Weaving the Dairy Safety Net

This being an election year, we’ve already heard a great deal from the political class in Washington about what needs to be done to help farmers, and to help bolster the farm economy. Plainly, production agriculture in America is one of the few areas that hasn’t much benefited from the overall boon in the U.S. economy during the past decade.

In dairy, although we enjoyed robust prices the past few years, things clearly have taken a turn for the worse. Not only did farm-level prices drop late last year to their lowest level since 1978, the outlook for the rest of this year is likewise pretty bleak. Currently, wholesale cheese and nonfat dry milk prices are hovering right at the support price level, and butter is selling at only about one-third the peak price it enjoyed in 1998. Like most of the rest of the ag commodity spectrum, dairy is now going through a period of painful and frustrating price weakness. The only redeeming notes are that feed prices are still low, and demand for dairy products is strong.

So, while all is not lost, we still have a very difficult year in store. And given how much milk continues to flow off of farms right now, it’s highly unlikely (barring some terrible weather calamity like another El Nino) we’ll see much of a bump in prices until this fall, at the earliest.

That’s why NMPF’s #1 priority for this year, from a policy standpoint, is to maintain the dairy safety net: our price support program. One of the many dairy policy changes contained in the 1996 Farm Bill was the scheduled elimination of the price support program at the end of 1999. Back in 1996, it didn’t appear that we would much miss the program. But as the planned end of the program got closer day by day, it became increasingly apparent that the support program was an important tool for managing the price volatility that has been rocking our industry in the 1990s. This program is the only means of maintaining a safety net under dairy prices – and thus, under dairy producers.

Thanks to a concerted effort in Congress by dairy producers from across the country, we were able to obtain a 12-month extension of the program last year – but that extension only runs through 2000. Given where prices are, and where we expect them to be in the future, it’s plain to see that we need to extend the program through the entire lifespan of the `96 Farm Bill (which is scheduled to run through 2002).

Interestingly, the dairy price support program has its critics on both ends of the spectrum. Some say we ought to wean ourselves from the program, and learn to operate with no government-backed minimum price at all. Others say the current price floor of $9.90/hundredweight is too low, and that even with a two-year extension, the level is too anemic to do the industry much good.

NMPF’s view is that while the price support program is not perfect, it does represent an important commitment from the federal government to providing some insurance that dairy prices won’t collapse entirely, as hog prices did two years ago. Is $9.90 an adequate price? Hardly – but then we ought not to be looking to the government to guarantee us more than a fallback price. Experience tells us that too high a minimum price will result in production that outstrips demand (which is our main problem right now anyway), and defeat the purpose of the price support program.

Fortunately, producers do have more tools to deal with price volatility today than in the past. In fact, the USDA just announced this month that it will be issuing a detailed regulation on how dairy farmers can take advantage of the forward contracting program authorized in last year’s Federal Order reform package. Many cooperatives already offer some type of forward pricing guarantee, at little or no cost to the producer. And the USDA has been sponsoring the Dairy Options Pilot Program for more than a year, which offers producers the opportunity to hedge their price risk under the tutelage of the government.

Ultimately, there’s very little the government, or cooperatives, or even individual producers, can do to completely insulate farmers from the whims of the marketplace. Economic laws are among the most unforgiving and immutable forces we have to deal with. But we can do certain things to improve our odds, and give dairy farmers at least a modest amount of protection from the pressures of price volatility that they have to deal with. The price support program is like any other safety net – it may have a few holes in it, but if you’re teetering on a tightrope 100 feet above it, you’re awfully glad it’s there.

National Milk Producers Federation

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