDA estimates dairy cash receipts will total $33.2 billion in 2016, a drop of more than $16 billion from 2014.
“Identifying a safety net program for dairy producers that can moderate a $16 billion drop in cash receipts yet only cost $42 million to the federal government is a large challenge,” Brown said.
MPP-Dairy has come under scrutiny as milk prices and dairy farmer returns fall. One of the criticisms of the program is that the current level of the MPP-Dairy margin, which measures the U.S. all-milk price less feed cost, is not representative of what dairy producers face today, he explained.
“The reduction in feed costs as represented by national corn, soybean meal and alfalfa prices has resulted in the MPP margin falling far less than the decline in national milk prices,” Brown said. “Many producers have reported their financial situation has eroded much faster than the MPP-Dairy margin has declined.”
Current corn and soybean meal price volatility, price variation around the country and the disconnection between feed cash costs and the costs to produce those crops have also resulted in differing regional impacts.
Coefficients used to determine the national average feed cost under MPP-Dairy may also play a role, Brown said. During the program’s development, a National Milk Producers Federation (NMPF) task force constructed dairy rations made up of corn, corn silage, soybean meal and alfalfa. According to Brown, those original coefficients were reduced 10 percent to reduce the MPP-Dairy program cost during 2014 Farm Bill debate. The effect was to lessen the effect of feed prices on the overall MPP formula.
U.S. milk supplies are going to continue to increase, perhaps well into 2017, Brown said. Global demand and strengthening U.S dairy exports will be needed to move dairy market prices higher. Strong domestic demand must continue as well.
“Federal dairy policies must address the added volatility that comes as a result of more emphasis on global markets,” Brown said.
Part of the issue also requires a change in mindset on the part of dairy farmers, who must learn MPP-Dairy’s role is focused on margin risk management, as opposed to setting a milk price floor common under previous federal dairy policies, he said.
U.S. Rep. Collin Peterson (D-Minnesota), ranking member of the House Ag Committee, said all avenues must be explored, including moving the program’s administration to USDA’s Risk Management Agency.
Collin, who marshaled MPP-Dairy through the 2014 Farm Bill debate, emphasized the program was an insurance program, and not a government payment program.
“If we get a situation with $10 milk and we have the kind of participation we have going on right now, it’s going to be a disaster,” he said.
Mooney: MPP-Dairy adjustments needed
Dairy farmer Randy Mooney, Rogersville, Missouri, agreed MPP-Dairy was in need of adjustment.
Mooney, who serves as chairman of both the NMPF and Dairy Farmers of America (DFA), urged the House Ag Committee to work with NMPF to reassess how MPP-Dairy can be improved.
Dairy farmers are facing the worst global turndown in milk prices since 2009, Mooney said. The difficult economic conditions and tighter operating margins over the last ten years have resulted in the loss of more than 18,000 U.S. dairy farms.
“I fear the present environment of depressed market prices could result in even more farm closures,” Mooney said. ”USDA projects the 2016 U.S. all-milk price to average $14.85 per hundredweight. If realized, this price would represent a milk price decline of nearly 40 percent from 2014, and is second only to 2009 in terms of low milk prices over the last decade. For a small family farm milking 100 cows, this price decline equates to a farm revenue decline of approximately $200,000.”
“We remain confident that improvements can be made by the Congress to this still-evolving program,” Mooney said. Recent USDA administrative changes will enhance the MPP’s flexibility and make it more useful, he added.
Read: USDA announces Margin Protection Program for Dairy improvements
In 2015, U.S. dairy producers paid $73 million in premiums and fees to USDA, while USDA only paid out $700,000 under the program. This year, dairy farmers have paid in another $23 million.
“Our experience to date is that MPP is not completely fulfilling its intended objective as an effective safety net,” he said. “For many farmers, the MPP is simply not enough to protect them in this economic environment.”
Like Brown, Mooney suggested the feed cost adjustment made by Congress when approving the 2014 Farm Bill is at least partially to blame.
“One change reduced the feed cost component of the margin so the current formula no longer reflects the true cost of feeding a herd. Second, while the feed cost component was changed, farmer premiums did not (and some were even adjusted upward), when they should have been changed to accommodate the reduced feed component. MPP has been less effective as a result,” Mooney said.
The failure of adjusted feed cost calculations to trigger adequate indemnity payments in 2015 sent the wrong signal to dairy farmers, Mooney said.
“In 2015, many farmers saw that the MPP didn’t pay out much, even at the highest levels of coverage. So in 2016 they opted for the least expensive – and minimal – level of coverage available. Had Congress not reduced the feed ration, more farmers would have seen benefits in 2015 and participated at higher levels this year,” he said.
Dr. David P. Anderson, professor and livestock economist with the Texas A&M University, College Station, Texas, said the presence of an adequate dairy safety net is critical.
In partnership with FAPRI, Texas A&M’s Agricultural and Food Policy Center (AFPC) maintains information and economic modeling for 20 representative dairy farms in 10 states.
Based on January 2016 baseline price projections through 2020, dairy profitability will continue to be pressured by falling prices as production has not yet declined significantly in response to lower returns. As a result, more than half of the representative dairy farms are expected to end the baseline period in marginal or poor condition. PD
PHOTO: Randy Mooney (center), Missouri dairy farmer and chairman of both the National Milk Producers Federation (NMPF) and Dairy Farmers of America (DFA), urged the House Ag Committee to work with NMPF to reassess how MPP-Dairy can be improved. Courtesy of National Milk Producers Federation
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