Rolling The Dice On Dairy Reforms

Volume 136, No. 19 Friday, November 4, 2011

Federal dairy policy ideas have been bundled in a fast-track farm bill and hustled into Congress’ Joint Select Committee on Deficit Reduction -the Super Committee.

Ag legislators are trying to lock in farm program savings as the Super Committee faces a November 23 deadline to cut $1.2 trillion from the US deficit.

A news release skirmish between Wisconsin Cheese Makers Association and National Milk Producers Federation in recent days illuminates a nagging question with the breakneck pace for these unprecedented dairy reforms: does the dairy industry know the real impact of its proposals?

On Nov. 1, National Milk Producer Federation (NMPF) took issue with a news release from WCMA and Dairy Business Association in opposition to the Dairy Security Act penned by US Rep. Collin Peterson. In part, the Federation’s beef with WCMA and Dairy Business Association revolved around data from a systems dynamic model developed over several years by Dr. Mark Stephenson at the University of Wisconsin and Professor Chuck Nicholson at California Polytechnic State University.

In late October, Stephenson and Nicholson analyzed the Dairy Security Act and presented results to WCMA and DBA members. The model looked at “high producer participation” in the proposed dairy margin insurance program, specifically 50 percent of all US producers placing 50 percent of their milk into margin protection at a $7/cwt level. That set of criteria yielded a very high cost to the government — $3.66 billion in taxpayer dollars paid to dairy farms between 2012 to 2020.

Stevenson and Nicholson subsequently tweaked their definition of “high producer participation” to reflect 50 percent of producers protecting 60 percent of their milk at $6/cwt. This criteria yields a much lower government expenditure: $824 million from 2012 to 2018. NMPF has latched onto this lower figure as more favorable.

Both data runs are correct within the framework of the model. The trick is, producer participation in these proposed programs can only be estimated (and re-estimated).
It’s noteworthy how a slight upward shift in producer margin protection sends government costs soaring in the model. Rather than studying this effect beforehand, Congress’ quick implementation of these policies may result in a future attempt to create caps on coverage if worst-case-scenario government
expenditures become reality.

What else do Drs. Stephenson and Nicholson model report?
• Net farm operating income does vary less over the years and this stability is greater when participation in the dairy margin insurance and stabilization programs is larger.

• But more stable milk prices come at a cost: These programs reduce average net farm operating income per farm during the period 2012 to 2018 for all farm size categories.

• The dairy stabilization program would be active between 40 and 45 percent of the time under the $6 margin trigger value. This frequency is greater than what would have been observed during the past decade, but this voluntary supply management program is likely to change the trajectory of future prices so that past outcomes may not be a particularly good guide to future outcomes.

Stevenson and Nicholson urge caution when looking at the model’s conclusions: “Because of the difficulty in assessing farmer participation decisions, our analysis should be considered as suggestive of the likely impacts of the proposed programs, rather than as definitive predictions of the next seven years were these programs to be in place.”

They also note that current volatile dairy market conditions can result in substantial equity loss and a higher probability of business failure for farms. Given that, the authors state, “it is not possible to conclude on the basis of reduced average net farm operating income that dairy farmers would be worse off under the proposed legislation.”

So what is clear today? It’s very clear that little analysis has been done on the very complex dairy reforms being moved to the Super Committee in Congress.

It is also clear that at this pace of activity there will be no time for new input. The Super Committee process will result in no public hearings, no amendments and no chance to let further study modify these proposals.

Leaders supporting these reform concepts are, in essence, rolling the dice. And the impact on dairy farm income, farm numbers and costs to government may only be known long after this farm bill becomes law. r

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org


Other John Umhoefer Columns

 Productive Changes In Wisconsin
 The Successful Idea Of DBIC
 Cheese Cuts Both Ways: Consolidation and Growth
 IDFA's Deep Dairy Reforms
 Wisconsin In The Spotlight
 An Overbuilt Foundation
 What the New Governor Means To Wisconsin
 No Man's Land
 Dairy & Wisconsin’s New Leadership

Wisconsin Cheese Is Investing, Expanding
 Talking Competition
 Being Big Dairy
Upper Midwest Prospects in 2010
Upper Midwest Growth: Perspectives From The Farm
Blue Skies or Bust
Pushing Back Against A Tough 2009
Support Demand, Not Price
Dairy: A Good Bet in a Bad Economy
Wisconsin's Future: Growth
Keeping Sustainability Real
Nose Dive
Dairy Dives into 2009
Consider This...
 Fulls Vats
Implement Make Allowances ASAP
Security Reforms
Spring Forward
A Week of Clarity

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