The so-called "Dairy Cliff"—a legislative reset which could send milk prices up to $6 per gallon or more if the current farm bill is allowed to expire after December 31—is catching headlines across the country. While the issue is taking a back seat to the better-known Fiscal Cliff, the potential surge in milk prices and the changes to dairy policy proposed by both the Senate and the House could have big implications for Midwestern dairy farmers and consumers.
Ever since the mid-1900s, the USDA has provided a "support price" for dairy products in the U.S. The USDA is required to buy as much milk at that price as producers want to sell, the intention being to keep milk prices from dropping so low that farmers can't stay in business. If there's no replacement or extension of the current farm bill, the formula for the support price reverts to legislation from 1949, which would bring milk prices up to approximately $38 per hundredweight or around $6 per gallon, according to University of Wisconsin-Madison Director of Dairy Policy Mark Stephenson.
A big jump in milk prices might sound like a good deal for farmers, but most are afraid of the long-term consequences that might bring. "We would price ourselves right out of the market," local dairyman Bill Rowekamp said. "Nobody wants to see that happen." Local dairy farmer and president of the Winona County Farm Bureau Glen Groth echoed the fears that such a price increase would drive consumers to buy less milk and dairy products.
Even though the chances of an extension to the current farm bill—much less a new farm bill—being enacted by the end of the year are dwindling by the minute, neither Stephenson, Groth, nor Rowekamp thought the country was likely to go off the "Dairy Cliff."
"This is like the Mayan calendar," Stephenson said. "We're going to take our chance to get deliciously scared about this but the likelihood that it's actually going to happen is very small in my opinion."
The stories about the impending Dairy Cliff "are just sensationalism," Rowekamp said. "It will never happen. If it comes right down to it, if [Congress] can't agree, they will just extend the existing farm bill."
"Right now I think [Congress] is playing a game of politics," Groth said. "They're using the dairy industry as a sacrificial lamb to hold up and say, 'If you guys don't do this, we'll have these high milk prices, so you better tell your congressmen to get the farm bill passed.'"
The Secretary of Agriculture will have to announce the new support price if no deal is made, but "he could very legitimately drag his feet a little bit, and probably waste another four to six weeks before actually implementing the program," said Stephenson. Even then, producers aren't likely to take product from their established buyers and jump through the hoops required to sell to the government if they believe the new support price will only be around for a few weeks, Stephenson said.
That would give the new Congress two months or more to come to a deal before the new support price sets in. Still, the farm bill would have to be one of the first things on the new Congress' agenda. Stephenson said he thinks an extension to the current farm bill is the most likely outcome, but if mid-January rolls around and Congress isn't any closer to a deal he might start to worry.
Senate, House propose new dairy policy
Both the Senate and House farm bill proposals contain similar language on a new dairy policy. The proposed legislation would eliminate the long-standing insurance and price control programs and replace them with a voluntary program combining margin insurance and "soft quota."
The new insurance program would pay farmers when the difference between the price of milk and the cost of producing it (their margin) falls below a certain point. Farms would have a one-time choice to opt into the program for the life of the farm bill. Farms that joined would also have to participate in the Dairy Market Stabilization Program, which would reduce the amount dairy farmers could be paid for their product when demand for milk is low. In the House version, when the margin for milk drops below six dollars for two months in a row, farmers would only be paid for 92-98% of their normal production. The purpose of the program is to avoid oversupply of milk in order to protect prices for farmers.
The National Milk Producers Federation, which represents dairy co-ops, is pushing for the new farm bill, but not all farmers are in favor of it.
"What region of the country you're in has a lot to do with whether you like the program or not," Rowekamp said. To farms in the West and Northeast who are struggling with rising feed costs and have a more limited ability to grow, insurance against those grain prices and a program for keeping milk prices where they're at sounds good, he said. For Midwestern dairies, which grow much of their feed themselves, it's less attractive.
"But back here in Minnesota, there's a lot of farms where the parents are looking to slow down, and they've got a son or daughter looking to come in," Rowekamp said. "To make that all happen you have to add cows; you've got to do something to generate more income so both families can live. This quota would hurt that."
There are private-sector mechanisms for protecting dairy prices. "We have well-functioning futures markets for milk and dairy products," Stephenson said. "There are risk-management tools that are very effective, but they do require more thought, more effort on the part of producers. It's not as easy as signing up for an insurance product."
In futures markets, dairy producers contract with buyers to provide x amount of milk at y price on a specified date in the future. The idea is that by engaging in these future contracts, producers (and buyers) can protect themselves from the ups and downs of the day-to-day market.
If these new dairy policies are passed, either before the end of the year or sometime in future, farmers will still have the one-time option to join or not. So farmers who are opposed to the programs aren't stuck with them. "I don't have a problem with it personally," said Rowekamp, who doesn't plan on joining. "I just hope dairymen take a good look at all the ramifications before they sign the paper."