Transcript Slide 1

Dairy Policy
in the 2007 Farm Bill
Ed Jesse
UW-Madison/Extension
Dairy Policy in the 2007 Farm Bill:
Constraints
Budget
Trade Negotiations
Federal Budget Receipts and Expenditures,
Constant (2000) Dollars
3,500
*Congressional Budget Office Projections, April 2006
3,000
Expentitures
2,000
1,500
1,000
Receipts
500
0
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
0
20 5
06
20 *
07
20 *
08
20 *
09
*
$Billion
2,500
Fiscal Year
Composition of Federal Budget Expenditures, FY2005
(Billion Dollars)
Other Discretionary
430
Defense*
506
Net interest
180
Mandatory
1,295
*Includes Homeland Security.
Source: Congressional Budget Office
Government Farm Program Expenditures
35
3.0
FY 2006 and 2007 are
April 2006 projections
30
2.5
20
1.5
15
1.0
10
0.5
5
0.0
0
-0.5
$Billion
2.0
$Billion
25
1998
1999
2000
2001
2002
2003
2004
2005
2006E
2007E
U.S. WTO Proposal
on Agricultural Trade Reform
• Market access:
– Cut tariffs 55 to 90 percent
– No tariff greater than 75 percent
• Export Subsidies:
– Eliminate completely by 2013
• Domestic support:
– Reduce “Amber Box” subsidies by 60 percent
United States Permitted Aggregate Measure of Support
(AMS) Under WTO
20
18
16
14
All Other
Commodities
$Billion
12
10
8
6
4
Dairy
2
0
Current
U.S. Proposal
Dairy Policy in the 2007 Farm Bill:
Options
• Mandatory Supply Control?
– No way
• Voluntary Supply Control?
– CWT will continue, but no government program like
Milk Diversion or Whole Herd Buyout
• Compacts?
– Interest, but opposition too strong
Dairy Policy in the 2007 Farm Bill:
Options
• MILC?
– Not in current form
• Milk Price Support Program?
– Maybe, especially if Farm Bill completed before new
WTO agreement is completed
• Countercyclical payments?
– Maybe, depends on details
Milk Price Supports
Versus
Dairy Countercyclical Payments
Operation of Milk Price Support Program
Congress
Political
Milk
Support
Price
$9.90/Cwt. @ “Average” BF
$9.80/Cwt. @ 3.5% BF
USDA
Mechanical*
Product
Purchase
Prices
Butter: $1.05/Lb.
Nonfat Dry Milk: $0.80/Lb.
Block Cheddar: $1.1314
Barrel Cheddar: $1.1014
*Exception: Allocation of butter-powder value (tilts)
Dairy Price Support Program:
How its Supposed to Work
Market Price
Support Price
$9.80
Dairy Price Support Program:
How it Actually Works
Market Price
Support Price
$9.80
$8.57
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
$/Cwt.
Class III, Class IV, and Support Prices
22.00
21.00
Class III
20.00
Class IV
19.00
Support Price @ 3.5% BF
18.00
17.00
16.00
15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
2000
2001
2002
2003
2004
2005
2006
3/
20
4/ 00
2/
20
7/ 00
1/
2
9/ 000
29
12 /200
/2
8/ 0
2
3/ 000
28
/2
6/ 001
26
/2
9/ 001
24
12 /200
/2
3/ 1
2
3/ 001
23
/2
6/ 002
21
/2
9/ 002
19
12 /200
/1
8/ 2
2
3/ 002
18
/2
6/ 003
16
/2
9/ 003
14
12 /200
/1
3/ 3
2
3/ 003
12
/2
6/ 004
10
/2
0
9/ 04
8/
2
12 004
/7
/2
0
3/ 04
7/
20
6/ 05
5/
20
9/ 05
3/
2
12 005
/2
/2
0
3/ 05
2/
2
5/ 006
31
/2
00
6
1/
$/Lb
Block Cheddar Cheese Prices: NCE minus CCC
0.00
-0.01
-0.02
-0.03
-0.04
-0.05
-0.06
-0.07
-0.08
-0.09
-0.10
-0.11
-0.12
Weeks since January 1, 2000
when Chicago Mercantile
Exchange price fell below
CCC purchase price
-0.13
Can the Milk Price Support Program Work
under Current Marketing Conditions?
• The assumption is that a large number of cheese plants
make independent sales decisions.
• The reality is that a small number of large block and
barrel plants have their entire volume of production
committed to an even smaller number of buyers.
• Can the Milk Price Support Program survive a 60
percent reduction in permitted AMS?
Should the Milk Price Support Program Work
under Current Marketing Conditions?
• Support program distorts prices for dairy products,
especially nonfat dry milk. Creates fictitious market for
powder and impedes developing capacity to produce
other milk protein products with demonstrated demand
(e.g., MPC).
• “Higher of” pricing for fluid milk results in the CCC
sometimes setting fluid milk prices.
• USDA has authority to alter butter and nonfat dry milk
purchase prices, but is unwilling to take the political heat.
Countercyclical Payments:
A Better Alternative?
•
Elements:
1) Set Target price in reference to Class III Price
2) 100 percent of monthly deficiency paid to all
producers. No production caps.
3) Use payment limitation applicable to other farm
programs ($50,000 annual limit)
Countercyclical Payments:
A Better Alternative?
•
Advantages:
1)
Eliminates market distortions – milk moves to its highest and
best use.
2)
Promotes domestic production of MPC, other forms of milk
protein, and other dairy products.
3)
Promotes Exports
4)
Provides absolute level of support
5)
Reduces or eliminates the likelihood of the Class IV price
moving the Class I price
Countercyclical Payments:
A Better Alternative?
•
Questions:

