The Dairy Subtitle of the Food, Conservation and Energy Act of 2008

The Dairy Subtitle of the Food, The Dairy Subtitle of the Food, Conservation and Energy Act of 2008Conservation and Energy Act of 2008

2008 Farm Bill Education Conference2008 Farm Bill Education Conference

Brian W. GouldBrian W. GouldAssociate ProfessorAssociate Professor

Department of Agricultural. and Applied EconomicsDepartment of Agricultural. and Applied EconomicsUniversity of Wisconsin-MadisonUniversity of Wisconsin-Madison

July 8, 2008

http://future.aae.wisc.edu

Dairy Subtitle General CharacteristicsDairy Subtitle General Characteristics Dairy not the cause of lengthy delayDairy not the cause of lengthy delay

In contrast to last 2 Farm BillsIn contrast to last 2 Farm Bills No major changes from current programsNo major changes from current programs Reconciliation of House and Senate versions were Reconciliation of House and Senate versions were

relatively harmoniousrelatively harmonious Delay in enactment benefited dairy interestsDelay in enactment benefited dairy interests

Change in MILC program with more realistic target Change in MILC program with more realistic target for triggering payments via feed cost adjuster added for triggering payments via feed cost adjuster added in Conference Committeein Conference Committee

Jesse, Cropp and Gould (2008) Briefing Paper on Dairy Jesse, Cropp and Gould (2008) Briefing Paper on Dairy Subtitle Available from UW WebsiteSubtitle Available from UW Website

Dairy Subtitle of the 2008 Farm BillDairy Subtitle of the 2008 Farm Bill

Milk Price Support Program (MPSP)Milk Price Support Program (MPSP) Established by the Agricultural Act of 1949 and used Established by the Agricultural Act of 1949 and used

to support to support manufacturingmanufacturing milk price milk price 75-90% parity based on relationship between milk 75-90% parity based on relationship between milk

price and farm costs over 1910-14price and farm costs over 1910-14 Parity used in setting support price over 1950-1981Parity used in setting support price over 1950-1981

Milk price supported by CCC purchases of cheddar Milk price supported by CCC purchases of cheddar cheese, NFDM and buttercheese, NFDM and butter

1981 support price was $13.10, $9.90 since 19991981 support price was $13.10, $9.90 since 1999

MPSP Accounted for 25% of WTO Aggregate Measure MPSP Accounted for 25% of WTO Aggregate Measure of Support (AMS) for U.S. Agricultureof Support (AMS) for U.S. Agriculture

Dairy Product Price Support ProgramDairy Product Price Support Program

Dairy Product Price Support Program (DPPSP)Dairy Product Price Support Program (DPPSP) Under 2008 Farm Bill, MPSP renamed Under 2008 Farm Bill, MPSP renamed Dairy Product Dairy Product

Price SupportPrice Support ProgramProgram CCC purchases dairy products to support commodity CCC purchases dairy products to support commodity

prices not manufacturing milk priceprices not manufacturing milk price Support pricesSupport prices

Cheddar: Cheddar: BlocksBlocks $1.13 $1.13 BarrelsBarrels $1.10 $1.10 Butter: $1.05Butter: $1.05 NFDM: $0.80NFDM: $0.80

USDA can sell back CCC inventoriesUSDA can sell back CCC inventories ≥≥ 110% of current CCC purchase price110% of current CCC purchase price

DPPSP is an attempt to reduce dairy’s contribution to DPPSP is an attempt to reduce dairy’s contribution to the U.S. AMSthe U.S. AMS No longer supporting a particular milk priceNo longer supporting a particular milk price


No Change From 2007Level

Implications of Supporting Dairy Commodity PricesImplications of Supporting Dairy Commodity Prices The issue of butter-powder tilts no longer a problemThe issue of butter-powder tilts no longer a problem

Butter and NFDM considered joint productsButter and NFDM considered joint products Under previous program if butter support price Under previous program if butter support price ↓ ↓

than NFDM support price would be than NFDM support price would be ↑ ↑ in order to in order to maintain milk support pricemaintain milk support price

Allow Sec. of Agriculture to Reduce Support PricesAllow Sec. of Agriculture to Reduce Support Prices If CCC 12-month net removals exceed certain levelsIf CCC 12-month net removals exceed certain levels A policy option but not required to be undertakenA policy option but not required to be undertaken



ProductProduct12-Month Net 12-Month Net

Removal TriggersRemoval Triggers

Maximum Maximum Per Lb. Per Lb.

