Minnesota-Wisconsin Dairy Policy Conference- 2011 Rochester, MN Steve Etka Midwest Dairy Coalition

1. Minnesota-Wisconsin Dairy Policy Conference- 2011 Rochester, MNSteve EtkaMidwest Dairy Coalition “USDA Dairy Industry Advisory Committee Recommendations: Budget and Political Feasibility”

2. Political Constraints • We’ve heard how bleak federal budget picture is for next Farm Bill. • But how is Congress responding, and what are the political realities that govern and limit policy responses?

3. Should Dairy Legislation Move Before Farm Bill? • Will Congress do a pre-farm bill dairy reform package or include dairy in the 2012 Farm Bill? • Pros of pre-FB dairy package: • Congress can focus on dairy before getting bogged down in the larger Farm Bill process • Dairy lead the way for other commodities • Cons: • But doing dairy early, will other commodities ask for the same, thus diluting support for Farm Bill • Is dairy ready to go?

4. NMFP Foundation for the Future as Starting Point • NMPF Board passed the Foundation for the Future “package of concepts… as the basis for future direction in federal dairy policy.” • Now the process has shifted to Congress, and other voices and perspectives enter the process as well.

5. Dairy Industry Advisory Committee • DIAC proposal is one of those other perspectives that is now part of that discussion. • DIAC faced some political constraints that NMPF did not face, but are more similar to constraints faced by Congress. DIAC represented broader set of interests.

6. Political Constraints of DIAC Similar to Those of Congress • Because DIAC committee represented all regions, and also represented producer processor and retailer views, their proposals should be very relevant to Congress, which also has to balance all of those interests. • DIAC “sausage making” not unlike Congress’ process.

7. Noteworthy DIAC Votes and Recommendations • DIAC has 23 Recommendations, some more substantive and noteworthy than others. • Many of the recommendations are vague and give a lot of wiggle room for interpretation. • A few of the recommendations jump out, and deserve much more attention

8. MILC program/NMPF Margin Program: Hybrid? “Continue MILC, with a production cap based on available funds, with two important modifications: (1) use an all-milk income/feed cost margin trigger, and (2) provide an insurance program for production excluded by the cap to provide protection for larger producers.” (DIAC recomm. #11)

9. Counter-Cyclical Assistance:To Cap or Not to Cap? • Huge Policy Decision Facing Congress • NMPF says “no way” to any payment limits or caps on counter-cyclical assistance. • DIAC, budget hawks, and many producer groups argue for caps and continued targeting of counter-cyclical program assistance. • Which direction will Congress take? • DIAC proposed a compromise between NMPF margin insurance concept and MILC concept

10. Based on 2010 statistics from NASS: • 88% of U.S. dairy farms have herds of 200 or fewer cows, but only had 26 percent of nation’s milk production • In contrast, 2.7 % of US dairy farms have herds over 1000 cows, but the produce 48 percent of the nation’s milk.

12. Are We Supporting Farmers or Milk? • Congress has a clear policy decision about whether to maximize support to dairy farmers, or to every last drop of milk. • Is the problem in the dairy industry that we are losing milk production, or that we are losing dairy farmers? • What is the problem that Congress seeks to address?

13. In past, Congress has focused on providing a safety net for dairy producers, not for dairy production. • Growth management discussion is evidence that our problem is that we have periods of too MUCH milk, resulting in great volatility in dairy producer profit margins, with negative effects on farm viability

14. Focus First on Safety Net for Bulk of Dairy Farmers • Ideally, given budget constraints, Congress would focus its scarce resources on meeting needs of 90 percent of dairy farmers. • Then find a way to deal with the unique problems of the top 10-15 percent of farms, who may not be adequately addressed by core counter-cyclical program.

15. NMFP Margin Program Shifts Focus to Top 10-15% of Farms • Relative to past focus of Congress, the NFMP Margin program concept, because of its unlimited/uncapped structure, would shift focus toward needs of the top 10-15% of farms. • To cover all of milk, NMFP margin program dilutes support to average sized dairy farms.

16. If you compare MILC program assistance over 2002-2009 timeframe with the assistance that would have been provided under NMPF base margin insurance program, it demonstrates the dilemma faced by Congress.

