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Supply management axed
Farm Bill conference report passes House 251 – 166, heads to Senate with revised Dairy Title

Special for Farmshine

WASHINGTON, D.C. – Down to the wire in this last week of January, the House-Senate conference committee issued its Farm Bill conference report on Monday, Jan. 27, which was then promptly voted on and passed 251 to 166 in the U.S. House of Representatives Wednesday, Jan. 29.

The big news is that the Dairy Title ends the Dairy Product Price Support Program and does not include supply management. Instead, the margin protection safety net that had been formulated in the Dairy Security Act has been modified to limit the ability to protect expanded milk production above an average yearly growth rate, and a brand new “dairy donation” program was included in the conference report to manage demand by moving dairy products directly to the less fortunate, not to government storage and resale, as a way to stabilize markets and manage supplies during a prolonged low-margin event.

A lesser-known provision of last summer's Senate bill had called for national milk price reform hearings. This language introduced by Senator Gillibrand was scratched from the House-Senate conference report, and is not part of the bill that passed the House Wednesday. Had supply management been included in the final Farm Bill, price reform hopes would have been dashed anyway.

House Ag Committee Chairman Frank Lucas said the strong majority vote to pass the Farm Bill as reported from the conference committee “fulfills the expectations the American people have of us. They expect us to work together to find ways to reduce the cost of the federal government.”

The five-year Farm Bill contributes major savings to deficit reduction compared to the 10-year baseline of current farm and nutrition programs. According to Lucas, the legislation also makes significant reforms to policy and includes a negotiated agreement on the size of reductions for the Nutrition Title, namely food stamps, which comprises more than 80% of the $956 billion Farm Bill package.

“I am hopeful this legislation will enjoy the same success when the Senate considers it, and I encourage the President to sign it quickly into law,” Lucas continued in his statement Wednesday after the House passed the conference report. The old Farm Bill extension has already expired on January 1.

The Dairy Policy Action Coalition (DPAC) -- a multi-state coalition founded in Pennsylvania four years ago -- supports Monday’s conference report, which was passed by the House on Wednesday, according to government relations advocate and dairy farmer Dennis Wolff, who previously served as Pennsylvania’s Secretary of Agriculture.

“We are especially pleased that it repeals the Dairy Product Price Support Program and offers an affordable margin insurance option without supply management,” said Wolff in an email interview Wednesday. “The Dairy Title moves dairy policy in the right direction. It makes some much needed changes and positions the U.S. as a dependable supplier to the growing global markets.”

Wolff added: “There is still a need to reform the federal milk marketing order system by doing a formal study to look at how effective the product price formula and the four-class pricing systems are functioning.”
DPAC has had countless meetings with members of Congress and their staff over the past four years to educate them on how federal policy affects dairy farmers, the dairy economy, and the rural communities that are widely affected by the financial health of local dairy farms.

“We explained that dairy farmers are not looking for a handout, but for policy that improves transparency in price discovery and supports the booming export market that will be the lifeblood for a growing and healthy dairy economy going forward,” Woff said. “The decision to remove supply management (the Dairy Market Stabilization Program) from the Dairy Title sends the right message to our global customers. Supply management would have been one more level of government intervention that would have been an administrative nightmare at both the farm and USDA levels.”

“This was a team effort right from the beginning,” said Bernie Morrissey, founder and retired treasurer of DPAC. “All the credit for sound dairy policy goes to the dairymen from around the entire United States, who came together, educated their congressmen and women, and voiced their opinions. Of course, without God, we can do nothing, and I know a lot of prayers were said over the past four years. This was a David and Goliath fight.”

In addition to removing the supply management provisions found in the former Senate version of the Farm Bill, the conference report adds a new “Dairy Donation Program” that is quite different from the former Dairy Product Price Support Program because it purchases products off the commercial market at market prices and donates them to nutrition programs for the less fortunate.

“DPAC believes the Dairy Product Donation Program will benefit families at risk of hunger,” Wolff said further. “This program is a useful method of moving dairy products to the most needy during times of extreme low margins.”

National Milk Producers Federation (NMPF) president and CEO Jim Mulhern released a statement Tuesday indicating that NMPF has worked over the past week with agriculture leaders in the House and Senate to develop a margin insurance program that will offer dairy farmers an effective safety net in the absence of the market stabilization component (supply management), which had been featured in NMPF’s original program.

“Despite its limitations,” said Mulhern, “we believe the revised program will help address the volatility in farmers’ milk prices, as well as feed costs, and provide appropriate signals to help address supply and demand.”

Mulhern described the outcome as establishing “a reasonable and responsible national risk management tool that will give farmers the opportunity to insure against catastrophic economic conditions, when milk prices drop, feed prices soar, or the combination. By limiting how much future milk production growth can be insured, the measure creates a disincentive to produce excess milk."

