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Could Milk Supply Limits Add to Drought Effects?

24 July 2012

US - A proposal in the new Farm Bill headed to the House floor would have been limiting US milk production since May, if it had been in effect, even as agriculture economists and the US Department of Agriculture are warning that the drought throughout the country will reduce milk supply and raise consumer prices, according to the International Dairy and Food Association (IDFA).

According to calculations set out in the bill using current USDA data, the proposed "Dairy Market Stabilisation Programme" (DMSP) would have been in effect starting in May and would likely still be in effect today. This new government programme would force milk companies to short payments to dairy producers and send the difference to the government. Producers would be subjected to the penalty until they reduced milk production.

The new programme would allow the government to manipulate farm milk prices when producers’ profits falter, effectively reducing the milk supply until milk prices increase, says IDFA. Dairy farmers enrolled in the programme would have had their revenue reduced from two per cent to six per cent in May and possibly by three per cent to seven per cent in June of this year. As a result of the lost revenue, farmers would be expected to reduce their milk production, most likely by reducing herd size.

The Farm Bill also calls for a new subsidized revenue insurance program that would simultaneously provide payments to dairy farmers to partially or totally offset the revenues lost through the stabilisation programme. Both programmes have been included in the Farm Bill that passed the Senate in June and was endorsed by the House Committee on Agriculture earlier this month.

“Not only will consumers be facing higher prices in the near future, because cows produce less milk during high heat conditions, and the cost of feed will be higher, but this new program would have already dug the hole deeper,” said Connie Tipton, president and CEO, International Dairy Foods Association.

“This is an excellent example of why it doesn’t make any sense for Congress to attempt to manage the supply of milk," said Jerry Slominski, senior vice president, International Dairy Foods Association. “The weather changes faster than government can change its rules and regulations, and this will cause prices to swing more wildly once the impacts of the drought are felt by the industry.”

The House Committee on Agriculture considered striking the new government milk supply management program, but an amendment offered by Congressman Bob Goodlatte of Viriginia and Congressman David Scott of Georgia was defeated. Speaker of the House John Boehner recently stated that our dairy programmes are “Soviet-style” and that one of the proposals in the bill “makes it worse.”

In response to this, the National Milk Producers Federation (NMPF), which supports the supply management proposed, has said that: "Summer heat always leads to a slowdown in milk output – this year will be no different – but the USDA reported last week that milk production in the second quarter of 2012 was up 2.0 per cent compared to 2012, while the first quarter was up a whopping 5.3 per cent. The US is well on track to produce a record volume of milk this year, a hot summer notwithstanding.

"As a result, farmers’ prices this June were down 18 per cent from June 2011, 30 cents a gallon less. Consumers really should be asking if the price they pay at retail for dairy products have dropped by the same amount. The answer is, retail prices haven’t changed, even as the farm price this year has reflected the fact that supply has raced ahead of demand. Meanwhile, grain prices reflect the opposite: that supplies are short in relation to demand.

"The dairy policy provisions in the Senate and House farm bills are tied to the critical difference between the farmer’s milk price, and the cost of feed. When that margin contracts to dangerously low levels, those who volunteer to use the proposed program will be insured against these low margins – and they are also expected to trim their milk output until margins reach healthy levels.

"These summer temperatures, and the possibility of a poor crop harvest, are exactly why we need a dairy farm safety net that takes into account higher feed prices, and also gives us a tool to better align supply and demand. Relying on the weather to perform this process is foolish."

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