Dick Groves
Editor, Cheese Reporter

 

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A Superior Type Of Dairy Product Purchase Program

From 1949 until earlier this year, the US government operated the dairy price support program (or, as it was renamed under the 2008 farm bill, the Dairy Product Price Support Program), under which USDA’s Commodity Credit Corporation would purchase surplus cheese, butter and nonfat dry milk at pre-announced prices.

From time to time, this program would cause some problems for the dairy industry, as well as for taxpayers. Back in the early to mid 1980s, for example, the CCC was buying hundreds of millions of pounds of surplus dairy products every year, and then storing and disposing those products, at no small cost.

Eventually, some of those surplus dairy products were given away to consumers, with mixed results. According to a 1988 USDA report to Congress, in fiscal year 1987, 415 million pounds of processed cheese and 67 million pounds of butter were donated to needy individuals under the Temporary Emergency Food Assistance Program, or TEFAP.

USDA’s report stated that TEFAP cheese donations had displaced over the life of the program, on average,
46 percent of commercial sales of American cheese. Interestingly, the report stated that USDA butter donations had a “substantial impact” on commercial margarine sales. Specifically, each pound of butter donated through the TEFAP reduced margarine sales by about one pound.

That was just one of many impacts of price support program purchases. Another impact involved hundreds of millions of pounds of inventory hanging over the market, thereby preventing large run-ups in price (depending on your perspective, this was either a positive or a negative impact).

As noted earlier, the price support program ended earlier this year, when President Obama signed the 2014 farm bill into law. And then last Friday, USDA published details about a new federal program which is designed to acquire dairy products and distribute them to needy individuals.

As detailed on our front page last week, the new Dairy Product Donation Program is designed to support dairy producer margins by increasing the price of milk. Under the DPDP, USDA will buy dairy products when the margin falls below a certain level, and will distribute those products to individuals in low-income groups through public and private non-profit organizations.

So therein lie at least a couple of differences between the old price support program and the new DPDP.
First, the DPDP is intended to increase the price of milk, whereas the price support program was intended to prevent the price of milk from falling below certain levels.

Second, the price support program involved the purchase of surplus dairy products, specifically cheese, butter and nonfat dry milk, whereas the DPDP involves the purchase of pretty much any dairy product. This offers at least a couple of huge advantages over the old price support program.

First, the farm bill requires USDA to consult with public and private nonprofit organizations that feed low-income groups, in order to determine the types and quantities of dairy products to be purchased and distributed under the DPDP. That makes this a customer-focused purchase program, as opposed to the processor-focused orientation of the price support program.

And one nice aspect to this customer focus of the DPDP is that there is already some research on the types and quantities of dairy products that would be most welcomed by low-income consumers.

More specifically, according to Feeding America, Inc., a nationwide network of more than 200 food banks, fluid milk is one of the items most requested by food bank clients, yet there is a nationwide shortage because milk is rarely donated.

A survey of Feeding America food banks found that 94 percent of respondents are actively working on improving the nutritional quality of meals provided to food bank clients, but 95 percent of those surveyed say they do not receive enough milk to meet the demand. The number one reason cited is inadequate milk donations.

So for starters, it would seem that one of the best products that could be purchased under the DPDP is fluid milk.

A second major advantage of the DPDP over the price support program concerns cost. Under the price support program, there were not only costs involved in buying surplus dairy products, but also in storing those products.

For example, according to a 1981 GAO report, the government’s cost to store surplus dairy products totaled over $24 million for the first nine months of fiscal year 1981 (as of June 30, 1981, the CCC’s inventories included about 518 million pounds of butter, 486 million pounds of cheese and 871 million pounds of nonfat dry milk).

Under the DPDP, storage costs will be zero. DPDP purchases cannot be stored by the CCC. Also, the farm bill specifically prohibits re-sales of DPDP-purchased products into the commercial market.

There is one major similarity, at this time, between the price support program and the new Dairy Product Donation Program: the support program was irrelevant when it was terminated, because cheese, butter and nonfat dry milk prices were so much higher than CCC purchase prices; and the DPDP is irrelevant now that it has been implemented, because, as USDA noted in the final rule published in last Friday’s Federal Register, the current actual dairy production margin is about $12.00 (the margin trigger is between $4.00 and $8.00).

But if and when the DPDP is triggered, it will be superior to the old CCC purchase program in some important ways.


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