“The mechanism used is not what we would have preferred,” said Mulhern, “but it will be better than just a stand-alone margin insurance program that lacks any means to disincentivize more milk production during periods of over-supply.

According to Mulhern, the program in the conference report passed Wednesday by the House “does not discriminate against farms of differing sizes, or preferentially treat those in differing regions. The revised bill also establishes a system for the U.S. Department of Agriculture (USDA) to purchase consumer-packaged dairy products during low-margin periods, which will stimulate demand and help dairy farmers when they need it most, and only then.”

John Wilson, senior vice president of Dairy Farmers of America, based in Kansas City, Mo., also released a statement Tuesday thanking DFA’s dairy farmer owners, supporters in Congress, NMPF and other industry leaders “for tirelessly working to advocate for change in dairy policy."

“We are disappointed with the announcement that the new Farm Bill will not include the Dairy Security Act (DSA)… With that said, we are encouraged the new bill replaces outdated dairy policy and includes a margin insurance program, similar to that in the DSA. This new program will serve as an important risk management tool in helping the nation’s dairy farm families maintain financial stability.”

In the Oklahoma Farm Report Tuesday, Chairman Lucas called the conference report compromise, which later passed the House on a strong majority, “nothing short of a miracle.” House and Senate conferees were able to agree on $9 billion in reductions in food stamps spending below the 10-year baseline, and to clear several other policy hurdles. The last piece of the puzzle to fall into place was the Dairy Title.

Specifically, the conference report entitled The Agricultural Act of 2014 passed by the House and pending before the Senate is 949 pages, spends $956 billion -- over 80% of which is the Nutrition Title (food stamps). The five-year legislative package includes the following dairy provisions:

1) A Margin Protection Program for Dairy Producers, with margin being the difference between the USDA-calculated All-Milk price and a specified feed cost formula that takes into account the costs to feed the entire herd, including dry cows and young stock. According to University of Wisconsin ag economist and dairy policy analyst Dr. Mark Stephenson, the “broad brush” of this section is that “it would create a margin insurance for producers -- available to protect between a $4.00 to $8.00 milk-feed price margin in 50¢ increments.”

Even though “supply management” is not included and producers will not be penalized for a percentage of their production during low-margin triggers, producers will have a “production history,” which is the highest annual milk production in the 2011, 2012, or 2013 calendar years. This “history” will govern how much of the farm’s milk production – if more than the history – can be covered by the base “margin protection” and/or the purchased “margin protection”.

“There are also provisions for new entrants into dairying,” notes Stephenson, and a farm’s “individual production history will grow by the U.S. average production growth in subsequent years.”

Producers who expand significantly beyond the average U.S. growth will not be able to protect the additional milk production pounds under this program, Stephenson explains.

2) The Margin Protection Program for Dairy Producers is set up in two pricing tiers as far as premium costs. According to Stephenson, every dairy operation’s first 4 million pounds of milk sold annually will benefit from significantly lower premium costs to purchase the protection compared with purchasing protection for a farm’s milk production above 4 million pounds.

“The $4.00 margin coverage level is available at no cost,” Stephenson explains, “but the premiums become increasingly expensive, and are particularly expensive to cover margins above $6.50 (the highest cost premium is for production history above 4 million pounds at an $8.00 coverage and would cost $1.36 per cwt.). Additionally, premiums below the $8.00 level will be discounted by 25% for the first two years of the program (2014 & 2015) for the first 4 million pounds of production history.”

3) There will be a flat administrative fee of $100, paid annually, for registered producers over the life of the Farm Bill; however, producers can change their coverage percentages and decision levels on an annual basis.

4) Dairy producers will have the choice of participating in the Margin Protection Program or the Livestock Gross Margin Insurance (LGM) program under Federal Crop Insurance – but not both.

5) The Dairy Product Price Support Program is ended and a new Dairy Donation Program is provided for. This aligns with what many farmers have said over the past four years about using low-margin troughs as a time to donate dairy products to the needy and thus help bolster that trough so margin protection periods are smaller.

6) The MILC program will continue on a temporary basis with a formal repeal occurring upon implementation of the 2014 Farm Bill.

7) The Dairy Export Incentive Program is also repealed.

8) The Dairy Promotion and Research Program and Dairy Indemnity Program are extended.

9) The Federal Order Review Commission is repealed.

10) The Dairy Product Price Support Program is repealed and a new Dairy Donation Program is authorized, to be operational along with the Margin Protection Program. The Secretary shall establish and administer this program for the purposes of addressing low dairy operating margins and to provide nutrition assistance to individuals in low-income groups.

This Dairy Donation Program will trigger when margins reach $4, and will be interrupted if the domestic market price of certain dairy products exceeds the world price by more than 5 to 7%.

The Dairy Donation Program designates USDA as distributer of the consumer-packaged dairy products, but will work with both public and private non-profit entities for the purpose of donation. The language specifically prohibits the storage and commercial resale of these dairy products.