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From The MPC Newsletter
May 21, 2010

Part Two of a Series Delving Into H.R. 5288, the "Dairy Price Stabilization Act"
By Rob Vandenheuvel, General Manager

Last week in this newsletter, you were all introduced to a new piece of legislation, H.R. 5288, the Dairy Price Stabilization Act of 2010. This bill was introduced by Rep. Jim Costa (Fresno) and four of his fellow Congressmen from around the country, and would implement a program we’ve been talking about for quite some time, the Dairy Price Stabilization Program. If you missed last week’s issue, you can find the article at: http://www.milkproducerscouncil.org/051410_dpsa.htm.

While last week’s article summarized what the bill IS, this week’s article is aimed at explaining what this bill IS NOT. In this political era, where buzzwords like “amnesty” and “socialism” are used to shape the debate on various legislative proposals, H.R. 5288 is no exception. One of the most frequent claims by critics of the legislation is that it’s akin to the Canadian quota system – a program that aims to maintain a high value of milk by severely limiting any growth in their milk production. In that system, dairy farmers are assigned a quota, and the only method of increasing your share of the market is to purchase additional quota from a fellow dairymen, which has resulted in extremely high values being attached to that quota; the current cost of buying that quota is reportedly around $30,000 per cow. Not only does that type of program create a huge barrier to any kind of real growth in the industry, but it also locks up a tremendous amount of money in the value of their quota, preventing that money from being invested in improvements and developments in the industry. It essentially puts the Canadian dairy industry in a “straightjacket.”

Clearly, a system structured like that would have tremendous opposition in the United States, including opposition from Milk Producers Council. For years, that type of system has been the de facto definition of “supply management” in the dairy industry, and regardless of the economics of the dairy industry, there has always been (and continues to be) broad objection for putting our industry in a straitjacket like that.

Before explaining how H.R. 5288 IS NOT comparable to the Canadian quota system, let me first remind the readers what H.R. 5288 does:

  1. Each individual dairy is treated as its own entity, just as the MILC program treats dairy farms today.

  2. Prior to each quarter, USDA will determine – based on a set of triggers clearly outlined in the bill - an “allowable year-over-year growth” in milk production that each dairy can produce without being considered an expansion. In most cases, this will be 3 percent annual year-over-year growth, allowing for every dairy to find efficiencies in their operation without be considered an “expansion.”

  3. For dairies that choose to exceed this allowable growth (i.e., plan an expansion in milk production or start a dairy), a market access fee is determined prior to each quarter by USDA. This fee is also based on a set of triggers outlined clearly in H.R. 5288. This fee will range from $0.03 - $0.50 per hundredweight on all a facility’s milk, or $0.15 - $2.50 per hundredweight on only the expansion, whatever is cheaper for the dairy.

  4. 100 percent of the funds collected as market access fees will be distributed to the dairies that did not exceed their allowable year-over-year growth in milk production. This is a key piece of the Dairy Price Stabilization Act, as these funds create the tangible financial incentive for dairies that are not in “expansion mode” to maintain their production within their allowable year-over-year growth.

  5. A Producer Board would be established to oversee operation of the program. The Board would not be authorized to make any changes to the prescribed triggers in the bill unless a 2/3 majority of the Board approved such a recommendation. The composition of the Board would largely mirror the composition of the National Dairy Promotion and Research Board, with each dairy region of the country getting a base level of representation, and additional representation distributed based on milk volume.

(For those of you who want more details on what H.R. 5288 does, you can check out the article from last week’s newsletter - http://www.milkproducerscouncil.org/051410_dpsa.htm - or you can find more information on the bill at http://www.stabledairies.com.)

So what makes H.R. 5288 different from the kind of supply management we’ve always been familiar with, i.e., the Canadian quota system?

  1. H.R. 5288 gives EVERY dairy an opportunity to grow their production and grab a share of future market growth

Under the Dairy Price Stabilization Act, NOTHING prevents any dairy farmer from expanding their production and securing a larger share of the market demand. Let me repeat that, NOTHING in H.R. 5288 prevents any dairy farmer from expanding their production and securing a larger share of the market demand. H.R. 5288 is about creating a real financial incentive for the dairies that are not in “growth mode” to manage their production. For those that want to grow or start a dairy in any given year, the cost of the market access fee would usually be $0.25 per hundredweight or less. That’s a fee that can be budgeted for the first year on your new dairy or your expansion. But since 100% of the fees that are paid are distributed as a dividend each quarter to the dairies that did not expand, those dairies have a real incentive to actually manage their production growth and the 3 percent allowable year-over-year growth outlined in the bill.

That’s the beauty of H.R. 5288. It is a uniquely-American method of aligning future growth in production more closely with future growth in demand. It’s not about stopping our industry’s ability to grow. It’s about creating a system that lets us rationally grow – rather than all 65,000 dairies growing at the same time, inevitably resulting in an oversupply of milk.

  1. H.R. 5288 does not rely on purchasing expensive quota from your fellow dairymen

Under H.R. 5288, any dairy farmer can expand whenever they want. There’s no need to find another dairy farm willing to sell you their quota. The cost of increasing your share of the market is both knowable and budgetable. And the money you are spending on the market access fees aren’t leaving the industry – instead, they are compensating current dairymen who are holding their production in line to allow the market to absorb your increase in production.

  1. H.R. 5288 doesn’t lock billions of dollars in the value of any quota

Under H.R. 5288, once you’ve established your increased share of the market by paying the market access fee, your facility is then eligible to receive the market access fee dividends. You’re not buying an expensive asset. Instead, for a limited amount of time, you’re paying your fellow dairymen to hold their production in line, allowing the market to absorb your increased production. And as stated above, once you’ve established your new share of the market, you’ll be on the receiving end of the dividends as an incentive to manage your new increased share of the market.

As you can see, H.R. 5288 creates an “agreement” amongst the family of dairy farmers. The program recognizes that we need continued growth in production to meet the future growth in demand. We are increasingly feeding more of the world, and all indications are that the world market will continue to want more American dairy products. But H.R. 5288 also recognizes that it is completely irrational to have all 65,000 dairies trying to grab more market share at the same time. So the program creates this agreement that allows every dairy who wishes to grow an opportunity to grab that additional market share, simply by paying a budgetable fee that will compensate those dairies that are not in “growth mode” and are willing to hold their production that year to 3 percent growth or less.

I urge you all to read the bill. Read how the program would work. Those who would paint this as a government take-over of the dairy industry or a Canadian-style quota system have either never read the bill or simply don’t understand it. The bill is about empowering dairy farmers, with the only role of government to ensure that everyone plays by the same set of rules. As we’ve seen with the CWT program, it’s simply not possible to expect every dairy to play by the same rule voluntarily.

As MPC and other producer groups around the country have presented this idea to producers, we’ve seen tremendous support. But YOUR CONGRESSMEN NEED TO HEAR FROM YOU! Many dairy farmer groups from the east coast to the west coast have examined H.R. 5288 and have recognized the value in the proposal, but we can’t rely on them to do this alone. Your Congressman need to hear from you today! If you don’t know who your Congressman is or how to get a hold of him/her, please call (202) 224-3121. That number gets you to the Clerk of the House of Representatives, who can direct your call to your local Congressman. Everyone needs to do their part, so please, call your Congressman today and urge them to support H.R. 5288.

Next week, I’ll continue this series of articles, delving into another facet of H.R. 5288, the Dairy Price Stabilization Act. And as always, if you have any questions, please give us a call (909-628-6018) or visit www.stabledairies.com or MPC’s website at www.milkproducers.org.

 

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