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Dairy Policy in the 2007 Farm Bill

Dairy Policy in the 2007 Farm Bill. Ed Jesse UW-Madison/Extension. Dairy Policy in the 2007 Farm Bill: Constraints. Budget Trade Negotiations. U.S. WTO Proposal on Agricultural Trade Reform. Market access: Cut tariffs 55 to 90 percent No tariff greater than 75 percent Export Subsidies:

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Dairy Policy in the 2007 Farm Bill

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  1. Dairy Policy in the 2007 Farm Bill Ed Jesse UW-Madison/Extension

  2. Dairy Policy in the 2007 Farm Bill:Constraints Budget Trade Negotiations

  3. U.S. WTO Proposalon Agricultural Trade Reform • Market access: • Cut tariffs 55 to 90 percent • No tariff greater than 75 percent • Export Subsidies: • Eliminate completely by 2013 • Domestic support: • Reduce “Amber Box” subsidies by 60 percent

  4. Dairy Policy in the 2007 Farm Bill:Options • Mandatory Supply Control? • No way • Voluntary Supply Control? • CWT will continue, but no government program like Milk Diversion or Whole Herd Buyout • Compacts? • Interest, but opposition too strong

  5. Dairy Policy in the 2007 Farm Bill:Options • MILC? • Not in current form • Milk Price Support Program? • Maybe, especially if Farm Bill completed before new WTO agreement is completed • Countercyclical payments? • Maybe, depends on details

  6. Milk Price SupportsVersusDairy Countercyclical Payments

  7. Operation of Milk Price Support Program Congress Political Milk Support Price $9.90/Cwt. @ “Average” BF $9.80/Cwt. @ 3.5% BF USDA Mechanical* Butter: $1.05/Lb. Nonfat Dry Milk: $0.80/Lb. Block Cheddar: $1.1314 Barrel Cheddar: $1.1014 Product Purchase Prices *Exception: Allocation of butter-powder value (tilts)

  8. Dairy Price Support Program:How its Supposed to Work Market Price Support Price $9.80

  9. Dairy Price Support Program:How it Actually Works Market Price Support Price $9.80 $8.57

  10. Can the Milk Price Support Program Work under Current Marketing Conditions? • The assumption is that a large number of cheese plants make independent sales decisions. • The reality is that a small number of large block and barrel plants have their entire volume of production committed to an even smaller number of buyers. • Can the Milk Price Support Program survive a 60 percent reduction in permitted AMS?

  11. Should the Milk Price Support Program Work under Current Marketing Conditions? • Support program distorts prices for dairy products, especially nonfat dry milk. Creates fictitious market for powder and impedes developing capacity to produce other milk protein products with demonstrated demand (e.g., MPC). • “Higher of” pricing for fluid milk results in the CCC sometimes setting fluid milk prices. • USDA has authority to alter butter and nonfat dry milk purchase prices, but is unwilling to take the political heat.

  12. Countercyclical Payments: A Better Alternative? • Elements: • Set Target price in reference to Class III Price • 100 percent of monthly deficiency paid to all producers. No production caps. • Use payment limitation applicable to other farm programs ($50,000 annual limit)

  13. Countercyclical Payments: A Better Alternative? • Advantages: • Eliminates market distortions – milk moves to its highest and best use. • Promotes domestic production of MPC, other forms of milk protein, and other dairy products. • Promotes Exports • Provides absolute level of support • Reduces or eliminates the likelihood of the Class IV price moving the Class I price

  14. Countercyclical Payments: A Better Alternative? • Questions: • Would program stimulate production, even with low target price? ($10.00 - $10.50 Class III price is not profitable anywhere.) • At what levels would commodity markets clear without CCC purchases? (Doesn’t matter to producers, who are protected by payments) • Would processors lowball producer prices because direct payments would keep producers whole? (Cooperatives should be able to prevent this from happening.)

  15. Countercyclical Payments: A Better Alternative? • Questions (Continued): • Would cheese buyers lowball cheese prices? (May be possible in the short run, but with a payment limitation, the resulting producer pay price would force contraction in milk production and a market adjustment.) • Would such a program be WTO-legal? (Would add to AMS, but much less than the milk price support program. Would add even less if payments were decoupled from historical production). • Would such a program be a budget-buster? (Unlikely unless 2002-03 reoccurs.)

  16. How much would it Cost?MILC Cost – FY2003

  17. How much would it Cost?Countercyclical – FY2003

  18. How Much would Farmers Get?Countercyclical – FY2003 with $50K Limit MILC Maximum payment based on 2.4 million pounds times average payment rate for FY2003

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