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The First Casualty

May 1, 2013

May is going to be a pivotal month in the crusade to create a better future for dairy farmers, as both the Senate and House Agriculture Committees will, in the next two weeks, begin marking up the five-year farm bill that stalled out at the end of 2012. Dairy farmers have a huge stake in how the farm bill gets resolved.

Unfortunately, our efforts to obtain an effective safety net for farmers, in the form of the Dairy Security Act (DSA), have been contested every step of the way by dairy processors. Their main goal in this process has been assuring themselves of an abundance of cheap milk, priced at levels that will harm farmers over the long term, and bankrolled by taxpayers. This is a recipe for disaster.

How did we reach this point? NMPF’s members have been working across the farmer community for four years to develop a better safety net, one that eliminates the ineffective and costly MILC, price support, and dairy export incentive programs. In their place, we are asking for the creation of a voluntary program to address not just milk prices, but margins: the gap between national average milk prices, and national feed costs. This insurance program allows up to 90% of a farm’s production to be covered by this risk management approach. Importantly, the Dairy Security Act contains a mechanism to temporarily adjust milk production when periods of low margins threaten farm balance sheets and – just as critically – threaten to drive up the cost of the insurance payouts to unsustainable levels.

Thus, the DSA has a market stabilization element that asks farmers who choose to enroll in this government program to trim their milk output by a few percentage points only when margins are severely compressed—as they have been on a handful of occasions over the last ten years. Now, there is no requirement that a participating farm actually cut milk production. It’s just that they won’t be paid on 100% of their output when the market is clearly indicating it doesn’t need all that milk. The idea is that it’s better to trim a slight amount for a short time, rather than suffer prolonged poor margins for months on end, as happened in 2009.

The DSA’s market stabilization component has processors and their allies using all manner of distortions and misrepresentations to attack it. The biggest ruse is that the stabilization program is a government assault on a farmer’s milk check. Remember, this is a voluntary approach to risk management, which offers producers the choice to participate. If they do, market stabilization makes the program more effective by reducing milk output to keep prices from hitting rock bottom. In reality, the program will improve farm income more quickly than without it, by better aligning supply with demand. Just as importantly, this approach saves taxpayers money.

The alternative endorsed by processors features no mechanism to curtail potentially excessive milk production. This is a great deal for them: it offers processors an over-abundant, cheap milk supply, ensuring that farmers are underpaid for the milk they produce, while taxpayers are asked to make up the difference.

We’ve seen spurious claims aplenty about the Dairy Security Act: it would kill exports (no, there’s a provision to suspend the market stabilization element if a misalignment between U.S. and world prices arises that could disadvantage U.S. dairy exports); it would stop the growth of the industry (no, the analyses done show that long-term growth is not hampered); the DSA would gouge consumers (hardly; an analysis by the University of Missouri said that farm-level milk prices will rise only ½ of one cent per gallon because of the DSA, not even noticeable given the monthly volatility of farmers’ milk prices – not that they set retail prices to begin with!).

One processor-affiliated group has even distorted a recent study of the DSA by Midwestern university economists by asserting that margin insurance by itself has a better net benefit. It reached that conclusion by claiming credit for the market-stimulating (and thus revenue-enhancing) effects of the stabilization program, even though such a program doesn’t even exist under a limited, margin insurance-only approach! And this assessment also assumes farmers will continue to produce and dump milk, even when they have two months advance notice to trim milk production and save on feed costs.

As has been noted since the days of the ancient Greek empire, when it comes to war, truth is the first casualty. The same observation applies to the processors’ war on the Dairy Security Act. The truth is, the dairy farmer-developed DSA is a better deal for farmers and for taxpayers. The real threat to the growth of our domestic dairy industry is not a market stabilization program that will only rarely activate; it’s the further damage to our dairy producer sector that would result from an ill-conceived processors’ dream plan to assure themselves a sea of taxpayer-subsidized milk. Congress should choose wisely, as truly the best and most honest approach is the Dairy Security Act.