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Dairy Policy Issues

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Abstract:

Two federal programs that support the price and income received by dairy farmers are expiring in 2007 -- the dairy price support program and the Milk Income Loss Contract (MILC) program. The reauthorization of these and other farm commodity price and income support programs is being debated by the 110th Congress in the context of a pending omnibus 2007 farm bill.

The MILC program allows participating dairy farmers to receive a government payment when the farm price of milk used for fluid consumption falls below an established target price. In its original authorization in the 2002 farm bill (P.L. 107171), the MILC program was scheduled to expire in 2005. However, a provision in the FY2006 budget reconciliation act (P.L. 109-171) extended MILC program authority for two years, through September 30, 2007. As a cost-saving measure, P.L. 109-171 prohibits any MILC payments for the last month of its extended authority (September 2007). Under budget rules, this means that the program will have no baseline budget spending allocated to it beyond its expiration date. The MILC program is generally supported by milk producer groups in the Northeast and the Upper Midwest. Large farmers contend that the prohibition on MILC payments for any annual milk production in excess of 2.4 million lbs. is biased against them.

The dairy price support program indirectly supports the farm price of milk through government purchases of surplus dairy products from dairy processors. The current support price is authorized at $9.90 per hundredweight (cwt.) through December 31, 2007, by the 2002 farm bill. In order to achieve the support price, USDA has a standing offer to dairy processors to purchase surplus manufactured dairy products at stated prices. Consequently, the government purchase prices usually serve as a floor for the market price of these products, which in turn indirectly supports the farm price of milk at $9.90 per cwt. Government purchases and costs have been relatively small in recent years, particularly when compared with the 1980s, when the support price was significantly higher. Most dairy farm groups view the program as a necessary safety net in a market characterized by volatile prices. Dairy processors consider the price support and MILC programs to operate at crosspurposes, which they say contributes to surplus milk production. Others are concerned that dairy support might have to be modified in order to comply with our trade obligations in the World Trade Organization.

On January 31, 2007, the Administration released a comprehensive 2007 farm bill proposal that included recommendations for both the dairy price support program and the MILC program. The Administration supports the extension of the price support program at the current level of $9.90 per cwt., viewing the program as a lowcost stabilizing influence on farm milk prices. It also supports a continuation of MILC payments at the current target price of $16.94 per cwt. In order to defray the cost of MILC program extension, the Administration recommends that the payment rate be gradually reduced over a five-year period. Annual payments to any producer would continue to be restricted to 2.4 million lbs. under the proposal.