The Correct Course

October 01,2011
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In the development of any new concept or product, there comes a time when the pursuit of perfection ultimately shifts toward the exploration of what’s possible. We’ve now reached that point in the development of new federal dairy policy.

From the summer of 2009 – when the brutality of the Great Dairy Depression first manifested itself – to this past summer, NMPF solicited and then synthesized a variety of viewpoints in the development of a radical reassessment of the best safety net for dairy farmers. We called it Foundation for the Future, and a great deal of spadework was done by a full cross-section of the dairy industry in providing unique, and sometimes opposing, perspectives on how best to form that foundation.

We took the resulting product this summer and road-tested it. At 13 meetings in 12 towns across the country, we walked through the detailed elements of Foundation for the Future in front of 1,300 dairy producers, and others involved in our business. It’s fair to say that no other dairy program has received the same degree of scrutiny or self- assessment, either within the industry, or by Congress. Even the safety net policy we have today, featuring the MILC and the price support programs, hasn’t received nearly the thorough examination that Foundation for the Future was subject to this year.

What we heard during our summer grassroots tour was a uniform agreement that the status quo is not acceptable, because it didn’t prevent the loss of billions of dollars in equity two years ago, and it leaves farmers equally vulnerable when the next market downturn arrives. Most farmers clearly see the value in a margin-based safety net, since our current price-centered programs were designed in the 20th century, for milk price targets that are no longer relevant in the new era of much higher feed costs. Thus, a margin insurance program was well received.

Many producers also see the value in having a means of managing the market during periods of low margins, in order to hasten a recovery. The current approach where individual farms make decisions to keep putting out more milk when margins are bad, even if the collective impact of those specific choices is bad for every farmer, is less than desirable. Hence, Foundation for the Future initially contained a mandatory Market Stabilization program to put the brakes on milk output when dire conditions imperil every farm’s bottom line.

But a compulsory approach to stabilizing the market in such a fashion proved to be a daunting goal. In essence, it was the potentially perfect solution that, for a variety of reasons, was not going to be politically possible to achieve.

So now, we’ve engaged in a course correction. No longer is the Dairy Market Stabilization Program going to be mandatory. In fact, the approach we have endorsed, which is now embodied in the new “Dairy Security Act of 2011,” introduced last week in the House of Representatives, offers farmers a clear choice.

Those who wish to have government-subsidized margin insurance, at both a basic and supplemental level, can opt for that safety net…but they must also then agree to participate in the market stabilization program, so they are expected be part of the solution when the problem of poor margins appears. On the other hand, those who for whatever reason don’t want the government to tell them what to produce will not be asked to help stabilize the market…but they don’t receive any help from the government if and when market conditions are poor.

The beauty of this approach is that it preserves a safety net for those who want it, and yet it also offers others a complete free-market approach. And just as the federal government is being forced to cut back spending and entitlements in other areas, there is no more free lunch with this new dairy program: there is no free government money without a corresponding obligation to help the greater good of the industry. We are past the point as a country where people can expect something for nothing from Uncle Sam.

In addition to the safety net components, the Dairy Security Act requires the U.S. Department of Agriculture to reform the way the Class III price is determined, doing away with end product pricing formulas and make allowances, and going to a competitive pay price.

Is this pivot toward a compromise approach a perfect solution? Of course not, and there will remain those who either feel it does too much, or doesn’t go far enough. But it’s a sound foundation, economically and politically. Compared to current program, the DSA saves taxpayers $131 million over ten years, which is good politics and good policy. Beyond being a necessary course correction, it’s the correct course for America’s dairy producers.