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From The MPC Newsletter
Friday, May 10, 2013

2013 Farm Bill: Why the "Goodlatte-Scott Amendment" is the Wrong Policy for our Dairy Industry
By Rob Vandenheuvel, General Manager

Next week, both the Senate and House Agriculture Committees are scheduled to hold “markups” of the 2013 Farm Bill.  During the markups, both Committees will be debating the Farm Bill, considering proposed amendments and ultimately voting on what language should be included in the Farm Bill that is sent to the full Senate and House of Representatives for a vote.

Both of the Committees have released their initial versions of the Farm Bill, and while the overall bills have differences, the dairy portions of the bills are very similar.  Both include provisions from the Dairy Security Act, which is supported by dairy organizations and cooperatives around the country.  As a reminder:

bullet The Dairy Security Act would replace our current “safety net” programs of the Milk Income Loss Contract (MILC) and Dairy Product Price Support Program (DPPSP).
bullet The Dairy Security Act includes two main pieces: (1) the Dairy Producer Margin Protection Program (DPMPP) and the Dairy Market Stabilization Program (DMSP).  Participation in these programs is voluntary.
bullet The DPMPP – often referred to as the “margin insurance program” – would provide dairies that sign up with direct payments when national “milk-price-over-feed-cost” margins fall below certain thresholds.  Dairy farmers could sign up for the basic program or opt for an enhanced program that requires producer premiums, but provides more frequent and larger payments.
bullet The DMSP is a standby program that would only be triggered in during periods of low-margins and would incentivize dairies to temporarily cut back milk production in order to restore milk and dairy product supply/demand balance in the marketplace.  The DMSP only applies to dairies that opt to enroll in the taxpayer-funded DPMPP.

While you can never be exactly sure what amendments are brought up for debate and vote during these markups, it is a certainty that in the House Agriculture Committee, an amendment – known as the Goodlatte-Scott Amendment – will be brought up that would fundamentally change the dairy provisions in the Farm Bill.  For those who are unfamiliar with the Goodlatte-Scott Amendment (which was brought up during last year’s Farm Bill debate, but rejected by the House Agriculture Committee), it would replace the Dairy Security Act with a stand-alone margin insurance program, with higher premiums paid by dairy farmers, but no Dairy Market Stabilization Program.

Milk Producers Council, along with dairy organizations and cooperatives around the country, has supported the inclusion of the Dairy Security Act in the 2013 Farm Bill and asked that the House Agriculture Committee reject the Goodlatte-Scott Amendment.  A letter signed by our coalition of supporters can be found at: http://www.nmpf.org/files/Coalition-of-Dairy-Organizations-Supporting-DSA-050813.pdf.  On the other hand, the Goodlatte-Scott Amendment is being supported by the nation’s processors – represented by the International Dairy Foods Association (IDFA).

Why is Milk Producers Council so supportive of the Dairy Security Act and so opposed to the Goodlatte-Scott Amendment?  It’s actually quite simple.  MPC supports programs that result in MARKET-BASED profitability for U.S. dairy farmers, which is what the Dairy Security Act represents.  The Goodlatte-Scott Amendment does not prioritize market-based profitability, but rather represents a taxpayer-funded corporate welfare system for dairy farmers.

So what do I mean by that?  The U.S. dairy industry has long struggled with a fundamental problem of trying to balance our milk supply with the demand.  The reason is simple to understand.  It’s a combination of our constant advances in herd health / milk production and the fact that a dairy cow produces milk every day, whether or not there is actually a profitable market for that milk.  When our industry produces more milk than profitable demand can absorb, our milk prices drop, sending the basic “Econ 101” signal that less milk is needed.  However, for a variety of reasons, it is difficult to get that economic signal to the individual dairy farmers in a timely manner.  Those reasons include: (1) the fact that dairy cows cannot be “turned off” like a machine at a manufacturing plant; (2) dairy farmers are paid a “blend price” for all their milk, so there’s not direct incentive to produce less milk, since dairy farmers are paid the same price for every pound of milk they produce; and (3) our tax code makes it advantageous to grow our dairies, not contract them, even if only temporarily during a period of oversupply.

So what happens is that even though the market price for milk may drop below what it costs to produce that milk, each individual dairy farmer still wants to produce as much milk as possible in order to maximize their operation’s revenue stream.  While that makes perfect sense to an individual dairy farmer, it is devastating for the dairy farming community as a whole, since we don’t get a supply reduction, even though the market is trying to send a signal – through lower prices – that less milk is needed.