Would program stimulate production, even with low target
price? ($10.00 - $10.50 Class III price is not profitable
anywhere.)

At what levels would commodity markets clear without CCC
purchases? (Doesn’t matter to producers, who are protected
by payments)

Would processors lowball producer prices because direct
payments would keep producers whole? (Cooperatives
should be able to prevent this from happening.)
Countercyclical Payments:
A Better Alternative?
•
Questions (Continued):

Would cheese buyers lowball cheese prices? (May be
possible in the short run, but with a payment limitation, the
resulting producer pay price would force contraction in milk
production and a market adjustment.)

Would such a program be WTO-legal? (Would add to AMS,
but much less than the milk price support program. Would add
even less if payments were decoupled from historical
production).

Would such a program be a budget-buster? (Unlikely unless
2002-03 reoccurs.)
How much would it Cost?
MILC Cost – FY2003
Month
Oct '02
Nov
Dec
Jan '03
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Total Maximum Cost
Total Actual Cost
Maximum Farm
Payment ($)
Target
Price
($/cwt)
13.69
13.69
13.69
13.69
13.69
13.69
13.69
13.69
13.69
13.69
13.69
13.69
Class I
Mover
($/cwt)
10.15
10.60
10.52
10.56
10.23
9.81
9.64
9.71
9.74
9.77
10.97
13.71
Def.
Payment
($/cwt)
Mo.
Prod.
(Mil Lbs)
Max MILC
Payment
($Mil)
1.5930
1.3905
1.4265
1.4085
1.5570
1.7460
1.8225
1.7910
1.7775
1.7640
1.2240
0.0000
13,897
13,499
14,247
14,595
13,444
15,048
14,642
15,014
14,340
14,264
14,024
13,473
221
188
203
206
209
263
267
269
255
252
172
0
2,504
1,148
43,740
How much would it Cost?
Countercyclical – FY2003
Imputed Countercyclical Payments, FY2003
Target Price (Class III
Reference) $/cwt
$10.00 $10.50 $11.00 $11.50
Total Program Cost ($Mil)
MILC
1,148
1,148
1,148
1,148
No Payment Limitation
195
646
1,340
2,126
$50,000 Payment Limit
195
535
937
1,263
Countercyclical:
How Much would Farmers Get?
Countercyclical – FY2003 with $50K Limit
Imputed Countercyclical Payments, FY2003
Target Price (Class III Reference), $/cwt
MILC
$10.00
$10.50
$11.00
$11.50
Total Farm Payment ($)
100 cows
200 cows
500 cows
1,000 cows
2,006
4,339
11,442
25,855
6,712
14,519
38,282
50,000
14,028
30,343
50,000
50,000
22,324
48,286
50,000
50,000
26,398
35,000
35,000
35,000
0.11
0.11
0.11
0.11
0.37
0.37
0.37
0.21
0.78
0.78
0.48
0.21
1.23
1.23
0.48
0.21
1.46
0.89
0.34
0.15
Farm Payment per cwt ($)
100 cows
200 cows
500 cows
1,000 cows
MILC Maximum payment based on 2.4 million pounds times average payment rate for FY2003