DecreaseDecrease

Cheddar Cheddar CheeseCheese

> 200 mil. lbs and < 400 mil. lbs> 200 mil. lbs and < 400 mil. lbs 10¢10¢

> 400 mil. lbs> 400 mil. lbs 20¢20¢

ButterButter> 450 mil. lbs and < 650 mil. lbs> 450 mil. lbs and < 650 mil. lbs 10¢10¢

> 650 mil. lbs> 650 mil. lbs 20¢20¢

Nonfat Nonfat Dry MilkDry Milk

> 600 mil. lbs and < 800 mil. lbs> 600 mil. lbs and < 800 mil. lbs 5¢5¢

> 800 mil. lbs> 800 mil. lbs 10¢10¢

Conditions Under Which Support Conditions Under Which Support Prices Can be ReducedPrices Can be Reduced

Implications of Supporting Dairy Commodity PricesImplications of Supporting Dairy Commodity Prices Low probability that net removals will reach levels Low probability that net removals will reach levels

triggering possible price reductionstriggering possible price reductions CCC purchase prices are so low CCC purchase prices are so low → farm milk → farm milk

prices well below cost of production → supply prices well below cost of production → supply responseresponse

Except for a few years, CCC annual purchases have Except for a few years, CCC annual purchases have been well below trigger levelsbeen well below trigger levels



Annual CCC Dairy Commodity Net Removals

-100

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Mil. lbs.

Butter Cheese

NFDM Butter LimitCheese Limit NFDM Limit

Milk Income Loss Contract (Milk Income Loss Contract (MILCMILC) Program ) Program Similar to initial MILC program and subsequent Similar to initial MILC program and subsequent

MILCX extensionMILCX extension Differences between new MILC and previousDifferences between new MILC and previous

A variable target price system establishedA variable target price system established Price deficiency payment rate (% of difference Price deficiency payment rate (% of difference

between target and market price paid) between target and market price paid) The cap on annual eligible milk marketings The cap on annual eligible milk marketings

The following table provides a summary of MILC The following table provides a summary of MILC program characteristics under 2008 Billprogram characteristics under 2008 Bill

Milk Income Loss Contract ProgramMilk Income Loss Contract Program

Characteristic Value

Base Class I Target @ Boston ($/cwt)Base Class I Target @ Boston ($/cwt) 16.9416.94

Class I Payment Rate (%)Class I Payment Rate (%)Oct. 1, 2007 – Sept. 30, 2008Oct. 1, 2007 – Sept. 30, 2008Oct. 1, 2008 – Aug. 31, 2012Oct. 1, 2008 – Aug. 31, 2012

After Aug. 31, 2012After Aug. 31, 2012

343445453434

National Average Dairy Feed Cost ($/cwt)National Average Dairy Feed Cost ($/cwt)Jan. 1, 2008 – Aug. 31, 2012Jan. 1, 2008 – Aug. 31, 2012

After Aug. 31, 2012After Aug. 31, 20127.357.359.509.50

Feed Cost Adjustment Rate (%)Feed Cost Adjustment Rate (%) 4545

Annual Payment Quantity Limit (1,000 lbs)Annual Payment Quantity Limit (1,000 lbs)Oct. 1, 2007 – Sept. 30, 2008Oct. 1, 2007 – Sept. 30, 2008Oct. 1, 2008 – Aug. 31, 2012Oct. 1, 2008 – Aug. 31, 2012

After Aug. 31, 2012After Aug. 31, 2012

2,4002,4002,9852,9852,4002,400


Milk Income Loss Contract (Milk Income Loss Contract (MILCMILC) Program ) Program Major change is the ability to adjust target price Major change is the ability to adjust target price

according to changes in feed costaccording to changes in feed cost Feed cost: Cost of 16% protein dairy ration used Feed cost: Cost of 16% protein dairy ration used

by USDA in its milk-feed price ratioby USDA in its milk-feed price ratio 51% corn, 41% alfalfa hay, 8% soybeans51% corn, 41% alfalfa hay, 8% soybeans

National Base Feed Cost National Base Feed Cost is set at $7.35/cwt of feedis set at $7.35/cwt of feed Increases to $9.50 in Sept. 2012Increases to $9.50 in Sept. 2012


