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It’s Becoming More Difficult To Reduce US Milk Supplies Even When Prices Are Low

Washington—“It has become increasingly difficult to reduce US milk supplies, even when milk returns suggest contraction is needed,” according to Dr. Scott Brown, state agricultural extension economist at the University of Missouri.

Brown, who for the last three decades has worked extensively on federal policy issues with a detailed focus on dairy policy issues, made his comments Wednesday at a House Agriculture Committee hearing entitled “Rural Economic Outlook: Setting the Stage for the Next Farm Bill.”

During the 1980s and 1990s, there were more dairy farmers with relatively higher production costs that would exit the industry during tough economic times, Brown noted.

By the 2000s, the remaining operations tend to have larger fixed costs, which makes them less responsive to current financial conditions.

Since 2000, annual milk production has only declined in 2001 and 2009, Brown pointed out. Milk production even expanded during the drought-induced record feed prices of 2012-13. By comparison, milk production fell five times over the 1986 to 1999 period.

The 2016 economic downturn that the dairy industry faced has resulted in many looking for alternatives to the dairy safety net program contained in the 2014 farm bill, Brown said. There is “growing concern” that the Margin Protection Program (MPP) did not provide a strong enough safety net for dairy producers last year.

It is important to understand the “large task” of building a solid safety net program with a tight federal budget, Brown noted. “It is extremely difficult to construct a stronger safety net program for dairy farmers while reducing federal spending remains a priority.”

There is a “high correlation” between the level of government expenditures for the dairy industry safety net and the effectiveness of the safety net, Brown said. Changes to the MPP, or for that matter any other alternative that may be debated as the 2018 farm bill comes into focus, “will likely result in a more effective safety net only if the estimated cost of the program rises.”

This is the third full year of the MPP.

According to Brown, the level of dairy farmer participation in the higher margin coverage levels has “continually fallen” as premium costs have exceeded anticipated MPP payments.

In 2016, 140 billion pounds of production history or about two-thirds of US milk production was enrolled in only the catastrophic $4 level of coverage, Brown noted. That catastrophic level of coverage is a “pretty low safety net” with margins not fallling below that level since 2009.

“MPP participation has been much lower than many estimated when the program became law in early 2014,” Brown said. “When MPP was being debated before the 2014 farm bill was finished, many assumed that 70 percent of milk production would be signed up for $6.50 coverage.” The 2016 MPP data shows that slightly more than 2 percent of 2016 milk production was signed up for the program at the $6.50 level.

In addition to the experience that participation in the MPP has been much less than expected, feed costs have moved much lowerr than estimated when the program was first enacted into law in 2014, Brown said. All else equal, the decline in feed costs should reduce MPP costs and reduce the expected cost of alternative programs driven in part by feed cost levels.

“The 2016 MPP experience left many dairy farmers disenchanted with MPP,” Brown said. “The reduction in feed costs as represented by national corn, soybean meal and alfalfa prices resulted in the MPP margin falling far less than the decline in national milk prices. The MPP margin seemed out of sync relative to many producers who saw their financial situation erode much faster than the MPP margin.”

The MPP was a major change in dairy policy relative to the past safety net provided to the dairy industry, Brown noted.

“The move to a policy providing margin risk management from one that provided a floor on milk prices has required moving from an attitude of program return maximization to risk management,” he said. “More work is needed to help producers think through the risk management aspect of the MPP. MPP participation has moved to the lower levels of margin coverage when at times producers may be better served to participate at higher levels.”

A balance must be struck in setting parameters of federal dairy policy, Brown stated.

“We have had experience with dairy programs that provided too much support to the industry and resulted in large milk surpluses and chronically low milk prices or large government expenditures,” Brown said. “No one in the dairy industry liked these periods.

“However, setting support too low means it may never trigger in those times that it is most needed,” he added. “This tradeoff will always require modifications as future farm bills are debated and passed.”