Dairy producers rebound from worst of price collapse, but say federal reform still needed

The dairy industry is an important economic engine for many communities in the Midwest, as reflected by recent actions taken in Wisconsin and regional interest in the future policy direction of the federal government.

Stateline Midwest Vol. 20, No. 7: July / August 2011

The ideal climate for dairy cows and high-quality forages has made the Midwest home to more than 55 percent of the 53,000 dairies in the United States, and in turn, dairy has been good for the region’s rural economy.

However, this “cash cow” has seen hard times over the last decade, most notably a milk price collapse in 2009 that nationally led to the loss of thousands of farms and the slaughter of hundreds of thousands of dairy cows. Over the past decade, the number of farms and cows in most states has declined.

But there are exceptions, including in the Midwest.

In Wisconsin, the nation’s second-largest milk-producing state, production is up since 2005 — a trend that Republican Sen. Dan Kapanke believes is largely the result of legislative action.

In 2004, the state established a tax credit program for livestock and dairy operations. The program — which allows these operations to claim a tax credit of up to $50,000 for investments in barns, milking parlors and other high-cost operational needs — has “resulted in over $500 million in farm investments,” Kapanke says.

This year, a bipartisan bill (SB 9) to extend this tax credit through 2017 was signed into law. Also, in 2009 and 2010, the Legislature passed similar tax credits for dairy, meat and food processors.

States and dairy operations are now keeping a close eye on potential federal reform of milk-pricing policies, which have been blamed for a 50 percent drop in the price farmers received for milk from 2008 to 2009.

As a result of the plunge, the average dairy farmer wound up losing about $100 per cow each month in 2010. The U.S. Department of Agriculture spent $1 billion to buy dairy products to try to boost farmers’ prices, but this was insufficient because farmers also faced higher expenses, such as rising prices for fertilizer and corn.

The volatility in the dairy market is a result of federal milk pricing that uses a complex formula cobbled together over the last 40 years and based on the Chicago Mercantile Exchange price for cheese. While the original concept was that milk would be priced on the value of the finished product (cheese), less than 1 percent of cheese is actually traded on the exchange today.

With discussions beginning on the 2012 farm bill, reforming dairy policy has become a priority, because the collapse of 2009 showed policymakers that current dairy programs provide neither the safety net nor the market resiliency that producers need.

The National Milk Producers Federation — which represents the majority of the U.S. milk supply, including 40,000 dairy producers through 31 cooperatives — has proposed afour-point reform plan:

  • Reforming milk pricing by restructuring the Federal Milk Marketing Order to reduce volatility and increase transparency.
  • Replacing the existing federal safety net (the Dairy Price Support and the Milk Income Loss Contract programs), which does not provide enough support because increased production costs have far outpaced the price supports.
  • Creating a voluntary Margin Protection Program, similar to existing crop-insurance programs.
  • Establishing a supply management program that would cut production when prices drop below certain levels, keeping supply and demand in alignment.

The International Dairy Foods Association, which represents the processors, opposes the program, calling it an attempt at supply management and saying it would lead to higher milk prices and reduce exports.