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Vandenheuvel and Meyer: Should any growth management plan include a market access fee on all of the milk produced? What should that price be?

Published on 28 December 2009

Since the dramatic drop in milk prices in 2009, many groups have come up with proposed programs that would control the speed of expansion and possibly limit the amount of milk produced in the U.S. dairy industry. One plan that has been widely discussed would assess a fee to a dairy if its milk production exceeds 2 to 3 percent growth. The real debate is over how much of the milk should be “taxed” – all the milk produced on the dairy or just the milk that exceeds the 2 to 3 percent of allowable growth – and how much that fee should be.

We have asked two experts, Rob Vandenheuvel with Milk Producers Council and John Meyer with Holstein Association USA, to discuss the virtues and vices of the different options. What option do you think should be accepted?

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Vandenheuvel
The challenge in constructing a program to address milk price volatility is to do so without creating an unreasonable barrier to expansion and new entry. The Canadian system is a classic two-tier price scheme that has created a huge difference between the value of “quota milk” and non-quota milk. That big difference creates a value in the right to produce milk. That value is now priced in excess of $30,000 per cow. This type of program not only makes it difficult for current producers to expand, but it makes it virtually impossible for new producers to enter the industry. That is not the industry most U.S. dairy farmers want.

The authors of the Dairy Price Stabilization Program, or DPSP, (www.stabledairies.com) were determined to craft a proposal that would avoid these pitfalls. Under the program we advocate, dairies that want to expand their production above a normal growth rate (example – a dairy increases production 50 percent one year, instead of 3 percent) would pay a market access fee for that year. That money would go to those producers who hold their production in line for that year.

The question of whether to assess a market access fee on all the milk of an expanding dairy or only the additional milk is a big deal. A program that applies a market access fee only on the additional milk must be substantially higher than a fee that is applied to all a facility’s milk. A new-milk-only fee would have to be in the range of $6 to $9 per hundredweight to be effective. Whereas, according to the economic modeling done by Cornell University’s Program on Dairy Markets and Policy, a market access fee on all a facility’s milk of $0.50 to $1.50 per hundredweight would be enough to dramatically reduce milk price volatility. The fundamental problem with a new-milk-only market access fee is that we have then created a Canadian-style two-tier price program that will act as a barrier to new entry and expansion – just the problems we were trying to avoid.

Instead, the DPSP gives expanding producers an option: a lower market access fee applied to all the milk produced by a new dairy or an expanding dairy or a higher market access fee that is only applied to the additional milk produced if the expansion is more modest. PD

Rob Vandenheuvel

Meyer
Originally, the Holstein Association’s Dairy Price Stabilization Program (DPSP) called for a market access fee on “all milk.” However, after presenting drafts of our program to dairy farmers, milk cooperatives, the National Milk Producers Federation Strategic Planning Task Force, educators, economists, and dairy media, from coast to coast, and getting their feedback and input, the Holstein Association USA board of directors improved the program by applying the market access fee on “new milk” only. Bottom line, if the market access fee was placed on “all milk” produced, the fee per hundredweight on your farm could vary drastically from the fee paid by your neighbor. A farm that expands two, three or more times beyond its current milk production would have a much lower fee per hundredweight than someone who is expanding just a fraction of their current size.

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One of the National Milk Producers Federation Strategic Planning Task Force’s concerns with our original “all milk” provision was, “There would be a huge incentive to build new farms, rather than expand existing farms, since the market access fee would be spread over all milk, not just marginal increases.” Consequently, most believe the DPSP has been enhanced by having the market access fee on just “new milk.”

While there has been a lot of discussion on what the market access fee on “new milk” might be, the answer is it will likely vary from quarter to quarter. The DPSP Advisory Board would meet quarterly to consider the economic conditions of the dairy industry and determine the market access fee, which could range from little to nothing or up to several dollars. Considerations in determining the fee each quarter include domestic needs, government purchase responsibilities, exports and other opportunities. The board would include 12 producers from across the country, along with a representative from the consumer sector, a dairy products firm, and a fluid milk bottler. Additionally, a dairy economist would be appointed to help advise the board.

1. The DPSP could be put into place without affecting any current dairy programs.

2. Implementing the DPSP does not require opening the Farm Bill.

3. The DPSP is the only new, detailed program available that can have a positive effect on mailbox milk prices now and in the future.

More information can be found by contacting Lucas Sjostrom at (800) 952-5200, ext. 4244 or . PD

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John Meyer

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