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What’s in it for you? Dairy producer, processor groups outline policy priorities

Progressive Dairyman Editor Dave Natzke Published on 25 March 2017

Dairy producer and processors organizations took policy priorities to the Capitol Hill, March 22, as Congress continues early work on writing the 2018 Farm Bill.

In testimony before the House Agriculture Committee, Jim Mulhern, president and CEO of the National Milk Producers Federation (NMPF), and Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA), shared common concerns related to price volatility and risk management, trade and nutrition programs.

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NMPF: Fix safety net

The top priority on NMPF’s policy list are changes to the Margin Protection Program for Dairy (MPP-Dairy), the USDA’s troubled federal “dairy safety net” created in the 2014 Farm Bill.

Mulhern noted recent 2017 milk futures prices have declined dramatically, resulting in a deteriorating outlook for farmer income margins.

“The reality is that we have a dairy program today that is an ineffective safety net,” he said. “We have a program that is a program in name, but not in effect. While MPP was, and is, the right approach for the future of federal dairy policy, the program in its current form does not provide meaningful safety net support to the nation’s dairy farmers.”

In his opening comments, House Agriculture Committee chairman K. Michael Conaway (R-Texas) noted MPP-Dairy had “underperformed” since its implementation in the 2014 Farm Bill, leaving “dairy farmers with virtually no assistance.”

“Underperformance of MPP has resulted in very few producers purchasing buy-up coverage levels in 2017, leaving producers even more exposed to market volatility,” Conaway said. “While the industry is to be commended for making the fundamental shift away from price support to margin protection, that will only be sustainable if MPP actually provides sufficient risk management going forward.”

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MPP-Dairy changes offered

Mulhern said NMPF has spent the past 18 months examining potential program changes. He outlined changes approved by the NMPF board to make the program more effective:

Restore the feed cost formula to its original form. After approving the program in 2014, lawmakers implemented a 10-percent cut to the weightings of feedstuff components (corn, soybean meal and alfalfa hay) to meet Congressional Budget Office scoring during congressional budget deliberations. The resulting feed formula “understates the price to farmers of producing 100 pounds of milk, thereby overstating the actual margins farmers are experiencing” by about $1 per hundredweight of milk, Mulhern said.

Direct USDA to obtain more precise feed cost data to more accurately reflect true costs and margins. The changes would:

1) Use corn prices compiled by USDA’s Agricultural Marketing Service (AMS), which calculates the corn purchase prices paid by farmers. The current formula averages USDA National Agricultural Statistics Service (NASS) prices paid to corn producers at the first point of sale.

2) Average soybean meal prices collected by AMS at multiple locations throughout the U.S. The current formula uses a single price, at central Illinois, as a proxy for the national average. NMPF estimated the change would increase the national average soybean meal price by about $9 per ton.

3) Develop a more detailed U.S. average price for dairy quality alfalfa hay. The current U.S. average price for alfalfa hay reported by NASS is an average of all grades and qualities of hay.

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Mulhern said the multiple feed pricing points, as well as the correlation between regional milk and feed costs, would eliminate the need to calculate regional or state dairy income margins.

Improve program participation affordability by reducing supplemental premium costs for operations producing 4 million pounds of milk or less per year. Peterson and Mulhern said higher levels of supplemental coverage were especially important for small- and medium-sized producers. Mulhern said the 4-million pound threshold was acceptable.

“The Margin Protection Program is the right idea, we just have to get it tweaked so that it works, especially for the small guys. I’m not sure the big guys want it or need it that much, as long as they have catastrophic coverage), that’s what they want. Hopefully we can find a way to get this done,” Peterson said.

Make technical changes designed to make the program more responsive to producers. Changes would include:

1) Calculating the MPP-Dairy margin on a monthly basis, rather than six times per year under the current program. The change would improve the timeliness and more accurately reflect risk management needs.

2) Adjust the annual enrollment date to later in the year, allowing farmers to have adequate time and information to make coverage decisions for the upcoming year. Current program enrollment dates have aligned somewhat with the government’s fiscal year, although USDA has granted extensions each year at NMPF’s request.

Enact policy changes lifting caps on participation in the Livestock Gross Margin-Dairy (LGM) insurance program, run by USDA’s Risk Management Agency (RMA), to work in a complementary manner with MPP. More sophisticated than MPP-Dairy premiums, LGM-Dairy’s premiums change as futures markets change, and producers have the ability to make numerous decisions to help customize their risk management coverage. The current law prohibits dairy farmers from participating in both MPP-Dairy and LGM-Dairy.

Potential cost an issue

Any adjustments to MPP-Dairy are likely to boost the program’s cost. However, Conaway said America’s farmers and ranchers have repeatedly answered the call for federal budget deficit reduction. He estimated 2014 Farm Bill savings at just over $100 billion—four times the savings estimated when the bill was passed.

“While we don’t yet know the resources that we will have available to craft the next farm bill, we do know that America’s farmers and ranchers feel like they have given at the office,” Conaway said.

U.S. Rep. Colin Peterson (D-Minnesota), ranking member on the committee, recalled the creation of MPP-Dairy, which he helped craft with the NMPF. He noted congressional budget fights at the time of implementation resulted in adjustments to the program’s feed cost calculation that essentially rendered it ineffective.

Although he questioned its validity, Peterson said Congressional Budget Office (CBO) budget “scoring” estimated inclusion of the original feed cost formula would result in a 10-year, $2 billion price tag.

