DPAC applauds Dairy Advancement Act Senate Bill 1682 offers 'fresh approach' for dairy
WASHINGTON, D.C., October 13, 2011 -- On the day in which the U.S. Congress passed three historic free trade agreements, the grassroots dairy producers of the Dairy Policy Action Coalition (DPAC) were in the nation's capitol stressing the need for policies that position dairy farmers to benefit from these trade opportunities.
DPAC lauded the October 12 introduction of the much-anticipated Dairy Advancement Act by Senator Robert Casey, Jr. (D-Pa.). Senate Bill 1682 was the highlight of discussions on Capitol Hill throughout the day. It contains key elements of DPAC’s Cornerstones for Change.
The bill repeals the Dairy Product Price Support program, which saves taxpayer dollars and sends a clear signal to global trading partners that the U.S. will be a dependable supplier of dairy products that are in demand and will clear those inventories even when market prices are low. The bill also makes available low interest loans to manufacturers to encourage investment in retrofitting their plants to adjust to this change by focusing on making and marketing products that have broader demand.
"Dairy is the one sector that has really struggled in the midst of a bright economic picture for agriculture," said Dennis Wolff, a lifelong dairy farmer from Millville, Pa., who served as a former state secretary of agriculture and is now a relations consultant for DPAC through Versant Strategies. "The policy decisions being made now by the Senate and House Ag Committees, as they consider their recommendations for the Joint Select Committee on Deficit Reduction, will be critical to the futures of our dairy farm families. The Dairy Advancement Act improves market transparency and starts the process of simplifying the milk pricing system. At the same time it recognizes the need for a modest safety net and for expanded risk management choices for producers."
“We applaud Senator Casey for introducing the Dairy Advancement Act. Unlike other proposals, which make the system even more complex, this bill calls for reforms that simplify and improve the way our milk is priced,” said DPAC chairman Cliff Hawbaker, a dairy producer from Chambersburg, Pa.
“As dairy farmers, we are looking for less, not more, government cost and control of our industry. We see the opportunities in the world markets and realize we are part of a world supply-and-demand balance,” observed Duane Hertzler, a dairy producer from Loysville, Pa. “We thank Senator Casey for recognizing the importance of the food, jobs, and economic vitality our dairy farms brings to our local communities with a bill that looks at the big picture.”
DPAC notes that while trade agreements open doors for U.S. dairy products, the industry must be positioned to walk through those doors with the products that are in demand. Thus, the Dairy Advancement Act is not only a dairy bill, but also a jobs bill for the economy. It captures the federal policy concerns expressed at countless public forums held across the United States, and takes a progressive approach by improving transparency, growing global markets, encouraging new product development and offering safety net options, without invoking supply control and without putting taxpayers at risk for billions in liabilities as in other dairy proposals. These issues are important to dairy farms of all sizes, as well as to processors and manufacturers of dairy products.
"The Dairy Advancement Act offers producers a choice to have a direct payment through MILC when the milk price hits a trigger, or to use an individual tool to protect a margin between feed cost and milk price,” said Rob Barley, a farmer from Conestoga, Pa. “It does not link the safety net to supply management like in other proposals. Having used LGM-Dairy, I have found that it allows the producer to develop a customized safety net and protect the margin that is relevant to his dairy operation.”
"We support this bill because we believe that controlling the U.S. milk supply is not the solution. All the evidence indicates that we do not have an over supply of milk relative to U.S. and global demand. Instead, the important task is to be developing products and marketing strategies," said Dave Forgey, a dairy producer from Logansport, Ind. "There is a reported 7 billion pounds of unmet global dairy demand in the world, and that gap is expected to widen. Why would we want to back away from that market with proposals that control production, when instead we can chart a pathway forward for U.S. dairy farmers through the Dairy Advancement Act?"
Producer Howard Straub from St. Johns, Mich. observed how his state has made agricultural exports a priority. "Dairy needs to be part of that bright future. We don't believe the producers' interests are best served by sending a signal to the world that we'll be the country to pull-back when margins tighten," he said. "Instead, we need to build and serve those long term customers by making the right products and marketing them consistently."
"We have a lot to be proud of as dairy farmers. We have the resources and the people," said Dale Hoffman, a dairy producer from Shinglehouse, Pa. "When you look at the overall economy, what sector is most productive? Agriculture. We'll lose it if we don't innovate and compete."
For Hoffman, the choice is simple: "Make those products here and keep the jobs and dollars here at home. If we can innovate and market our dairy products, we can be very competitive. We just need to unleash our potential as the United States of America."
“Since DPAC was formed in 2009, we have worked tirelessly on the Cornerstones for Change to give fellow dairy producers a voice in the policy decisions that will shape our futures,” said Alan Kozak, a producer from Millersburg, Ohio. “We thank Senator Casey for introducing the Dairy Advancement Act and ask the House and Senate Agriculture Committees to consider this fresh approach when making their recommendations to the Joint Select Committee on Deficit Reduction; or to put the dairy policy discussion through the normal committee process.”
