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From The MPC Newsletter
Friday, September 27, 2013

Farm Bill Update: What is "Permanent Law" and Why Does It Matter?
By Rob Vandenheuvel, General Manager

Over the past month, the U.S. Congress has certainly had its hands full.  The media has been keeping busy covering the Syria debate, the possibility of a government shutdown, the upcoming implementation of Obamacare and the approaching debt limit.  In the midst of these issues is the effort to renew the Farm Bill; a topic that you may not find on the front page of the paper, but certainly a critical issue for many, including our nation’s dairy farmers.

We’ve written countless articles in this newsletter about the Farm Bill, and the important effort to reform the dairy safety net programs.  We’ve talked about the need to replace the current safety net (MILC and Price Support programs) with a more equitable system of margin insurance, tied to a market stabilization program that will empower our dairies with the tools to better respond to supply/demand imbalances.

Today, we’re going to look at another issue – one that is often misunderstood, yet one that seems to get headlines every time a Farm Bill is about to expire.  The issue is “permanent law.”  Congressman Collin Peterson (D-Minnesota) recently made headlines when he announced he had suggested that U.S. Department of Agriculture (USDA) Secretary Tom Vilsack begin preparing to implement “permanent law,” in the event that a new Farm Bill is not agreed to.  

What is “permanent law”?  There are two bills – one from 1938 and another from 1949 – that are collectively referred to as agriculture’s “permanent law.”  The 1949 law – approved by Congress as the “Agriculture Act of 1949” – is where we find the permanent law for milk.  These laws are still on the books; the only reason they are not enforced today is because the current Farm Bill (and previous Farm Bills before it) temporarily supersedes permanent law.  However, if the Farm Bill were to expire (which looks like it will likely happen next week), permanent law would once again be in effect.  (It’s important to note, however, that while the Farm Bill may expire next week, the provisions described below impacting dairy farmers wouldn’t start until January 1, 2014).

Specific to the dairy industry, the Agriculture Act of 1949 states that:

“…the price of milk shall be supported at such level not in excess of 90 per centum nor less than 75 per centum of the parity price therefore as the Secretary determines necessary in order to assure an adequate supply of pure and wholesome milk to meet current needs, reflect changes in the cost of production, and assure a level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs.  Such price support shall be provided through the purchase of milk and the products of milk.”

-- (7 USC § 1446)

What this means is that under permanent law, the U.S. Secretary of Agriculture is required purchase milk and milk products in an effort to support a milk price that is at least at 75 percent of the “parity price” (and up to 90% of parity, based on the Secretary’s discretion).  The parity price, which is calculated monthly by USDA, is essentially a measure of the historical relationship between the value of an agriculture commodity and the costs associated with making that commodity.  In the case of milk, the parity price is based on a historical relationship between the price of milk and the various input costs associated with dairy farming.  The base period used to define that historical relationship is 1910-1914 – a period that USDA claims was considered a relatively normal period when price relationships were generally stable across all sectors of agriculture and non-farm industries.

The September 2013 announced “parity price” for U.S. milk was $49.50 per hundredweight.  So under permanent law, the Secretary of Agriculture would be required to purchase milk and milk products in an effort to support U.S. milk prices at no less than $37.13 per hundredweight.  Compare that to the September 2013 announced “All-Milk Price” of $19.40 per hundredweight (and of course, an even lower price in California).

So like it or not, that is the law of the land.  Yes, it is a very old policy based on what the dairy industry looked like about 100 years ago, and most in the industry would say that there are better ways of providing a safety net for U.S. dairy farmers.  But the fact remains that this permanent law is what becomes effective if the Farm Bill expires.  Rep. Peterson was absolutely right to point out that U.S. dairy farmers should be able to count on the government enforcing the laws that are in place.

This is obviously not the first time the issue has come up.  Dubbed as the “Milk Cliff” last year, the issue comes up anytime a Farm Bill is about to expire.  And in the past, the dairy community has largely tried to minimize the issue; instead, urging Congress to complete their work on the Farm Bill.

So what is different this time?  Why is Congressman Peterson recommending that Secretary Vilsack prepare for the implementation of this permanent law?  And why should we as an industry be thankful that he did?

Well for starters, there are numerous steps that must be taken before USDA can effectively start purchasing dairy products.  It’s been many, many years since any cheese has been sold to USDA through the Support Price program, and so product specifications, grading inspectors, warehousing, and undoubtedly many other issues must be considered in advance. 

But secondly – and most importantly – Rep. Peterson knows that our dairy farmers cannot afford to continue with the status quo.  The current Farm Bill – approved in 2008 – provides no real safety net for U.S. dairy farmers – as evidenced by the 2009 collapse of the industry – and any kind of extension of that failed policy should not be an option. 

The dairy industry – through the efforts National Milk Producers Federation and Rep. Peterson – has developed an alternative safety net program, one that is vastly superior to the status quo.  MPC and dairy organizations/cooperatives from around the country have stood up and supported the Dairy Security Act as the safety net policy we support for the next Farm Bill.  However, up until now, Congress has been unable to agree on an overall Farm Bill that can be signed into law.  So here we sit.

Congressman Peterson has correctly recognized that we have only two acceptable options: let the Farm Bill expire and permanent law to resume, or approve a new dairy safety net program.  Permanent law is admittedly a harsh way to support the industry, but it does provide real protection that “reflects changes in the cost of production” and “assures a level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs” (excerpts from 1949 law; wouldn’t it be great if these virtues drove the 2013 Congress?!?).   The other option – the one preferred by dairy organizations/cooperatives around the country – is to implement the Dairy Security Act as part of any Farm Bill legislation that is approved this fall.

Of course, not everyone sees it this way.  In a press release last week, the International Dairy Foods Association (IDFA), on behalf of the processors they represent, stated that “…the U.S. Department of Agriculture should not move quickly to enforce the 1949 law…”  Instead, IDFA points out that, “The Obama administration enjoys ample legal authority to delay the enforcement of the 1949 act should Congress fail to pass a new farm bill prior to December 31.” (press release can be found at http://goo.gl/8d72Wr). 

It’s not difficult to see the priorities of our “partners” in the industry.  The thought of not having a dairy safety net doesn’t seem to faze them one bit.  And why should it?  Through end-product pricing and cost-based make allowances, U.S. dairy farmers have gone to great lengths to protect these processors from economic harm, providing opportunities for processor profits regardless of whether the price of dairy products is high or low.  So why in the world would they care if dairy farmers have a safety net program?  The statement they put out answers that question: they’re ultimately fine with the status quo. 

Fortunately, Congressman Peterson understands the issues faced by our dairy farmers, and while we hope Congress can complete its work on a Farm Bill that includes the Dairy Security Act, we are thankful that someone in Washington is making sure that dairy farmers aren’t just thrown under the bus.

 

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