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Margin insurance — without supply management — makes sense

Connie Tipton

Connie Tipton is president and CEO of the International Dairy Foods Association. She contributes this column exclusively for Cheese Market News®.

The severe drought and high feed costs have focused us all on the importance of adopting a better safety net for dairy producers. U.S. milk production is already slowing as feed costs are hitting dramatic new levels and farm equity is threatened. Some are predicting that farm milk prices won’t rise quickly enough to offset the rapidly rising feed costs. That means an increasing number of producers will feel the margin squeeze more acutely in the next few months, and herd reductions will accelerate.

Well over two years ago, the National Milk Producers Federation developed a reform proposal for dairy policy that was basically on the right track. It eliminated the current safety net programs and replaced them with a new margin insurance program that would help dairy producers when the difference between feed costs on milk prices narrows below profitable levels. In order to get some of its membership on board, NMPF also agreed to force any dairy producer wanting access to margin insurance to be subject to periodic reductions in their paycheck, effectively imposing government-mandated milk production limits on the entire dairy supply chain.

We commend the leadership that Jerry Kozak and NMPF brought to this issue, but it’s time to acknowledge that by embracing a supply management program, called Dairy Market Stabilization, the effort took a step backwards. Supply management was guaranteed to be controversial and an impediment to progress. It is a policy that few actually like (even its congressional sponsor has said he isn’t fond of such policies), but somehow it has been sold as being essential, regardless of widespread dissension among producers and aggressive opposition by processors.

Members of IDFA (and many others) believe this is an unnecessary and troublesome requirement to burden our dairy producers with for many reasons, but particularly because of its negative consequences on both consumers and U.S. dairy exports. Our exports in the first half of this year were up 8 percent in volume and 19 percent in value from last year’s record pace. To take advantage of growing markets, dairy food companies have invested in new and expanded facilities in Colorado, New York, South Dakota, Idaho, Iowa and Texas, significantly increasing demand for milk production in many areas.

What’s more, our members who are exporting tell us their customers and competitors around the world are watching to see what policy direction we take in the United States as part of their decision-making for future supply contracts. The risk of putting the brakes on this growth opportunity frankly seems foolish.

The proposed Dairy Market Stabilization Program would routinely increase our domestic prices relative to international prices and make our dairy industry less competitive. And, the proposed solution to this problem in the bill — turning the program off once it starts working as intended — is truly a case of closing the barn doors after the horses have left.

Our dairy industry needs a margin insurance program now, and everyone, from producers to processors to domestic consumers to exporters and even to taxpayers who fund food and nutrition programs, needs this to be put it in place without the controversial stabilization program provisions.
Such an approach has been drafted by Reps. Bob Goodlatte, a Republican from Virginia, and David Scott, a Democrat from Georgia. Their bipartisan amendment keeps 80 percent of what is proposed by the Dairy Security Act. More than 90 percent of dairy producers would pay less in premiums under the Goodlatte-Scott amendment. By dropping the stabilization program, dairy producers would never have their income reduced due to a government mandate in order to meet their government-set base production level.

I frequently hear that there’s too much “my way or the highway” in Washington. Well, for over a year, we have been told that our dairy industry must accept the Dairy Market Stabilization Program because of federal budget constraints. But that’s not true. The Goodlatte-Scott amendment doesn’t bust the budget and, in fact, costs nearly the same as the Dairy Security Act.

The Goodlatte-Scott amendment represents the true middle-ground approach that will move our industry forward, with policies that provide an effective safety net for dairy producers without restraining our ability to serve our growing markets. By eliminating a market-intrusive program that is anathema to many members of Congress, the amendment will help smooth some of the bumps in the road to passage of a farm bill this year and get much needed help to dairy producers without negative impacts on anyone else who is part of the U.S. dairy industry.

At a recent briefing held by the House Dairy Farmers Caucus, Dr. Mark Stephenson, director of dairy policy analysis at the University of Wisconsin College of Agricultural and Life Sciences, pointed to the speed at which circumstances change in the dairy industry, noting that the heat and drought have raised concern that current milk production will be affected and the dairy industry may not have enough milk. Stephenson told caucus members and staff that most producers prefer to make independent production decisions; they want a simple safety-net program and they don’t want handouts — they want to compete and let the market decide long-run average prices. His analysis of the Goodlatte-Scott amendment indicated that the insurance program would smooth out market volatility — as extreme volatility is another issue that farmers want addressed.

As more and more industry stakeholders are suggesting, let’s support this compromise solution — margin insurance without supply management — to sustain a vibrant and growing dairy industry.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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