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**Dairy POLICY**

***Background***

The Milk Price Support Program (MPSP) is mandated in the 2002 farm bill
and carried out through the Commodity Credit Corporation (CCC). MPSP has
been modified over the years, but it continues to support milk prices
for dairy farmers. Temporary provisions for inventory control and other
programs have been added from time to time. The purpose of the MPSP is
to support the price of fluid milk received by dairy producers through
purchases of dairy products.

The 2002 farm bill authorized CCC to support the price of milk produced
in the 48 contiguous

States through the purchase of cheese, butter, and nonfat dry milk
(NDM). The current milk price support rate is \$9.90 per hundredweight
(cwt) for milk testing 3.67 percent butterfat (milk fat). The 2002 farm
bill allows CCC to allocate the rate of price support between the
purchase prices for nonfat dry milk and butter in a manner that will
result in the lowest level of expenditures by the CCC, or to achieve
other objectives as appropriate. The price of NDM and butter may be
adjusted no more than twice within a calendar year. In addition to
purchases of bulk products at announced prices, CCC has historically
purchased butter, cheese, and NDM in further processed forms or in
consumer-size packages to support the price of milk.

Under the MPSP, farmers are not paid directly, but purchases of dairy
products enable milk processors of average efficiency to pay farmers the
mandated support price for their milk. Under the MPSP, in order to
facilitate use in food assistance programs, products purchased in bulk
are repackaged in forms suitable for sales and donation. Purchases vary
greatly from year to year depending on the dairy market supply and
demand situation and the support rate. Expenditures were high in the
early 1980s when the support rate was relatively high, averaging about
\$2 billion per year, and peaked in fiscal year (FY) 1983 at \$2.7
billion. A gradual lowering of the support rate brought lower
expenditures---with FY 1995 through FY 1997 expenditures less than \$100
million. The type of products purchased also varies over time, with all
products being purchased in large quantities during the 1980s, but
butter dominating purchases in the early 1990s and NDM dominating
purchases from 2000 through 2005.

Besides MPSP, the Milk Income Loss Contract (MILC) program is also
available to dairy producers. MILC program payments are made on a
monthly basis when the Federal Class I milk price in Boston,
Massachusetts, falls below the benchmark price of \$16.94 per
hundredweight (cwt). When the Boston milk price exceeds \$16.94, no
payments are made to dairy operations. Eligible dairy producers are
those who produce and market cow's milk. A maximum of 2.4 million pounds
of milk marketed by an operation are eligible for MILC payments per
fiscal year. Payments are issued no later than 60 calendar days after
CCC receives production evidence for the applicable month. MILC program
payment rates are currently determined by multiplying 34 percent of the
difference between \$16.94 and the Boston Class I (BCI) price for the
month.

The BCI fluid milk price is announced to the public the Friday on or
before the 23rd of each month for the forthcoming month. Before MILC
program payments are issued, all persons involved in a single dairy
operation must provide verifiable production and marketing evidence.
Dairy operators cannot reorganize the structure of a dairy farm
operation for the purpose of receiving multiple payments.

Another Federal program that affects regional dairy prices is the
Federal Milk Market Order (FMMO) program, operated by the Agricultural
Marketing Service (AMS). The FMMO program was authorized by the
Agricultural Marketing Agreement Act of 1937 to help stabilize the
marketing relationship between dairy farmers and handlers and to ensure
a sufficient quantity of fluid milk. Under the FMMO, raw milk is
currently classified into four different classes according to usage. The
FMMO specifies formulas for determining minimum handler prices for each
class of raw manufacturing milk that are tied to the dairy product
produced from that milk: fluid milk, cheese, butter, NDM, and whey. The
highest value use, Class I fluid milk price, is determined using the
manufacturing formula plus an additional amount that is reflective of
the location value. This is the only value that varies by location. The
FMMO maintains regional marketing orders that calculate "blend" prices
producers receive according to amounts of milk used in each class in the
relevant order.

Dairy compacts may also influence milk prices. The Northeast Dairy
Compact was created by six New England States with the consent of
Congress and became effective in July 1997 but Congressional authority
for the compact expired at the end of September 2001. A compact is a
regional agreement to support the incomes of producers' prices within
the region for the purpose of maintaining regional dairy production.

***General Opinions Expressed***

-   Commenters generally agreed that dairy programs (especially the
    MPSP) are too complex and need to be simplified.

-   Commenters also generally agreed that milk prices are too volatile,
    at least when they exceed support, which complicates planning and
    financing dairy operations.

-   Many believe the MPSP needs updating to suit present-day marketing
    and technologies.

-   Other commenters, especially in the Southeast, believe the MPSP
    works fine, but they believe that support rates need to be raised.

-   General concern was expressed that regulatory barriers to growth and
    innovation need to be reduced, especially EPA-imposed rules, but
    also MPSP purchases interfering with the fluctuation in market
    prices.

-   Some cheese makers preferred to see the MPSP eliminated so that they
    could pursue private risk-management options.

-   MILC comments varied, with Western dairy producers generally
    opposing and others generally favoring continuation. Many small
    dairy farmers, particularly outside of Western States, thought the
    MILC was simple and equitable.

-   A desire for risk management tools, such as the discontinued forward
    contracting program, was expressed, particularly by several Midwest
    participants.

-   Some participants from the Southwest opposed forward contracting.

-   Some participants favored reauthorizing dairy compacts while others
    opposed compacts.

-   A few participants thought large producer/handlers should be
    federally regulated and that their participation in Federal Milk
    Marketing Orders should be mandatory.

