Abstract
The U.S. dairy industry is one of the largest by size and production in the world. Historically, U.S. dairy policy has been heavily interventionist offering support, payouts, subsidies, and coverage to domestic producers. The purpose of this study is to determine if U.S. dairy policy has upkept with modern trajectories of the dairy industry and whether the policies are advantageous or harmful to national milk producers and dairy processors. It was determined that the policies are outdated and have become detrimental to the healthy growth and innovation of the industry. It is proposed that the dairy industry is allowed to enter the free market with minimum subsidies but regulatory support for both domestic and international markets. This will lead to the stabilization of the industry and milk production as well as foster innovation and healthy growth based on consumer demand.
Introduction
The U.S. dairy policy is one of the more complex elements of agricultural politics and has historically involved significant government support. The first primary legislation, the Agricultural Adjustment Act of 1933, identified milk and dairy products as basic commodities. Marketing agreements were put into place which designated fluid milk areas and sought to monitor volumes and timing of milk sales to raise producer prices. Prices for milk, butter, cheese, and nonfat dry milk were upkept by government purchases. Established with the Agricultural Marketing Agreement of 1937, the government placed Federal Milk Marketing Orders (FMMOs), modified through the years, to establish competitive and stable market conditions for both dairy farmers and consumers. (Zulauf, Schnitkey, Swanson, and Paulson, 2021). This policy exists to the current day.
In the midst of a financial crisis in 1999, the Market Loss Assistance Payments were authorized as commodity prices dropped. By 2002, monthly deficiency payments were established if the milk price was below a certain threshold. The 2014 farm bill replaced this with the Daily Margin Protection Program, which made payments if the margin difference between U.S. average milk prices and the cost of feed were less than then a specific value. Finally, in 2018, the program was renamed Dairy Margin Coverage (DMC), with a similar formula but payment parameters and calculations modified (Zulauf, Schnitkey, Swanson, and Paulson, 2021). Notably, since U.S. policy started shifting from milk payment programs to a milk price support approach in the 1990s, the variability of milk price and net return have increased significantly. Dairy consumption has shifted dramatically over the last 50 years, from whole milk to lower fat and healthier alternatives.
The research objective of this paper is to determine if U.S. dairy policy has upkept with modern trajectories of the dairy industry and whether the policies are advantageous or harmful to national milk producers and dairy processors.
Policy Discussion
The policy instruments have shifted over decades ranging from market intervention to setting floor prices for milk to direct payments and now a subsidized insurance program. With the Agricultural Act of 2014, Congress significantly reformed the U.S. dairy policy, removing three programs and creating the Dairy Margin Protection Program, later renamed Dairy Margin Coverage (DMC). It was a welcome shift away from archaic policies in the industry, which have historically aggressively subsidized dairy production by farmers. The modern approach with DMC is now meant to provide farmers with protection against risk in highly volatile milk and feed prices, but it does not artificially maintain low prices any longer.
The structure of dairy farming has significantly changed in the last decade. Instead of small dairy farmers as was prevalent through the 20th century, modern dairy production is conducted in much larger operations by larger conglomerates or farmers, as the industry is seeing rapid rates of consolidation to cut costs. Changes in structure have lowered average manufacturing costs for milk by 19% in the first decade of the 21st century (Macdonald. Cessna, and Mosheim, 2016). This, in turn, reduced milk prices and also made the U.S. a competitive exporter of dairy products. Prior to the 2014 legislation, borders and exports were severely limited.
The DMC program includes all dairy operations in the United States, run by single or multiple producers who commercially produce cow’s milk. The DMC is designed to protect dairy producers from adverse changes in milk-feed margins. An example of this occurred during the 2009 financial crisis when the industry suffered $10 billion in losses and took on another $4 billion just to finance operations (Macdonald. Cessna, and Mosheim, 2016). An eligible dairy operation has its production history determined by the USDA. An administrative fee of $100 must be paid unless a waiver applies. The producer then selects a “coverage level ranging from $4 to $9.50 in 50 cent increments.” Furthermore, “a coverage percentage of the dairy operation’s production history” is selected, ranging from 5 to 95 percent (Farm Service Agency, 2019). The program then offers “catastrophic coverage” at no additional cost, or if the dairy margin coverage is selected above the catastrophic level, the producer must pay premiums per hundredweight, with different tiers for the production of more or less 5 million lbs. of a dairy product.
The other significant aspect of U.S. dairy policy remains the Federal Milk Marketing Order (FMMO) which has been in place since the inception of dairy policies. Present in most regions, the FMMO regulates the minimum price for commercial buyers of milk. Prices differ depending on if they plan to simply pasteurize the milk for drinking or make yogurt or cheese out of it. The minimum milk prices are determined by complex formulas which change monthly to reflect the wholesale prices of commodities and differ across geographic regions of the country (Sumner, 2018). The majority of U.S. milk is marketed through FMMO or similar state-level programs.
