Federal milk marketing orders
Under the 2002 Farm Act, the milk support purchase program, which had been operating year-to-year recently,
again becomes a multiyear program. The milk support price
equals $9.90 per hundredweight (cwt). The Commodity
Credit Corporation (CCC) will buy, at support purchase
prices, any butter, cheddar cheese, or nonfat dry milk that
is offered to it and meets specifications. The support purchase
prices are set to ensure that the price of manufacturing
milk averages at least the milk support price of $9.90 per
cwt. The Secretary has authority to adjust the product purchase
price if deemed necessary.
The Dairy Export Incentive Program (DEIP) pays cash
bonuses that allow dairy product exporters to buy U.S. products
and sell them abroad when international prices are below
domestic prices. DEIP removes products from the domestic
market, helps develop export markets, and plays an important
role in milk price support. The DEIP quantities and dollar
amounts are subject to World Trade Organization restrictions
under the Uruguay Round
Agreement on Agriculture.
The 2002 Farm Act establishes a national Dairy Market
Loss Payments (DMLP) Program to provide a price
safety net for dairy producers. A monthly direct payment
is to be made to dairy farm operators if the monthly Class
I price in Boston (Federal Order 1) is less than $16.94
per cwt. Payments are to be made on up to 2.4 million pounds
of milk per year per organization (based on 2001 U.S. average
data, which is the production from about 132 cows). The
number of producers per operation does not affect its limit.
Federal milk marketing orders are intended to help
establish and maintain orderly marketing conditions for
both milk producers and dairy product consumers. A classified
pricing system and pooling are the two key elements of milk
marketing orders. Milk marketing orders define the relationship
between prices of fluid and manufactured dairy products
and a geographic price structure, sometimes called the price
surface. The 1996 Farm Act called for several changes in
the milk marketing order system, including consolidation
of the then existing 31 orders. There are currently 11 Federal
milk marketing orders. The 2002 Farm Act did not change
milk marketing orders.
Economic Implications
A simple example illustrates the general features of DMLPs.
A direct payment to milk producers is triggered when the
Class I milk price in Boston is less than $16.94 per cwt.
The amount of the payment, on a per-cwt basis, is calculated
as 45 percent of the difference between $16.94 and the Boston
Class I price.
Using an actual example, the Class I price in Boston in
May 2002 was $14.51 per cwt. A per-cwt direct payment of
$1.09 (0.45 x [$16.94 - $14.51]) is in order. This rate
is then multiplied by the farmer's payment quantity for
the month. The payment is made no matter where the producer
is located, how the producer's milk is used, or what price
was actually received for the milk produced.
The DMLP will stabilize and generally enhance producer
revenue and it will tend to increase production. However,
increased marginal production incentives will only be for
those producers selling less than the 2.4-million-pound
limit. These farmers account for less than one-third of
the milk supply. Other producers will view the payment as
income support and will react to DMLPs much like field-crop
producers react to counter-cyclical payments.
