Minnesota-Wisconsin Dairy Policy Minnesota-Wisconsin Dairy Policy Conference- 2011 Rochester, MNConference- 2011 Rochester, MN

Steve EtkaSteve EtkaMidwest Dairy CoalitionMidwest Dairy Coalition

““USDA Dairy Industry Advisory USDA Dairy Industry Advisory Committee Recommendations: Committee Recommendations: Budget and Political Feasibility” Budget and Political Feasibility”

Political ConstraintsPolitical Constraints

We’ve heard how bleak federal budget We’ve heard how bleak federal budget picture is for next Farm Bill. picture is for next Farm Bill.

But how is Congress responding, and But how is Congress responding, and what are the political realities that govern what are the political realities that govern and limit policy responses?and limit policy responses?

Should Dairy Legislation Move Should Dairy Legislation Move Before Farm Bill?Before Farm Bill?

Will Congress do a pre-farm bill dairy reform Will Congress do a pre-farm bill dairy reform package or include dairy in the 2012 Farm Bill?package or include dairy in the 2012 Farm Bill?Pros of pre-FB dairy package:Pros of pre-FB dairy package:– Congress can focus on dairy before getting bogged Congress can focus on dairy before getting bogged

down in the larger Farm Bill processdown in the larger Farm Bill process– Dairy lead the way for other commoditiesDairy lead the way for other commodities

Cons: Cons: – But doing dairy early, will other commodities ask for But doing dairy early, will other commodities ask for

the same, thus diluting support for Farm Billthe same, thus diluting support for Farm Bill– Is dairy ready to go?Is dairy ready to go?

NMFP Foundation for the Future as NMFP Foundation for the Future as Starting PointStarting Point

NMPF Board passed the Foundation for NMPF Board passed the Foundation for the Future “package of concepts… as the the Future “package of concepts… as the basis for future direction in federal dairy basis for future direction in federal dairy policy.”policy.”

Now the process has shifted to Congress, Now the process has shifted to Congress, and other voices and perspectives enter and other voices and perspectives enter the process as well.the process as well.

Dairy Industry Advisory Committee Dairy Industry Advisory Committee

DIAC proposal is one of those other DIAC proposal is one of those other perspectives that is now part of that perspectives that is now part of that discussion.discussion.

DIAC faced some political constraints that DIAC faced some political constraints that NMPF did not face, but are more similar to NMPF did not face, but are more similar to constraints faced by Congress. DIAC constraints faced by Congress. DIAC represented broader set of interests. represented broader set of interests.

Political Constraints of DIAC Political Constraints of DIAC Similar to Those of CongressSimilar to Those of Congress

Because DIAC committee represented all Because DIAC committee represented all regions, and also represented producer regions, and also represented producer processor and retailer views, their processor and retailer views, their proposals should be very relevant to proposals should be very relevant to Congress, which also has to balance all of Congress, which also has to balance all of those interests. those interests.

DIAC “sausage making” not unlike DIAC “sausage making” not unlike Congress’ process. Congress’ process.

Noteworthy DIAC Votes and Noteworthy DIAC Votes and RecommendationsRecommendations

DIAC has 23 Recommendations, some DIAC has 23 Recommendations, some more substantive and noteworthy than more substantive and noteworthy than others. others. Many of the recommendations are vague Many of the recommendations are vague and give a lot of wiggle room for and give a lot of wiggle room for interpretation.interpretation.A few of the recommendations jump out, A few of the recommendations jump out, and deserve much more attentionand deserve much more attention

MILC program/NMPF Margin MILC program/NMPF Margin Program: Hybrid?Program: Hybrid?

““Continue MILC, with a production cap Continue MILC, with a production cap based on available funds, with two based on available funds, with two important modifications: (1) use an all-milk important modifications: (1) use an all-milk income/feed cost margin trigger, and (2) income/feed cost margin trigger, and (2) provide an insurance program for provide an insurance program for production excluded by the cap to provide production excluded by the cap to provide protection for larger producers.” (DIAC protection for larger producers.” (DIAC recomm. #11)recomm. #11)

Counter-Cyclical Assistance:Counter-Cyclical Assistance:To Cap or Not to Cap?To Cap or Not to Cap?

Huge Policy Decision Facing CongressHuge Policy Decision Facing Congress

NMPF says “no way” to any payment limits or NMPF says “no way” to any payment limits or caps on counter-cyclical assistance. caps on counter-cyclical assistance.

