Transcript The Dairy Subtitle of the Food, Conservation and Energy Act of 2008 2008 Farm Bill Education Conference Brian W.

The Dairy Subtitle of the Food,
Conservation and Energy Act of 2008
2008 Farm Bill Education Conference
Brian W. Gould
Associate Professor
Department of Agricultural. and Applied Economics
University of Wisconsin-Madison
July 8, 2008
http://future.aae.wisc.edu
Dairy Subtitle of the 2008 Farm Bill
 Dairy Subtitle General Characteristics
 Dairy not the cause of lengthy delay
 In contrast to last 2 Farm Bills
 No major changes from current programs
 Reconciliation of House and Senate versions were
relatively harmonious
 Delay in enactment benefited dairy interests
 Change in MILC program with more realistic target
for triggering payments via feed cost adjuster added
in Conference Committee
 Jesse, Cropp and Gould (2008) Briefing Paper on Dairy
Subtitle Available from UW Website
Dairy Product Price Support Program
 Milk Price Support Program (MPSP)
 Established by the Agricultural Act of 1949 and used
to support manufacturing milk price
 75-90% parity based on relationship between milk
price and farm costs over 1910-14
 Parity used in setting support price over 1950-1981
 Milk price supported by CCC purchases of cheddar
cheese, NFDM and butter
 1981 support price was $13.10, $9.90 since 1999
 MPSP Accounted for 25% of WTO Aggregate Measure of
Support (AMS) for U.S. Agriculture
Dairy Product Price Support Program
 Dairy Product Price Support Program (DPPSP)
 Under 2008 Farm Bill, MPSP renamed Dairy Product
Price Support Program
 CCC purchases dairy products to support commodity
prices not manufacturing milk price
 Support prices
No Change
Cheddar: Blocks $1.13 Barrels $1.10 From 2007
Level
Butter: $1.05 NFDM: $0.80
 USDA can sell back CCC inventories
 ≥ 110% of current CCC purchase price
 DPPSP is an attempt to reduce dairy’s contribution to
the U.S. AMS
 No longer supporting a particular milk price
Dairy Product Price Support Program
 Implications of Supporting Dairy Commodity Prices
 The issue of butter-powder tilts no longer a problem
 Butter and NFDM considered joint products
 Under previous program if butter support price ↓
than NFDM support price would be ↑ in order to
maintain milk support price
 Allow Sec. of Agriculture to Reduce Support Prices
 If CCC 12-month net removals exceed certain levels
 A policy option but not required to be undertaken
Dairy Product Price Support Program
Conditions Under Which Support
Prices Can be Reduced
Product
12-Month Net
Removal Triggers
Maximum
Per Lb.
Decrease
Cheddar > 200 mil. lbs and < 400 mil. lbs
Cheese > 400 mil. lbs
10¢
> 450 mil. lbs and < 650 mil. lbs
10¢
> 650 mil. lbs
Nonfat > 600 mil. lbs and < 800 mil. lbs
Dry Milk > 800 mil. lbs
20¢
5¢
10¢
Butter
20¢
Dairy Product Price Support Program
 Implications of Supporting Dairy Commodity Prices
 Low probability that net removals will reach levels
triggering possible price reductions
 CCC purchase prices are so low → farm milk
prices well below cost of production → supply
response
 Except for a few years, CCC annual purchases have
been well below trigger levels
Dairy Product Price Support Program
Mil. lbs.