The Dairy Advancement Act aligns federal dairy policy with the global realities of the 21st century. It is a market oriented approach that was developed by listening closely to dairy producers and experts from all segments of the dairy industry. It simplifies and adds transparency to an overly complex system and gives producers safety net options, without restricting their opportunities to manage and grow their businesses for the next generation of farmers and consumers.
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DPAC is a coalition of grassroots dairy producers actively participating, with a unified voice, in the policies and issues affecting milk pricing. The coalition, formed in November 2009, and is organized into action groups. It is funded by donations from dairy producers in 20 states and the businesses that serve and supply dairy farms in eight states. DPAC has a 20-member board made up of active dairy producers from Pennsylvania, New York, Ohio, Indiana, Wisconsin, Tennessee, and North Carolina, along with ad hoc members from 12 additional states, including Michigan and Minnesota. For more information, visit www.dpac.net or call 800.422.8335 and ask for DPAC.
In response to the criticism of the Dairy Advancement Act (S. 1682), which was forwarded in a mass email on October 15, it is important to set the record straight.
First of all, subsidized exports are not part of this bill. While it is true that there are loan incentives for the manufacturing sector (cooperatives and proprietary plants) to modernize as well as “accounts receivable” financing incentives to facilitate exports with lengthy payment terms… the truth is that the grassroots dairy producers of the Dairy Policy Action Coalition (DPAC) oppose subsidies in the form of discounts for dairy exports because this is yet another crutch paid for by farmers and/or the taxpayers.
The majority of dairy exports in 2010 and 2011 moved “at the market,” without discounts. Discounts only serve to clear markets of products that are less desired and farmers end up paying for that. The Dairy Advancement Act (DAA) puts some emphasis on helping the industry transition away from the current “product support price” system to one that encourages processors and cooperatives to make products for the market and to develop markets and long term customer relationships.
The Milk Income Loss Contract (MILC) is retained in S. 1682 (DAA) because there is not enough agreement from enough regions to go cold-turkey with zero safety net. The subsidized LGM (capped at 3 mil. lbs with a $1.50/cwt deductible) is a choice if the producer gives up the MILC (capped at 2.4 mil. lbs). The "choice" is designed to fill in the gaps for smaller farms because large farms have access to long-term contracts and options trading with large contract sizes on the futures markets.
Thus, the DAA approach is to acknowledge the economic and food security benefit of having small and mid-sized family farms throughout various regional milksheds, so the safety net fills in the gaps to give smaller farms a more level playing field. Producers who give up the MILC and opt for the LGM also have the option to purchase additional insurance at their own expense.
The DAA provides an alternative to the Dairy Security Act (H.R. 3062). The Dairy Security Act (DSA) ties milk production controls to its high-risk and expensive version of margin insurance. DPAC believes this will result in smaller farms and young farmers being pushed to sign up to show bankers they are managing risk or have a safety net to maintain their credit worthiness.
Then, when it triggers, those farms would be forced to cut back their production (before their insurance premium has a chance to kick in) and their production cuts would have to be large enough to affect the entire U.S. and global supply-and-demand balance in order to correct a poor margin situation at the national level.
The Dairy Advancement Act (S. 1682) does not include supply management because DPAC is well aware of the fact that the U.S. is a milk deficit nation and because the U.S. is part of a global supply-and-demand balance. That is not going to change... so we had better get competitive and market savvy and make and market the products the world wants before someone else develops those long term relationships.
The Dairy Advancement Act is designed to help the U.S. dairy industry be more aggressive marketers instead of approaching global opportunities with such trepidation. This is the United States of America, after all.
Most of the current price risk is due to the feed cost side of the equation. It is apparent that the price side of the margin can only go to a certain point to where the food industry (defined as retailers, restaurant trade and foodservice sectors, not the dairy processors) make changes in what is offered as well as altering whole meal recipes, product formulations and package or serving sizes to control costs of dairy products and ingredients.
Any one of those sectors can make one small change to control their costs and then the producer is left holding the bag. These decisions occur not by IDFA's members... but by IDFA's members' customers who are the next downstream link in the value chain. These are the dairy producers’ customers as well. The consumer often does not get to decide. Dairy policy does not control Walmart, Krogers, Stouffers, Sysco, etc.
As for the criticisms leveled at this bill in the name of keeping the Dairy Product Price Support Program… Where to begin... Let’s start with the fact that world dairy demand grew 1.5% in 2009, but the U.S. walked away from the market.
The problem in 2009 was not so much the fluctuation of prices, but essentially how long the price flat-lined at such a low level even though Oceania (New Zealand) prices turned around. The U.S. dairy industry essentially served as the “balancer” of the world’s supply of milk to the detriment of our own farmers because we did not compete and clear our products through the market. We sold to the government warehouse, while other countries moved their products to the global marketplace.