-   Some stated that the Federal rule-making process is too long and
    burdensome.

-   Comments from the East, Midwest, and Southeast indicated that
    programs should maintain a regional production balance, in the sense
    of not allowing the economic viability of milk production in these
    regions to be undermined by the lower priced milk from elsewhere.

-   Some participants believe additional programs need to be instituted,
    such as ones that help beginning dairy farmers.

-   Support was expressed for continuing the MPSP.

    ***Detailed Suggestions Expressed***

    [Excessive Regulation & Program Reform]{.underline}

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-   Prices should be unregulated and forward contracting should be used
    to reduce risk and provide the needed safety net.

-   Phase out MPSP and do not extend MILC.

-   Policies that facilitate direct consumer purchases from the farm
    where grown are preferable.

-   MILC and MPSP should be continued, albeit with payment limitations.
    Targeting benefits is important.

-   Grade-A producers who do not belong to a cooperative should be
    allowed to share in pooling.

-   Local and small-scale producers can directly market value-added
    products and should be encouraged with training and short-term
    financial assistance, in place of the complex, expensive, and
    centrally administered State-Federal regulatory-pricing system.

-   More policy input should be received from small dairy producers.

-   Perishable commodities, including dairy products, should be
    protected by Government programs and fair support prices.

-   Regulations should be based on the best and most reliable scientific
    data.

-   Supply management of milk should be supported.

    [MILC]{.underline}

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-   Maintain MILC and initiate producer-financed supply programs to keep
    production and prices at effective levels.

-   Support MILC payment limitation of 2.4 million pounds.

-   Support MILC but the money should come from producers themselves.

-   Extend MILC because it supports rural infrastructure and promotes
    global competitiveness.

-   Reauthorize MILC because it works well with Maine's own dairy
    stabilization program.

-   Oppose MILC because it distorts supply-demand principles.

-   Concern was expressed that economically viable dairies are above the
    MILC payment limitation.

    [MPSP]{.underline}

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-   Terminate the Depression-era MPSP to expand markets and competition.

-   The Class I floor price should be \$13.

-   Support MPSP and orderly marketing provisions to maintain minimum
    farm incomes and adequate milk supplies in high-cost, high-demand
    areas. Support Direct Delivery Differentials and a Class I floor
    price to attract dairies to the Southeast Order.

-   Decouple MPSP so that price support payments somehow do not
    encourage over production and lower prices below market clearing
    levels.

-   Support a parity system or some way of stabilizing prices or revenue
    to help farmers gain bank financing.

-   Increase the milk support price above \$9.90.

-   Support MPSP in its current form because its price stability
    attracts young farmers into dairying.

-   Do not allow Class III or IV prices to fall below the support rate,
    with no more than one price adjustment per year.

    [Marketing Orders]{.underline}

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-   Continue Federal Milk Orders with changes made in an inclusive and
    deliberate rulemaking process, as in the past.

-   A direct delivery differential is needed to cover the cost of moving
    milk produced in the Southeast to plants beyond the local market.
    The transportation credit paid by processors should be increased and
    used to offset the cost of supplemental milk deliveries.

-   Improve the efficiency of the Federal Milk Marketing Orders hearings
    process.

-   Support the Milk Marketing Orders program.

-   Streamline the Federal Milk Marketing Orders program.

    [Dairy Compacts]{.underline}

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-   Support the National Dairy Equity Act, a national dairy compact.

-   Oppose compacts to avoid overproduction, but instead encourage farm
    income to be derived only from prices determined by world markets.

    [Import/Export and International Issues]{.underline}

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-   Oppose imports of MPCs that compromise definitions of dairy products
    and threaten farmgate prices.

-   MPCs are not milk and should not be allowed in processed cheeses.

-   Suggested import quotas, tariffs, and/or regulation on MPCs.

-   Oppose tariffs on MPCs because other countries will retaliate
    against U.S. cheese exports.

-   Requested better enforcement of the dairy check-off dollars for
    imported dairy products.

-   Use the Dairy Export Incentive Program (DEIP) to the maximum level
    prescribed by law.

-   Reduce tariffs and oppose export subsidies (DEIP) and legislative
    efforts to restrict MPCs.

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-   Fully implement dairy import tariffs, many of which are not now
    being utilized.

-   The U.S. should unilaterally pursue trade liberalization to
    encourage multilateral negotiations because liberalized trade is
    becoming increasingly important.

-   The 15 cent assessment on dairy products should be assessed on all
    imports.

-   [Environmental]{.underline}

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-   Nutrient management programs should be in effect, but not ones that
    excessively regulate.

-   Eliminate notification requirements under section 304(a) of the
    Superfund Amendment and Reauthorization Act of 1986.

    [Other Dairy Issues]{.underline}

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-   The farm bill should stress the uniqueness of the Northeast in
    providing small-scale local dairy products.

-   Pricing on the thinly traded Chicago Mercantile Exchange is a
    concern.

-   Develop a cattle quarantine station in Alaska, and grass hay should
    be eligible for Loan Deficiency Payments.

-   Address the urban sprawl that makes it difficult to expand dairy
    farms because of nuisance complaints.

-   Provide States a stable funding source to experiment with innovative
    policies aimed at developing new products, markets, and conservation
    strategies (i.e., Wisconsin Value Added Dairy Initiative).

-   USDA programs should complement States' strategic development plans,
    such as encouraging brand marketing, farm modernization, technical
    assistance, and development of new products.

-   There should be tax incentives to help young people enter the dairy
    business in partnership with experienced retirees.