MILC Price Deficiency RateMILC Price Deficiency Rate Original MILC payment rate: 45% of difference Original MILC payment rate: 45% of difference

between $16.94 and actual Class I Boston pricebetween $16.94 and actual Class I Boston price MILC-X extension: 34% starting in Oct. 2005MILC-X extension: 34% starting in Oct. 2005 2008 Farm Bill: 45% from Oct. 2008 – Aug. 20122008 Farm Bill: 45% from Oct. 2008 – Aug. 2012

34% thereafter34% thereafter

MILC Annual Eligible Milk ProductionMILC Annual Eligible Milk Production Original MILC: Payments limited to 2.4 mil. lbsOriginal MILC: Payments limited to 2.4 mil. lbs Producers can not opt out of program once Producers can not opt out of program once

participation startsparticipation starts 2008 Farm Bill: Limit ↑ to 2.985 mil. lbs.2008 Farm Bill: Limit ↑ to 2.985 mil. lbs.


Eligible Milk ProductionEligible Milk Production Using 2007 average U.S. milk yieldUsing 2007 average U.S. milk yield

2.400 mil. lb produced by 118 cows2.400 mil. lb produced by 118 cows 2.985 mil. lb produced by 147 cows2.985 mil. lb produced by 147 cows

83% of 83% of farmsfarms have their have their entireentire milk production milk production covered by MILCcovered by MILC Account for 22% of U.S. milk productionAccount for 22% of U.S. milk production

2,890 additional farms fully covered w/ higher limit2,890 additional farms fully covered w/ higher limit 7.5 billion additional milk covered7.5 billion additional milk covered 4% more of both farms and production4% more of both farms and production

We estimate that 44% of U.S. milk production could We estimate that 44% of U.S. milk production could be covered by new limitbe covered by new limit


Herd Size Herd Size (No. of (No. of Cows)Cows)

No. of No. of HerdsHerds

% of % of HerdsHerds

% of % of Milk Milk Prod.Prod.

Avg. Avg. Prod/Cow Prod/Cow (lbs/Year)(lbs/Year)

Max Cows Max Cows Covered Covered

by 2.4 Mil. by 2.4 Mil. Lb. LimitLb. Limit

Max Cows Max Cows Covered Covered by 2.985 by 2.985 Mil. Lb. Mil. Lb.

LimitLimit

1-291-29 20,01520,015 28.028.0 1.21.2 14,30614,306 2929 2929

30-4930-49 13,42013,420 18.818.8 4.54.5 16,00016,000 4949 4949

50-9950-99 20,98020,980 29.329.3 13.113.1 17,24017,240 9999 9999

100-199100-199 9,3259,325 13.013.0 12.212.2 18,45218,452 130130 161161

200-499200-499 4,5554,555 6.46.4 14.914.9 20,26720,267 118118 147147

500-999500-999 1,7001,700 2.42.4 12.312.3 19,94219,942 120120 150150

1,000-1,9991,000-1,999 920920 1.31.3 16.116.1 24,53324,533 9797 122122

2000+2000+ 595595 0.80.8 25.725.7 22,52822,528 106106 133133

All HerdsAll Herds 71,51071,510 ---------- ---------- 20,26620,266 118118 147147


Maximum No. of Cows Covered by Maximum No. of Cows Covered by MILCMILC Program by Herdsize Program by Herdsize

How is Feed Cost Adjuster Used to Set Target Price?How is Feed Cost Adjuster Used to Set Target Price? At the end of each month, USDA calculates At the end of each month, USDA calculates National National

Average Dairy Feed CostAverage Dairy Feed Cost Compare value with current $7.35 base Compare value with current $7.35 base If current average feed cost > $7.35 If current average feed cost > $7.35

Calculate % difference between current vs. baseCalculate % difference between current vs. base Multiply % difference by 0.45Multiply % difference by 0.45 The resulting % used to increase $16.94 Boston The resulting % used to increase $16.94 Boston

Class I targetClass I target

Spreadsheet Model Available: Spreadsheet Model Available: future.aae.wisc.edu/collection/software/MILC_Cost_Adjuster.xlsfuture.aae.wisc.edu/collection/software/MILC_Cost_Adjuster.xls


Feed Cost Adjuster Calculation Example #1Feed Cost Adjuster Calculation Example #1 Based on May 2008 dataBased on May 2008 data USDA’s USDA’s Agricultural PricesAgricultural Prices report is data source report is data source

Corn ($/bu):Corn ($/bu): $5.12 $5.12 Alfalfa ($/ton):Alfalfa ($/ton): $177.00 $177.00 Soybeans ($/bu): $12.30Soybeans ($/bu): $12.30