DIAC, budget hawks, and many producer groups DIAC, budget hawks, and many producer groups argue for caps and continued targeting of argue for caps and continued targeting of counter-cyclical program assistance.counter-cyclical program assistance.

Which direction will Congress take?Which direction will Congress take?

DIAC proposed a compromise between NMPF DIAC proposed a compromise between NMPF margin insurance concept and MILC conceptmargin insurance concept and MILC concept

Based on 2010 statistics from NASS:Based on 2010 statistics from NASS:

88% of U.S. dairy farms have herds of 200 88% of U.S. dairy farms have herds of 200 or fewer cows, but only had 26 percent of or fewer cows, but only had 26 percent of nation’s milk productionnation’s milk production

In contrast, 2.7 % of US dairy farms have In contrast, 2.7 % of US dairy farms have herds over 1000 cows, but the produce 48 herds over 1000 cows, but the produce 48 percent of the nation’s milk. percent of the nation’s milk.

Structure U.S. Dairy Herds: 2010

17.6%

24.8%

13.8%12.7% 13.0%

15.5%

32.5%

1.2%1.5%2.8%

6.4%

32.0%

11.3%10.4%

3.5%

1.1%

0%

5%

10%

15%

20%

25%

30%

35%

1 to 29 30 to 49 50 to 99 100 to 199 200 to 499 500 to 999 1,000 to1,999

2,000 plus

Number of cows

Pe

rce

nt

% herds by number of cows% milk by number of cows

Are We Supporting Farmers or Are We Supporting Farmers or Milk?Milk?

Congress has a clear policy decision Congress has a clear policy decision about whether to maximize support to about whether to maximize support to dairy farmers, or to every last drop of milk. dairy farmers, or to every last drop of milk.

Is the problem in the dairy industry that we Is the problem in the dairy industry that we are losing milk production, or that we are are losing milk production, or that we are losing dairy farmers? losing dairy farmers?

What is the problem that Congress seeks What is the problem that Congress seeks to address?to address?

In past, Congress has focused on In past, Congress has focused on providing a safety net for dairy producers, providing a safety net for dairy producers, not for dairy production. not for dairy production. Growth management discussion is Growth management discussion is evidence that our problem is that we have evidence that our problem is that we have periods of too MUCH milk, resulting in periods of too MUCH milk, resulting in great volatility in dairy producer profit great volatility in dairy producer profit margins, with negative effects on farm margins, with negative effects on farm viabilityviability

Focus First on Safety Net for Bulk Focus First on Safety Net for Bulk of Dairy Farmersof Dairy Farmers

Ideally, given budget constraints, Ideally, given budget constraints, Congress would focus its scarce Congress would focus its scarce resources on meeting needs of 90 percent resources on meeting needs of 90 percent of dairy farmers. of dairy farmers. Then find a way to deal with the unique Then find a way to deal with the unique problems of the top 10-15 percent of problems of the top 10-15 percent of farms, who may not be adequately farms, who may not be adequately addressed by core counter-cyclical addressed by core counter-cyclical program.program.

NMFP Margin Program Shifts NMFP Margin Program Shifts Focus to Top 10-15% of FarmsFocus to Top 10-15% of Farms

Relative to past focus of Congress, the Relative to past focus of Congress, the NFMP Margin program concept, because NFMP Margin program concept, because of its unlimited/uncapped structure, would of its unlimited/uncapped structure, would shift focus toward needs of the top 10-15% shift focus toward needs of the top 10-15% of farms. of farms.

To cover all of milk, NMFP margin To cover all of milk, NMFP margin program dilutes support to average sized program dilutes support to average sized dairy farms. dairy farms.

If you compare MILC program assistance If you compare MILC program assistance over 2002-2009 timeframe with the over 2002-2009 timeframe with the assistance that would have been provided assistance that would have been provided under NMPF base margin insurance under NMPF base margin insurance program, it demonstrates the dilemma program, it demonstrates the dilemma faced by Congress.faced by Congress.