The Federal Government feels an obligation to try and “protect” our U.S. dairy farmers through programs like the MILC and Price Support program, but as we’ve experienced in recent years, those programs fail miserably to provide any real “protection” for farmers.  That is why in the 2013 Farm Bill, Congress is trying to reform our dairy program to provide better protection for our dairy farmers.

The Dairy Security Act represents a new way of thinking.  It provides a level of protection in the form of “margin insurance,” but at the same time, introduces a new idea that we need a direct economic signal during unprofitable periods of time for the dairy farmers that will address the fundamental problem discussed above.  Rather than continuing to produce as much milk as possible, even when the market price for milk is trying to tell our industry that less milk is needed at that moment, the Dairy Security Act would send a signal for dairy farmers to temporarily cut back 2-4% of their milk production in order to eliminate the overproduction, restoring market balance in our industry.  While the government would be providing taxpayer-funded margin insurance payments to the dairies that enroll in the program, the temporary cutback in milk production will help restore healthy market-based margins in our industry, which in turn will eliminate the need for those insurance payments to continue.  And remember, the program is entirely VOLUNTARY.  Dairy farmers that choose not to have the government provide a margin insurance program are fully exempt from the Dairy Market Stabilization Program.  Another market-based concept embedded in the program.

On the other hand, the Goodlatte-Scott Amendment continues our fundamental problem of encouraging maximum milk production even during periods of oversupply.  Think about the signal individual dairy farmers would receive under this program during a period of oversupply.  The market price for milk would fall below what it costs to produce the milk.  That’s the market’s way of saying that milk production needs to be temporarily reduced.  However, the Goodlatte-Scott margin insurance program would be making payments during that time – which tells dairy farmers there is no need to reduce production – and there is no Dairy Market Stabilization Program to incentivize dairy farmers to temporarily cut back production at all.

The result?  We would have an industry that is producing more milk than we can profitably sell, and yet there would be no direct signal to actually do anything about it.  So what would cause the market to regain supply/demand balance and bring market prices back to a profitable level?  NOTHING.  And in the meantime, U.S. taxpayers would be footing the bill for more and more margin insurance payments to dairy farmers while we wait for a recovery – which again, won’t happen until we actually restore market balance.

This sets up a fantastic situation for those who are buying our milk – the processors.  Think about it: during periods of oversupply, these processors would get the benefit of buying milk at prices BELOW what it costs to produce that milk, while taxpayers are asked to make up the difference through margin insurance payments.  And because those payments are intended – by design – to hide the fact that we are overproducing the profitable demand, what hope do we have that the supply/demand balance will be restored in the short term?  Does that sound like a market-based program for the dairy industry?  Is that really the “free-market” approach to dairy policy?  Or could it be better described as corporate welfare?

MPC wants a federal dairy program that results in the MARKET providing a profitable price – which is only possible when we take the steps to bring supply and demand into better balance.  That’s what the Dairy Security Act does, and that’s why we support that proposal as the only reasonable policy to be included in the 2013 Farm Bill.

While neither of the California U.S. Senators are on the Senate Agriculture Committee, there are six Californians on the House Agriculture Committee, giving California a significant voice in how the Farm Bill is crafted by the Committee.  Those California members of the Committee are:

bulletRep. Jim Costa (D-Merced) – 202-225-3341
bulletRep. Jeff Denham (R-Modesto) – 202-225-4540
bulletRep. John Garamendi (D-Sacramento) – 202-225-1880
bulletRep. Doug LaMalfa (R-Redding) – 202-225-3076
bulletRep. Gloria Negrete-McLeod (D-Ontario) – 202-225-6161
bulletRep. Juan Vargas (D-El Centro) – 202-225-8045

California dairy representatives have been staking their positions with these six California Congressmen over the past weeks/months/years.  Unfortunately, their offices have heard different positions, as is all-too-often the case in the dairy industry.  MPC has joined California cooperatives Dairy Farmers of America and Land O’Lakes in supporting the Dairy Security Act.  California Dairies Inc., on the other hand, is advocating for the Goodlatte-Scott Amendment.  With the Committee markups scheduled for next week, there is still time for your voice as a dairy farmer to be heard.  The vote on the Goodlatte-Scott amendment is expected to be close, so every vote matters.  If you prefer a market-based solution like the one explained above, please call the Committee members above and urge them to support the Dairy Security Act and oppose the Goodlatte-Scott Amendment.  We need a program that addresses our fundamental problem, not one that puts dairy farmers in a constant state of government dependence and corporate welfare.

 

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