“I don’t know where we're going to find that,” Peterson said.

According to Peterson, costs for two MPP-Dairy modifications proposed by NMPF (decreased premium costs for dairy herds producing less than 4 million pounds of milk per year, and moving indemnity payment calculations to monthly instead of six times per year) would add an estimated $150 million and $21 million to costs, respectively, over the 10-year period.

Will farmers participate?

Due to its past ineffectiveness resulting in dwindling farmer participation since its inception, Mulhern and Peterson said MPP-Dairy may be a hard sell to dairy farmers, even with revisions.

“It will take time to get people back in the program,” Mulhern said. “We have to get the feed cost adjustment right, then look at the rates for coverage costs to encourage higher levels of buy-up coverage. We only need one year of the program working the way it should to show its value.”

During the program’s first full year of operation in 2015, farmers paid roughly $70 million in premiums and fees to USDA for the basic and supplemental coverage, but USDA paid out only $730,000 in indemnity payments.

Due to the program’s meager supplemental coverage performance in 2015, many producers reduced their coverage for 2016, choosing to only purchase coverage at the catastrophic ($4 per cwt.) coverage level, which in turn further reduced MPP payments to producers from USDA when margins shrunk last year. As a result, in 2016, farmers paid in $20 million, while USDA paid out only $13 million.

Results of the 2017 enrollment have not yet been announced, but only about 23,000 dairy producers, slightly more than half the nation’s dairy farmers, participated in 2016, and most of them were at the bare minimum level.

Other NMPF priorities

In written testimony, Mulhern outlined other dairy policy priorities sought by NMPF, including:

• Immigration reforms to ensure the dairy industry has an adequate, legal workforce.

• Trade policies preserving and growing existing markets in Mexico, Asia, Latin America and the Middle East, while providing access to closed or restricted markets. Those policies and agreements must also address import barriers such as Canada’s ingredients program and European Union's geographical indicators (GIs).

• Nutrition program changes to expand fluid milk and dairy product options in federal school and other feeding programs.

• Environmental sustainability programs providing tax credits to help farmers access upfront capital costs of nutrient recovery and biogas systems.

• Passage of the Dairy PRIDE Act, which requires enforcement of FDA regulations prohibiting manufacturers of plant-based beverages and other products from using “milk” on product labels.

Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA), said his organization is still studying NMPF’s proposal, but is supportive of fine-tuning the farmer safety net so it functions effectively, without distorting markets. IDFA represents 525 dairy manufacturing and marketing companies.

IDFA: Forward contracting program

“The dairy industry needs better mechanisms for risk management, both on the farmer side and the processor side,” Dykes said.

Dykes said a tool to help dairy processors manage price volatility includes extension and expansion of the current USDA Dairy Forward Contracting program. That voluntary program allows dairy processors to lock in long-term milk supplies with individual farmers or their cooperatives at a fixed price to reduce volatility.

The current program allows handlers regulated under federal milk marketing orders to agree on contract prices for Class II, III or IV milk, without having to pay the minimum federal order blend price. However, as it currently stands, the program prohibits forward contracting on milk used for Class I (fluid) purposes.

Dykes asked that the program be made permanent (it currently must be renewed with each farm bill) and be expanded to include fluid milk.

As domestic and global dairy product and ingredient buyers increasingly seek long-term contracts, making the forward contracting program permanent and expanding it to include Class I milk would provide processors with price predictability and keep customers who might otherwise leave the market at times of high dairy prices.

While NMPF has steadfastly opposed expansion of the forward contracting program to Class I milk, both Mulhern and Dykes said they would work to see if a consensus solution is achievable.

In written testimony, Dykes outlined other dairy policy priorities sought by IDFA, including:

• Review of the entire federal milk marketing order system, especially as it relates to Class I pricing mechanisms.

• Provide incentives for increased availability and options for milk and dairy products in USDA’s Supplemental Nutrition Assistance Program (SNAP Women, Infants and Children (WIC), school milk and other USDA nutrition programs.

• Consolidate implementation dates on product labeling requirements. Processors currently face a July 2018 deadline to comply with labeling requirements under the U.S. Food and Drug Administration’s “Nutrition Facts and Serving Size” rules, and a second deadline to implement any label changes under yet-to-be defined USDA rules related to foods incorporating genetically modified organisms (GMOs). IDFA has asked for a compliance deadline of May 2021 to address both changes.

• Continue congressional support of USDA’s National Organic Program (NOP).

• Support trade policies, including any renegotiation of the North American Free Trade Agreement (NAFTA), which preserves markets in Mexico, increases access to Canadian markets, and supports future growth in the Asia-Pacific region.

More collaboration recognized

While dairy producer and processor policy preference differences remain, several House ag committee members praised the heads of NMPF and IDFA for what appears to be a more collaborative relationship heading into the 2018 Farm Bill.

That may be because Dykes, who replaced long-time IDFA president and CEO Connie Tipton late last year, grew up on a Kentucky dairy farm and owned a six-person veterinary practice for a number of years in Illinois. Still a licensed veterinarian, Dykes also worked directly with dairy farmers in roles with Continental Grain and Monsanto.

The archived webcast of the hearing is available at https://www.youtube.com/watch?v=q3lu6tRD-Dc

Read also:

MPP-Dairy still a safety net formula, with adjustments

MPP-Dairy scrutinized during House ag committee hearing end mark

Dave Natzke
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