If NMPF Margin Program (base If NMPF Margin Program (base level) Had Been in Place vs. level) Had Been in Place vs. MILC Program (2002-2009)MILC Program (2002-2009)

100-cow herd farm 100-cow herd farm – would have received $59,000 would have received $59,000 lessless in in

assistance over periodassistance over period

1000-cow herd farm1000-cow herd farm– would have gained $159,000;would have gained $159,000;

10,000-cow herd farm 10,000-cow herd farm – would have gained $2.665 million over periodwould have gained $2.665 million over period

Big Payments to a Few Farms;Big Payments to a Few Farms;Significant Cuts to Most FarmsSignificant Cuts to Most Farms

If the NMPF margin program had been in If the NMPF margin program had been in place instead of MILC program in 2009 place instead of MILC program in 2009 alone, an average 10,000 cow farm would alone, an average 10,000 cow farm would have received $2.7 million in payments.have received $2.7 million in payments.

Average 100-cow herd would have Average 100-cow herd would have received $27,000 in assistance. received $27,000 in assistance.

Is this Politically Feasible?Is this Politically Feasible?

Is it politically feasible to cut assistance to Is it politically feasible to cut assistance to most dairy farms in order to fund most dairy farms in order to fund uncapped assistance to the top 10-15 uncapped assistance to the top 10-15 percent of farms?percent of farms?The DIAC answered “no” to that question, The DIAC answered “no” to that question, and recommended an improved MILC and recommended an improved MILC program, with an additional insurance program, with an additional insurance option for those few farms exceeding the option for those few farms exceeding the MILC cap. MILC cap.

Ongoing Safety Net or Ongoing Safety Net or Catasphrophic Only Program?Catasphrophic Only Program?

Will Congress Choose a Program that Kicks in Will Congress Choose a Program that Kicks in Rarely, or a Program with On-going Assistance?Rarely, or a Program with On-going Assistance?

Whereas MILC kicked in at times of low prices Whereas MILC kicked in at times of low prices throughout the 2002-2009 period, NMPF margin throughout the 2002-2009 period, NMPF margin program (base program) would have only kicked program (base program) would have only kicked in during 2009, had it been in place in during 2009, had it been in place

But when Margin Program does kick in, it does But when Margin Program does kick in, it does so in a BIG wayso in a BIG way

NMPF Foundation for the Future Milk Price - Feed Cost Margins and Margin Triggers

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$/C

wt

MILC v. FFF $4 Margin Target

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$/C

wt

MILC

$4 FFF Margin

MILC v. FFF $6 Margin Target

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$.C

wt

MILC

$6 FFF Margin

MILC v. FFF $8 Margin Target

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$/C

wt

MILC

$8 FFF Margin

It was with this analysis in mind that the It was with this analysis in mind that the DIAC called for a hybrid between MILC DIAC called for a hybrid between MILC and NMPF Margin Programand NMPF Margin ProgramKeep MILC with a capKeep MILC with a capBut trigger MILC based on margin levels But trigger MILC based on margin levels instead of price instead of price Institute buy-up or other insurance option Institute buy-up or other insurance option for farms that exceed the cap, for the for farms that exceed the cap, for the portion of their milk over the capportion of their milk over the cap

What Would that Buy Up Option What Would that Buy Up Option Look Like?Look Like?

If Congress takes DIAC’s advice, what If Congress takes DIAC’s advice, what would buy-up option look like?would buy-up option look like?Options-Options-– Improved LGM-Dairy Insurance option? A Improved LGM-Dairy Insurance option? A

few months ago, USDA instituted changes in few months ago, USDA instituted changes in program to make it more user friendly. program to make it more user friendly. Participation has increased significantly as a Participation has increased significantly as a result.result.

– MILC buy-up insurance option, with premiums MILC buy-up insurance option, with premiums subsidized on a sliding scale?subsidized on a sliding scale?

Federal Order ReformFederal Order Reform

Federal Orders Have Always been the 3Federal Orders Have Always been the 3rdrd Rail of Dairy Policy PoliticsRail of Dairy Policy Politics

In late 1990s regional fights in Congress In late 1990s regional fights in Congress over FMMO and Dairy Compacts Nearly over FMMO and Dairy Compacts Nearly Shut Down the GovernmentShut Down the Government

Since that Time, Congress has Since that Time, Congress has Aggressively Avoided Legislation on Aggressively Avoided Legislation on Federal Orders as has the IndustryFederal Orders as has the Industry

NMPF FMMO Plan Reignites NMPF FMMO Plan Reignites Old Tensions Old Tensions

Original Goals of NMPF Foundation for the Original Goals of NMPF Foundation for the Future Plan for Federal Order ReformFuture Plan for Federal Order Reform– Get rid of cumbersome end-product pricing Get rid of cumbersome end-product pricing

formulas, because system “creates winners formulas, because system “creates winners and losers… even between cooperatives”and losers… even between cooperatives”

– Replace with a competitive-pay based Replace with a competitive-pay based system that compensates producers fairly, system that compensates producers fairly, reduces volatility and avoids sending distorted reduces volatility and avoids sending distorted market signals.market signals.