17. If NMPF Margin Program (base level) Had Been in Place vs. MILC Program (2002-2009) • 100-cow herd farm • would have received $59,000 less in assistance over period • 1000-cow herd farm • would have gained $159,000; • 10,000-cow herd farm • would have gained $2.665 million over period

18. Big Payments to a Few Farms;Significant Cuts to Most Farms • If the NMPF margin program had been in place instead of MILC program in 2009 alone, an average 10,000 cow farm would have received $2.7 million in payments. • Average 100-cow herd would have received $27,000 in assistance.

19. Is this Politically Feasible? • Is it politically feasible to cut assistance to most dairy farms in order to fund uncapped assistance to the top 10-15 percent of farms? • The DIAC answered “no” to that question, and recommended an improved MILC program, with an additional insurance option for those few farms exceeding the MILC cap.

20. Ongoing Safety Net or Catasphrophic Only Program? • Will Congress Choose a Program that Kicks in Rarely, or a Program with On-going Assistance? • Whereas MILC kicked in at times of low prices throughout the 2002-2009 period, NMPF margin program (base program) would have only kicked in during 2009, had it been in place • But when Margin Program does kick in, it does so in a BIG way

25. It was with this analysis in mind that the DIAC called for a hybrid between MILC and NMPF Margin Program • Keep MILC with a cap • But trigger MILC based on margin levels instead of price • Institute buy-up or other insurance option for farms that exceed the cap, for the portion of their milk over the cap

26. What Would that Buy Up Option Look Like? • If Congress takes DIAC’s advice, what would buy-up option look like? • Options- • Improved LGM-Dairy Insurance option? A few months ago, USDA instituted changes in program to make it more user friendly. Participation has increased significantly as a result. • MILC buy-up insurance option, with premiums subsidized on a sliding scale?

27. Federal Order Reform • Federal Orders Have Always been the 3rd Rail of Dairy Policy Politics • In late 1990s regional fights in Congress over FMMO and Dairy Compacts Nearly Shut Down the Government • Since that Time, Congress has Aggressively Avoided Legislation on Federal Orders as has the Industry

28. NMPF FMMO Plan Reignites Old Tensions • Original Goals of NMPF Foundation for the Future Plan for Federal Order Reform • Get rid of cumbersome end-product pricing formulas, because system “creates winners and losers… even between cooperatives” • Replace with a competitive-pay based system that compensates producers fairly, reduces volatility and avoids sending distorted market signals.

29. Hard to Argue with original Federal Order Reform Goals Laid out by NMPF • But final FMMO Reform Proposal approved by NMPF Board is far different than those originally stated parameters. How? • Reignites Regional Fights Over Handling of Class I formulas, Worsening the Winner/Loser Issues of Federal Orders. Raises Class I mover by 51 cents. • Further distorts Market Signals, particularly on Class I

30. Higher Class I prices Result in Lower Manufacturing Milk Prices • When regulated Class I prices are increased, has an inverse effect of driving down manufacturing milk prices. • More milk is produced in response to the higher regulated milk prices, and the additional milk flows into manufacturing markets, driving down those prices. • Only about 1/3 of milk is used as Class I, and that portion is shrinking. • NMPF plan will increase regulated price of 1/3 of the milk, and drive down the price of manufacturing milk, the majority of milk in nation.

31. Is it Dangerous to Legislate Federal Order Details • One of the original NMPF arguments for federal order reform was that the process of seeking changes was too cumbersome • If you legislative details, as NMPF is proposing, dairy industry would have to go back to Congress each time when changes are needed. • Legislative process if far MORE cumbersome than administrative process

32. FMMO Reform Package Not Ready for Prime Time • DIAC ducked the issue by asking USDA to establish another committee to study federal orders and their effects. 2008 Farm Bill actually authorized a Federal Order Reform committee, but was never created and never funded. • Given the complexity and controversy, Congress may NOT want to legislate very specific details of federal order reform. Could follow DIAC’s lead by asking USDA to propose reforms following broad parameters

33. Midwest Dairy Coalition Principles for Dairy Reform • 1) We must seek ways to reduce volatility in net dairy farmer income, or at least provide tools for farmers to address that volatility. • 2) Proposals must not discriminate against manufacturing milk, by providing artificial enhancement of Class I (fluid) milk prices. • 3) Proposals must seek to eliminate or reduce the regional discrimination of the current federal milk marketing order system. • 4) Proposals must be sensitive to fact that small and medium sized dairy farms make up the overwhelming majority of dairy farms in the nation, and the unique needs of these farmers must be reflected in U.S. dairy policy.