• Price Support Programs
• National Dairy Market Loss Payments
• Fluid Milk Marketing
• Economic Implications

Dairy policy in the United States includes both Federal and State programs. The two major Federal dairy programs are the system of Federal milk marketing orders and the milk price support program. Government programs that assist international trade (see DEIP below) and provide domestic and international food aid also affect the dairy industry.

Price Support Programs

The current purchase program for supporting farm milk prices started with the Agricultural Act of 1949 and has been amended several times since then. The Food, Conservation, and Energy Act of 2008 (2008 Farm Act) fundamentally changes the milk support purchase program by specifying the support prices of purchased manufactured products, not the price of milk. The Commodity Credit Corporation (CCC) will buy butter, cheddar cheese, and nonfat dry milk that meet specifications. The support purchase prices are:

• not less than $1.05 per pound for butter,
• not less than $1.13 per pound for cheese in blocks,
• not less than $1.10 per pound for cheese in barrels, and
• not less than $0.80 per pound for nonfat dry milk.

The CCC authority to adjust relative purchase prices of butter, Cheddar cheese, and nonfat dry milk is restricted until purchases reach quantity levels specified in the 2008 Farm Act. CCC can make unrestricted inventory sales to the industry at specified prices (at least 10 percent above the purchase price).

The Dairy Export Incentive Program (DEIP) pays cash bonuses that allow dairy product exporters to buy at U.S. prices and sell abroad at prevailing (lower) international prices. DEIP removes nonfat dry milk, butterfat, and certain cheeses from the domestic market, helps develop export markets, and has played an important part in milk price support since the 1990 Farm Act. DEIP quantities and dollar amounts are subject to World Trade Organization (WTO) restrictions under the Uruguay Round Agreement on Agriculture. The 2008 Farm Act emphasizes use of DEIP to its maximum, subject to U.S. trade obligations.

National Dairy Market Loss Payments

The 2008 Farm Act authorizes continuation of a national milk income loss contract (MILC) program to provide income stabilization for dairy producers. However, program parameters are much more specific. A monthly direct payment is to be made to dairy operations if the monthly Class I price in Boston (Federal Order 1) is less than $16.94 per hundredweight (cwt) (as adjusted to reflect dairy feed costs). Payments are to be made on up to 2.985 million pounds of milk per fiscal year per operation during October 1, 2008, to August 31, 2012, using a rate of 45 percent of the difference noted above. The number of producers per operation does not affect its limit.

Fluid Milk Marketing

The Agricultural Marketing Agreement Act of 1937 first authorized Federal milk marketing orders, which have been modified many times since then, to help establish orderly marketing conditions for the benefit of both milk producers and dairy product consumers. A classified pricing system and revenue pooling are the two key elements of milk marketing orders. Milk marketing orders define the relationship among 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 milk marketing orders, including consolidation of the then existing 31 orders. In 2008, there were 10 Federal milk marketing orders. The elements of the 2008 Farm Act related to Federal milk marketing orders focus on processes under the system's regulations and on evaluation of effects--not on major program changes.

Economic Implications

The economic effects of changes in the dairy price support program and in the MILC program are noteworthy, but in different ways. The price support program changes are not expected to alter greatly the effects from those of a program with a specified support level for milk. However, the purchase prices for butter, Cheddar cheese, and nonfat dry milk provide a lower level of support than the milk support level under prior legislation because of changes in the estimated costs that are used to calculate milk prices from dairy product prices. On a manufacturing milk price basis, support is about 55 cents per cwt lower.

Changes to the MILC program increase payment levels. A simple example illustrates the general effects. The original MILC program included calculation of payments to eligible producers (farms) based on a target price of $16.94 per cwt and a reference price defined as the Class I price in Boston, MA. When the reference price is less than the target price, a payment rate per cwt of 45 percent of the difference is calculated and paid on milk production up to 2.4 million pounds per operation per year.

The 2008 Act specifies fiscal year payment rate and quantities of eligible milk production for three specific periods:

• For October 1, 2007-September 30, 2008, the payment rate was 34 percent of difference between $16.94 per cwt (as adjusted) and the Class I price in the Boston milk marketing order for the applicable month on up to 2.4 million pounds of milk marketings.
• For October 1, 2008-August 31, 2012, the payment rate is 45 percent of difference between $16.94 per cwt (as adjusted) and the Class I price in the Boston milk marketing order for the applicable month on up to 2.985 million pounds of milk marketings.
• Beginning September 1, 2012, the payment rate is 34 percent of difference between $16.94 per cwt (as adjusted) and the Class I price in the Boston milk marketing order for the applicable month on up to 2.4 million pounds of milk marketings.

In addition, the target price is adjusted for feed cost impacts so that it is no longer strictly a fixed price. The $16.94 price is adjusted by the percentage that National Average Dairy Feed Rations Cost exceeds $7.35 per cwt for any month for period from January 1, 2008, through August 31, 2012. The target cost of feed rations increases to $9.50 per cwt beginning September 1, 2012.

To show the impacts of these changes, since the payments are made monthly, would be difficult. The following scenario is "assumed" to show per-operation effects of the alternative programs under the following specific conditions.

• First, it is assumed that there will be a payment made and that the difference between the reference price and target price is $0.01 (one cent).
• Second, the operation is assumed to produce the full amount of milk on which payments are made in one month, which in each case is used to calculate a "one-time" payment.

Under the 2002 Act's program parameters, the payment would be $108.00 per operation [($0.01 per cwt x 0.45) x 2.4 million pounds].

Under the 2008 Act's program parameters, the payment would be $134.33 per operation [($0.01 per cwt x 0.45) x 2.985 million pounds].

For More Information...

• ERS, 2008 Farm Bill Side-By-Side
• USDA, Agricultural Marketing Service, Federal Milk Marketing Orders
• USDA Farm Service Agency, Dairy Operations and Price Support (includes MILC program)
• USDA, Foreign Agricultural Service, Dairy Export Incentive Program

Last updated: Friday, June 22, 2012

For more information contact: Roger Hoskin