Annual CCC Dairy Commodity Net Removals
1,100
1,000
Butter
NFDM
Cheese Limit
900
800
Cheese
Butter Limit
NFDM Limit
700
600
500
400
300
200
100
0
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
-100
Milk Income Loss Contract Program
 Milk Income Loss Contract (MILC) Program
 Similar to initial MILC program and subsequent
MILCX extension
 Differences between new MILC and previous
 A variable target price system established
 Price deficiency payment rate (% of difference
between target and market price paid)
 The cap on annual eligible milk marketings
 The following table provides a summary of MILC
program characteristics under 2008 Bill
Milk Income Loss Contract Program
Characteristic
Value
Base Class I Target @ Boston ($/cwt)
Class I Payment Rate (%)
Oct. 1, 2007 – Sept. 30, 2008
Oct. 1, 2008 – Aug. 31, 2012
After Aug. 31, 2012
National Average Dairy Feed Cost ($/cwt)
Jan. 1, 2008 – Aug. 31, 2012
After Aug. 31, 2012
Feed Cost Adjustment Rate (%)
16.94
Annual Payment Quantity Limit (1,000 lbs)
Oct. 1, 2007 – Sept. 30, 2008
Oct. 1, 2008 – Aug. 31, 2012
After Aug. 31, 2012
34
45
34
7.35
9.50
45
2,400
2,985
2,400
Milk Income Loss Contract Program
 Milk Income Loss Contract (MILC) Program
 Major change is the ability to adjust target price
according to changes in feed cost
 Feed cost: Cost of 16% protein dairy ration used
by USDA in its milk-feed price ratio
 51% corn, 41% alfalfa hay, 8% soybeans
 National Base Feed Cost is set at $7.35/cwt of feed
 Increases to $9.50 in Sept. 2012
Milk Income Loss Contract Program
 MILC Price Deficiency Rate
 Original MILC payment rate: 45% of difference
between $16.94 and actual Class I Boston price
 MILC-X extension: 34% starting in Oct. 2005
 2008 Farm Bill: 45% from Oct. 2008 – Aug. 2012
34% thereafter
 MILC Annual Eligible Milk Production
 Original MILC: Payments limited to 2.4 mil. lbs
 Producers can not opt out of program once
participation starts
 2008 Farm Bill: Limit ↑ to 2.985 mil. lbs.
Milk Income Loss Contract Program
 Eligible Milk Production
 Using 2007 average U.S. milk yield
 2.400 mil. lb produced by 118 cows
 2.985 mil. lb produced by 147 cows
 83% of farms have their entire milk production
covered by MILC
 Account for 22% of U.S. milk production
 2,890 additional farms fully covered w/ higher limit
 7.5 billion additional milk covered
 4% more of both farms and production
 We estimate that 44% of U.S. milk production could
be covered by new limit
Milk Income Loss Contract Program
Maximum No. of Cows Covered by MILC Program by Herdsize
Herd Size
(No. of
Cows)
Avg.
Prod/Cow
(lbs/Year)
Max Cows Max Cows
Covered Covered by
by 2.4 Mil. 2.985 Mil.
Lb. Limit
Lb. Limit
No. of
Herds
% of
Herds
% of
Milk
Prod.
1-29
20,015
28.0
1.2
14,306
29
29
30-49
13,420
18.8
4.5
16,000
49
49
50-99
20,980
29.3
13.1
17,240
99
99
100-199
9,325
13.0
12.2
18,452
130
161
200-499
4,555
6.4
14.9
20,267
118
147
500-999
1,700
2.4
12.3
19,942
120
150
1,000-1,999
920
1.3
16.1
24,533
97
122
2000+
595
0.8
25.7
22,528
106
133
All Herds
71,510
-----
-----
20,266
118
147
Milk Income Loss Contract Program
 How is Feed Cost Adjuster Used to Set Target Price?