→ → Dairy ration cost ($/cwt) of $9.93Dairy ration cost ($/cwt) of $9.93 % diff. over base = ($9.93 – $7.35)/$7.35 = 0.3512% diff. over base = ($9.93 – $7.35)/$7.35 = 0.3512 → → MILC target adjuster = 0.3512*0.45 = 0.16MILC target adjuster = 0.3512*0.45 = 0.16 New MILC Price Target = 1.16*$16.94 = $19.65New MILC Price Target = 1.16*$16.94 = $19.65 May Class I Boston price: $16.62+3.25 = $19.87May Class I Boston price: $16.62+3.25 = $19.87

→ → No MILC paymentNo MILC payment


May Class I Mover

Boston Differential

Feed Cost Adjuster Calculation Example #2Feed Cost Adjuster Calculation Example #2 We simulate system oWe simulate system over August ver August ′′08 – May 08 – May ′09′09 Use June 24Use June 24thth futures market data to evaluate futures market data to evaluate

potential for MILC payments over next 11 monthspotential for MILC payments over next 11 months Corn, Soybeans and Class IIICorn, Soybeans and Class III Interpolate across months with no futuresInterpolate across months with no futures

Alfalfa Hay: 20% over Aug. ′07 through May ′08 Alfalfa Hay: 20% over Aug. ′07 through May ′08 values to account for higher costs due to weather and values to account for higher costs due to weather and flooding conditionsflooding conditions



Simulated Feed Costs and Simulated Feed Costs and MILCMILC Targets: Aug. 08-May 09 Targets: Aug. 08-May 09

DateDate

Corn Corn ($/bu)($/bu)

Soy Soy ($/bu)($/bu)

Hay Hay ($/ton)($/ton)

Feed Feed Cost Cost

($/cwt)($/cwt)

Feed Feed Cost – Cost – TargetTarget($/cwt)($/cwt)

% Diff % Diff Over Over

TargetTarget

MILC MILC Target Target ($/cwt)($/cwt)

Class I Class I Mover Mover TargetTarget($/cwt)($/cwt)

Projected Projected Class I Class I MoverMover($/cwt)($/cwt)

Aug-08 7.31 15.17 164.40 12.05 4.70 64.0 21.82 18.57 19.66

Sep-08 7.39 15.05 162.00 12.05 4.70 64.0 21.82 18.57 20.46

Oct-08 7.45 15.04 164.40 12.16 4.81 65.5 21.93 18.68 20.46

Nov-08 7.52 15.02 162.00 12.18 4.83 65.7 21.95 18.70 20.40

Dec-08 7.59 15.09 163.20 12.27 4.92 67.0 22.04 18.79 20.40

Jan-09 7.64 15.16 162.20 12.30 4.95 67.4 22.08 18.83 19.90

Feb-09 7.69 15.18 165.60 12.43 5.08 69.1 22.21 18.96 19.87

Mar-09 7.75 15.21 171.60 12.60 5.25 71.4 22.38 19.13 19.76

Apr-09 7.79 15.20 188.40 12.98 5.63 76.6 22.78 19.53 19.89

May-09 7.82 15.20 192.00 13.09 5.74 78.1 22.89 19.64 20.08

Renews the 2000-2004 Pilot Forward Pricing Program Renews the 2000-2004 Pilot Forward Pricing Program Voluntary programVoluntary program Applied to milk marketed under FMMO’sApplied to milk marketed under FMMO’s Does not apply to Class I milkDoes not apply to Class I milk Producers continue to be able to receive minimum Producers continue to be able to receive minimum

FMMO price if not forward pricedFMMO price if not forward priced For handlers not cooperatives, the program For handlers not cooperatives, the program

terminates Sept. 30, 2012terminates Sept. 30, 2012 Contracts allowed to be in effect until Sept. 30, Contracts allowed to be in effect until Sept. 30,

20152015

Dairy Forward Pricing ProgramDairy Forward Pricing Program

Dairy Export Incentive Program (DEIP) Dairy Export Incentive Program (DEIP) Authorized by 1985 Farm Bill Authorized by 1985 Farm Bill Dairy export subsidy program designed to:Dairy export subsidy program designed to:

Promote dairy product exportsPromote dairy product exports Facilitate international market developmentFacilitate international market development Provide a way to remove surplus dairy productsProvide a way to remove surplus dairy products