Under the Price Support Program (DPPSP), the federal government purchased 276,156,841 pounds of nonfat dry milk (NFDM) in addition to butter purchases from Oct. 1, 2008 through Oct. 1, 2009. Most of this powder was purchased from Oct. 1, 2008 through April 2009 when U.S. imports of milk protein concentrates (MPC’s) were at record levels in December 2008 through March 2009 before leveling off in June of 2009. After New Zealand’s prices turned around in the summer of 2009, our government bought an additional 132,276 pounds of U.S. milk powder from Oct. 1, 2009 through Jan. 2010.
Since at least August of 2009, U.S. product prices and the raw manufacturing milk price, have lagged behind other nations, like New Zealand. A key reason is that we do not make – and market – products that foreign buyers (and in many cases domestic buyers) want. The DPPSP, along with the government-set “make allowances”, play a large role in holding back U.S. innovation and marketing because they create a low- or no-risk environment for the manufacture of brown-bag nonfat dry milk at specifications that meet the CCC standards, not necessarily the standards of world buyers.
As for cheese, our cooperatives – through the CWT program – collect producer assessments to pay for buyer discounts on the cheese products the cooperatives make in order to sell them overseas. In 2010 and 2011, we saw record exports of proprietary dairy products moving “at the market.” Instead of using producer assessments to pay for buyer-discounts, the U.S. should be focusing on making the products our foreign customers want and developing customer relationships to participate in these growing markets to enhance producer returns.
This, again, comes back to federal dairy policies and programs and what these policies and programs “promote” in terms of business models in the dairy processing industry (both cooperative and proprietary plants).
In short: The DPPSP removes risk for the powder and butter processors and in so doing it actually creates more risk for the dairy producer. Part and parcel of this is the current four-class system. Here is an excerpt from a 2007 paper on Classes and Components by University of Wisconsin professor emeritus Bob Cropp. (The whole paper can be found at: http://www.dpac.net/publication_files/cropp-paper-on-classes-and-components.pdf)
"Further, since dairy cooperatives with manufacturing plants provided most of the balancing service, negotiated over order premiums for fluid milk sales ought to compensate for manufacturing losses experienced by their operating butter-powder plants involved in providing the balancing function,” writes Cropp.
“Market data suggest that concerns of the opponents (to a four-class system) might have been valid. While milk production grew 3.1 percent from 1993 to 1995, nonfat dry milk production grew by 29 percent and government stocks of nonfat dry milk increased by 419 percent. There was evidence that nonfat dry milk was made and later reconstituted to make Class II products. The cost to make nonfat dry milk and later reconstituting it for Class II use was cheaper than paying the Class II price directly for raw milk."
This is still going on and is one of the key reasons for a two-class system to generate competition between more buyers in multiple classes instead of with fewer buyers within a class.
This bill does not specify that the two-class system must use a competitive pay price. Nor does it set up competitive surveys for only cheese milk and only within regions, as NMPF did in its recommendations for the Dairy Security Act. Instead, the Dairy Advancement Act starts the process by directing the Secretary to report to Congress and include an Economic Impact Assessment that looks at several things, including milk-feed margins and dairy farm profitability.
In the Federal Order Reform language of the Dairy Advancement Act, it clearly states the establishment of two classes: a fluid milk class and a manufacturing class with the price for both classes determined using the component prices of butterfat, protein, and other solids. The specifics are part of the hearing process to determine how to do this in a way that brings more market value to the producer.
As for the mandatory reporting. It is curious that DairyAmerica is the major opponent of daily price and volume reporting. In other words, Fonterra doesn't want daily reporting. Insiders suggest the following loopholes are "possible" in the weekly reporting: I sell you 2000 lbs of NFDM. 1000 lbs is for delivery next week at $1.40/lb and 1000 lbs is for delivery in 31 days at $1.80/lb. Our net transaction is $1.60/lb, but $1.40 is reported because anything that ships more than 30 days after the price is struck is NEVER reported. Yes. There are many loopholes in the current system.
The Dairy Advancement Act is not perfect, but it is based on what farmers from many regions could agree on and IT IS THE ONLY BILL that includes better and more frequent price reporting and mandatory inventory reporting. And it's the only bill moving the industry to a simpler pricing system based on two-classes of milk and doing so in a way that is responsible, that retains component values, and that includes a report to Congress and measure of impact on feed/milk margin before implementation. The two year process is important because it must be done right.
This bill is designed to help the U.S. dairy industry be more aggressive in making products and marketing products for the domestic and global markets. It recognizes that we are in a global supply-and-demand balance and that the U.S., alone, is deficit in milk production. Thus it does not include supply management. The Federal Order reform piece is sound and the mandatory reporting includes inventory.
For more information about both bills, look for a side-by-side comparison and other information at www.dpac.net, or call 800.422.8335 and ask for DPAC. Or simply email us.
About the author
Sherry Bunting is a freelance writer residing in Lancaster County, Pennsylvania. She has served as correspondence secretary for DPAC since 2009 and continues to cover the dairy and agriculture industry as a 30-year agriculture journalist, including her past services as an Editor and Managing Editor for two agricultural publications.
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