Policy Analysis
Despite the seemingly step back with recent policy, the U.S. government continues to heavily subsidize the industry. In 2016-2018, the government spent on average $40 billion annually in subsidies for the dairy industry, in some cases accounting for 42% of revenues for U.S. dairy producers relying on government support (Sumner 2018). The COVID-19 pandemic also saw significant support for the industry due to decreased commercial demands, with a substantial sum given as part of the American Rescue Plan. The high prices to uplift the industry have lowered price fluctuations but require billions in government taxpayer funds. The biggest issue with the policy and industry, particularly due to FMMO’s, the industry is more responsive to the government’s policies and incentives rather than focusing on the market itself.
The milk pricing and distribution policy is dominated by FMMO, which is more than 80 years old, offering questionable price regulations as well as unnecessary complexity. High prices of beverage milk reduce use and stimulate demand for alternative products such as soymilk. These high prices also drive producers towards manufactured products and price pooling schemes, creating incentives for more milk production in high-cost regions. It is a system that creates inefficiencies and barriers to innovation, with involved stakeholders unable to match the free-market competition no matter how they try to navigate the system (Sumner, 2018). The FMMO system is far outdated and brings more complexities than benefits to the modern dairy industry.
As for the DMC program, it, too, has many issues. It is essentially an income subsidy under the illusion of risk management. Similar to many other USDA-subsidized insurance programs, farm businesses choose not to purchase the insurance unless it is heavily subsidized. While dairy farming is risky and milk prices can be potentially volatile as a commodity, it is not justified to provide such large subsidies (Sumner, 2018). Without these subsidies, milk production would decline, but it would still meet market demand. Currently, the dairy industry disposes of 128 million tons of milk annually, which does not account for significant milk waste from the commercial and consumer markets. There have been instances of dairy farmers dumping milk to manipulate prices after a low period (Cappiello, 2018). Instead of wasting the subsidies, they could arguably be used for more productive uses in the economy.
The primary criticism is that the dairy industry is being artificially upheld by the previous and existing government policies. While understandably, dairy is a key nutritional product, the demand is at an all-time low. Furthermore, the industry no longer consists of small farmers but large conglomerates with high budgets and both the resources and expertise to navigate the free market. By dropping the price floors and subsidies, there will be a period of volatility for prices, with some producers potentially going out of business. However, the industry will rebound and adapt to the market, furthermore, most likely fostering innovation. This is combined with the strength of the U.S. dairy products as an international player, with low tariffs and key trade deals making the international market highly appealing as well as a source of income for these dairy producers and processors.
By removing restricting policies and regulations, the industry will be more competitive both domestically and abroad while saving the U.S. government billions in subsidies. Removing these programs is not indicative of no government support for the industry. The government may maintain catastrophic levels of subsidies for its DMC program for unprecedented shifts in the market due to natural disasters or economic crises. Furthermore, the government can provide the industry with market information, and research, aid in development, subsidies for new technologies and expansions, and help in removing barriers to accessing foreign markets.
Conclusions
The U.S. dairy policy has traditionally focused on supporting the producers by controlling milk prices and providing heavy subsidies. This analysis determined that the policies, despite efforts at modernization, are detrimental to both the industry in the long-term and the commercial market as well. The policies are outdated and do not match the realities ongoing in the industry that has become unhealthily reliant on these subsidies and even manipulates the pricing to benefit themselves. The U.S. dairy industry has been rapidly consolidating into large and influential conglomerates, making them viable to participate in the free market domestically and abroad with minor support from the government. The best solution going forward would be to remove current support and subsidies but to establish a price ceiling, as with most commodities, to prevent exuberant pricing during the transition period. Support and relationships with the dairy industry should be maintained, but subsidies should legally be implemented in the event of truly catastrophic events that impact the industry substantially.
References
Cappiello, J. The Dairy Industry Dumps 128 Million Tons of Milk Every Year. 2018. Web.
Farm Service Agency. Dairy Margin Coverage Program. 2019. Web.
Macdonald, J.M., Cessna, J., & Mosheim, R. Changing Structure, Financial Risks, and Government Policy for the U.S. Dairy Industry. 2016. Web.
Sumner, D.A. Changing Structure, Dairy Policy Progress: Completing the Move to Markets. 2018. Web.
Zaulauf, C., Schnitkey, G., Swanson, K., & Paulson, N. “US Dairy Market and Policy Overview.” Farmdoc daily 11(2021): 1-6. Web.