Activity level depends on relative international dairy Activity level depends on relative international dairy product pricesproduct prices When U.S. prices above world prices, very active When U.S. prices above world prices, very active

subsidy programsubsidy program Recently no activity given increased international Recently no activity given increased international

pricesprices

Dairy Export Incentive ProgramDairy Export Incentive Program

Sets Procedures for USDA to Accelerate FMMO HearingsSets Procedures for USDA to Accelerate FMMO Hearings 30 days after receiving hearing request30 days after receiving hearing request

Must issue a timeline for actions that result in Must issue a timeline for actions that result in completion of hearing within 120 dayscompletion of hearing within 120 days

Request information from petitioners to use in Request information from petitioners to use in making decision whether to hold a hearingmaking decision whether to hold a hearing

Deny the requestDeny the request Post-hearing briefs filed within 60 days of hearingPost-hearing briefs filed within 60 days of hearing Must issue recommended decision within 90 days of Must issue recommended decision within 90 days of

deadline for filing post-hearing briefsdeadline for filing post-hearing briefs Must issue final decision within 60 days of deadline for Must issue final decision within 60 days of deadline for

receiving comments and exceptions to decisionreceiving comments and exceptions to decision

Federal Milk Federal Milk MarketingMarketing Order Order Amendment ProceduresAmendment Procedures

The Entire Process for Amending an OrderThe Entire Process for Amending an Order Would still require at least 1 year under expedited rulesWould still require at least 1 year under expedited rules Could be longer if Could be longer if

USDA requests further information from petitionersUSDA requests further information from petitioners Allows lengthy time for filing comments and Allows lengthy time for filing comments and

exceptions to recommended decisionexceptions to recommended decision

Federal Milk Federal Milk MarketingMarketing Order Order Amendment ProceduresAmendment Procedures

Establish an FMMO Review Commission to Review Establish an FMMO Review Commission to Review Federal and Non-Federal Marketing Order Systems Federal and Non-Federal Marketing Order Systems Consider legislative and regulatory procedures to:Consider legislative and regulatory procedures to:

Enhance future competitiveness of dairy productsEnhance future competitiveness of dairy products Ensure transparency in dairy pricingEnsure transparency in dairy pricing Simply FMMO systemSimply FMMO system Evaluate whether FMMO’s serve interests of Evaluate whether FMMO’s serve interests of

producers, processors and consumersproducers, processors and consumers Determine costs/benefits of adjusting milk Determine costs/benefits of adjusting milk

composition standardscomposition standards 14 member commission 14 member commission Report within 2 years after 1Report within 2 years after 1stst meeting. meeting.

Federal Milk Marketing Order Federal Milk Marketing Order Review CommissionReview Commission

Dairy Promotion and Research ProgramDairy Promotion and Research Program Reauthorized Dairy Check-Off Program Reauthorized Dairy Check-Off Program Now includes all states, Puerto Rico and D.CNow includes all states, Puerto Rico and D.C Authorized 7.5¢ assessment per milk equivalent for Authorized 7.5¢ assessment per milk equivalent for

imported dairy productsimported dairy products

USDA Reports to Congress Within 90 Days Concerning USDA Reports to Congress Within 90 Days Concerning NFDM Price Reporting Procedures and Procedure NFDM Price Reporting Procedures and Procedure Impacts on FMMO PricingImpacts on FMMO Pricing

Strengthens Mandatory Reporting of Dairy-Related Sales Strengthens Mandatory Reporting of Dairy-Related Sales and Inventoryand Inventory Establish electronic reporting systemEstablish electronic reporting system

Other LegislationOther Legislation

Contact InformationContact Information

Jesse, Cropp and Gould, 2008. Jesse, Cropp and Gould, 2008. Dairy Subtitle: Food, Dairy Subtitle: Food, ConservationConservation and Energy Act of 2008, and Energy Act of 2008, Department of Department of Ag. and Applied Economics, U. of WisconsinAg. and Applied Economics, U. of Wisconsin

Univ. of Wisconsin Dairy Marketing Website:Univ. of Wisconsin Dairy Marketing Website:http://future.aae.wisc.eduhttp://future.aae.wisc.edu

Brian W. GouldBrian W. GouldDept. of Agricultural and Applied EconomicsDept. of Agricultural and Applied Economics(608)263-3212(608)[email protected]@wisc.edu

Documents

The Dairy Subtitle of the Food, Conservation and Energy Act of 2008