Hard to Argue with original Federal Order Hard to Argue with original Federal Order Reform Goals Laid out by NMPFReform Goals Laid out by NMPFBut final FMMO Reform Proposal approved by But final FMMO Reform Proposal approved by NMPF Board is far different than those originally NMPF Board is far different than those originally stated parameters. How?stated parameters. How?Reignites Regional Fights Over Handling of Reignites Regional Fights Over Handling of Class I formulas, Worsening the Winner/Loser Class I formulas, Worsening the Winner/Loser Issues of Federal Orders. Raises Class I mover Issues of Federal Orders. Raises Class I mover by 51 cents. by 51 cents. Further distorts Market Signals, particularly on Further distorts Market Signals, particularly on Class IClass I

Higher Class I prices Result in Higher Class I prices Result in Lower Manufacturing Milk PricesLower Manufacturing Milk PricesWhen regulated Class I prices are increased, has an When regulated Class I prices are increased, has an inverse effect of driving down manufacturing milk inverse effect of driving down manufacturing milk prices.prices.More milk is produced in response to the higher More milk is produced in response to the higher regulated milk prices, and the additional milk flows regulated milk prices, and the additional milk flows into manufacturing markets, driving down those into manufacturing markets, driving down those prices. prices. Only about 1/3 of milk is used as Class I, and that Only about 1/3 of milk is used as Class I, and that portion is shrinking. portion is shrinking. NMPF plan will increase regulated price of 1/3 of the NMPF plan will increase regulated price of 1/3 of the milk, and drive down the price of manufacturing milk, milk, and drive down the price of manufacturing milk, the majority of milk in nation. the majority of milk in nation.

Is it Dangerous to Legislate Federal Is it Dangerous to Legislate Federal Order DetailsOrder Details

One of the original NMPF arguments for One of the original NMPF arguments for federal order reform was that the process federal order reform was that the process of seeking changes was too cumbersomeof seeking changes was too cumbersomeIf you legislative details, as NMPF is If you legislative details, as NMPF is proposing, dairy industry would have to go proposing, dairy industry would have to go back to Congress each time when back to Congress each time when changes are needed.changes are needed.Legislative process if far MORE Legislative process if far MORE cumbersome than administrative processcumbersome than administrative process

FMMO Reform Package FMMO Reform Package Not Ready for Prime TimeNot Ready for Prime Time

DIAC ducked the issue by asking USDA to DIAC ducked the issue by asking USDA to establish another committee to study federal establish another committee to study federal orders and their effects. 2008 Farm Bill actually orders and their effects. 2008 Farm Bill actually authorized a Federal Order Reform committee, authorized a Federal Order Reform committee, but was never created and never funded. but was never created and never funded.

Given the complexity and controversy, Given the complexity and controversy, Congress may NOT want to legislate very Congress may NOT want to legislate very specific details of federal order reform. Could specific details of federal order reform. Could follow DIAC’s lead by asking USDA to propose follow DIAC’s lead by asking USDA to propose reforms following broad parameters reforms following broad parameters

Midwest Dairy Coalition Midwest Dairy Coalition Principles for Dairy ReformPrinciples for Dairy Reform

1) We must seek ways to reduce volatility in net dairy 1) We must seek ways to reduce volatility in net dairy farmer income, or at least provide tools for farmers to farmer income, or at least provide tools for farmers to address that volatility. address that volatility. 2) Proposals must not discriminate against 2) Proposals must not discriminate against manufacturing milk, by providing artificial manufacturing milk, by providing artificial enhancement of Class I (fluid) milk prices. enhancement of Class I (fluid) milk prices. 3) Proposals must seek to eliminate or reduce the 3) Proposals must seek to eliminate or reduce the regional discrimination of the current federal milk regional discrimination of the current federal milk marketing order system. marketing order system. 4) Proposals must be sensitive to fact that small and 4) Proposals must be sensitive to fact that small and medium sized dairy farms make up the overwhelming medium sized dairy farms make up the overwhelming majority of dairy farms in the nation, and the unique majority of dairy farms in the nation, and the unique needs of these farmers must be reflected in U.S. dairy needs of these farmers must be reflected in U.S. dairy policy. policy.