 At the end of each month, USDA calculates National
Average Dairy Feed Cost
 Compare value with current $7.35 base
 If current average feed cost > $7.35
 Calculate % difference between current vs. base
 Multiply % difference by 0.45
 The resulting % used to increase $16.94 Boston
Class I target
 Spreadsheet Model Available:
future.aae.wisc.edu/collection/software/MILC_Cost_Adjuster.xls
Milk Income Loss Contract Program
 Feed Cost Adjuster Calculation Example #1
 Based on May 2008 data
 USDA’s Agricultural Prices report is data source
 Corn ($/bu):
$5.12
 Alfalfa ($/ton):
$177.00
 Soybeans ($/bu): $12.30
 → Dairy ration cost ($/cwt) of $9.93
 % diff. over base = ($9.93 – $7.35)/$7.35 = 0.3512
 → MILC target adjuster = 0.3512*0.45 = 0.16
 New MILC Price Target = 1.16*$16.94 = $19.65
 May Class I Boston price: $16.62+3.25 = $19.87
 → No MILC payment May Class I
Boston
Mover
Differential
Milk Income Loss Contract Program
 Feed Cost Adjuster Calculation Example #2
 We simulate system over August ′08 – May ′09
 Use June 24th futures market data to evaluate
potential for MILC payments over next 11 months
 Corn, Soybeans and Class III
 Interpolate across months with no futures
 Alfalfa Hay: 20% over Aug. ′07 through May ′08
values to account for higher costs due to weather and
flooding conditions
Milk Income Loss Contract Program
Simulated Feed Costs and MILC Targets: Aug. 08-May 09
Corn
($/bu)
Date
Soy
($/bu)
Hay
($/ton)
Feed
Cost
($/cwt)
Feed
Cost –
Target
($/cwt)
% Diff
Over
Target
MILC
Target
($/cwt)
Class I
Mover
Target
($/cwt)
Projected
Class I
Mover
($/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
Dairy Forward Pricing Program
 Renews the 2000-2004 Pilot Forward Pricing Program
 Voluntary program
 Applied to milk marketed under FMMO’s
 Does not apply to Class I milk
 Producers continue to be able to receive minimum
FMMO price if not forward priced
 For handlers not cooperatives, the program
terminates Sept. 30, 2012
 Contracts allowed to be in effect until Sept. 30,
2015
Dairy Export Incentive Program
 Dairy Export Incentive Program (DEIP)
 Authorized by 1985 Farm Bill
 Dairy export subsidy program designed to:
 Promote dairy product exports
 Facilitate international market development
 Provide a way to remove surplus dairy products
 Activity level depends on relative international dairy
product prices
 When U.S. prices above world prices, very active
subsidy program
 Recently no activity given increased international
prices
Federal Milk Marketing Order
Amendment Procedures
 Sets Procedures for USDA to Accelerate FMMO Hearings
 30 days after receiving hearing request
 Must issue a timeline for actions that result in
completion of hearing within 120 days
 Request information from petitioners to use in
making decision whether to hold a hearing
 Deny the request
 Post-hearing briefs filed within 60 days of hearing
 Must issue recommended decision within 90 days of
deadline for filing post-hearing briefs
 Must issue final decision within 60 days of deadline for
receiving comments and exceptions to decision
Federal Milk Marketing Order
Amendment Procedures
 The Entire Process for Amending an Order
 Would still require at least 1 year under expedited rules
 Could be longer if
 USDA requests further information from petitioners
 Allows lengthy time for filing comments and
exceptions to recommended decision
Federal Milk Marketing Order
Review Commission
 Establish an FMMO Review Commission to Review
Federal and Non-Federal Marketing Order Systems
 Consider legislative and regulatory procedures to:
 Enhance future competitiveness of dairy products
 Ensure transparency in dairy pricing
 Simply FMMO system
 Evaluate whether FMMO’s serve interests of
producers, processors and consumers
 Determine costs/benefits of adjusting milk
composition standards
 14 member commission
 Report within 2 years after 1st meeting.
Other Legislation
 Dairy Promotion and Research Program
 Reauthorized Dairy Check-Off Program
 Now includes all states, Puerto Rico and D.C
 Authorized 7.5¢ assessment per milk equivalent for
imported dairy products
 USDA Reports to Congress Within 90 Days Concerning
NFDM Price Reporting Procedures and Procedure
Impacts on FMMO Pricing
 Strengthens Mandatory Reporting of Dairy-Related Sales
and Inventory
 Establish electronic reporting system
Contact Information
 Jesse, Cropp and Gould, 2008.
Dairy Subtitle: Food,
Conservation and Energy Act of 2008, Department of
Ag. and Applied Economics, U. of Wisconsin
 Univ. of Wisconsin Dairy Marketing Website:
http://future.aae.wisc.edu
 Brian W. Gould
Dept. of Agricultural and Applied Economics
(608)263-3212
[email protected]