Correspondent
GREEN BAY
With an eye on the next Farm Bill, for 2012 or later, the National Milk Producers Federation is crafting an income protection proposal that would assure participating dairy farmers of a profit margin on their feed costs regardless of the price of milk, NMPF president and chief executive officer Jerry Kozak told his audience at the Dairy Business Association’s 5th annual expansion symposium which had 450 registered attendees.
The motivation for such a new approach, to be called Dairy Producer Income Protection Program (DPIPP), is an overall dissatisfaction by the dairy industry with the current milk pricing system, its ineffective and outdated remaining safety nets and the domestic dairy sector’s limited ability to take advantage of opportunities in the global market, Kozak remarked. “We have become the balancing plant for the world because of how we price our milk.”
DPIPP would also be an opportunity to get rid of the make allowances which have created friction among processors and between dairy farmers and processors. The proposal will not call for a disbanding of the remaining 11 federal milk marketing orders but would introduce two classes of milk pricing – fluid and all manufactured products.
“We need a new fabric,” Kozak declared. “This is about margin, not milk prices. It would protect against losses from low milk prices or high feed costs for corn, protein and forage. This would protect individual producers.”
Other organizations, including the Holstein Association, have submitted proposals to address the volatility of milk prices but Kozak rejects that approach. He described those plans as well intentioned but argued that neither of those proposals nor that of the NMPF would stop the volatility. What’s needed, he said, is a way to moderate the effects of price volatility and to provide the right tools to do it.
DPIPP, which would be voluntary – though with perhaps a five-year initial commitment, would be financed by a combination of federal subsidies and producer-paid insurance premiums. It would resemble the relatively new livestock gross margin insurance program but not the crop insurance program.
Kozak mentioned the approximately $1.5 billion paid to dairy farmers in 2009 under the federal Milk Income Loss Contract program, saying thank goodness for it, but also indicating that it was not a good investment overall nor one that was equitable to all producers. He suggested that in 2009 the $1.5 billion would have been more than enough to pay for an insurance indemnity on a base portion, percentage yet to be determined, of every dairy farm’s milk production under DPIPP.
Regarding the free insurance from a federal subsidy for a portion of a farm’s milk production, Kozak said the NMPF’s 25-member task force and subcommittees prefer to cover a larger quantity of milk at lower level of insurance rather than a more limited volume at a higher level. Any protection beyond that level – supplemental insurance – would be paid for by the dairy producers, he noted. “They would pick their own percentage of protection.”
Asked if the same goal could be reached by teaching dairy producers about the existing risk management tools and persuading them to use those tools, Kozak agreed in theory but is convinced that it would not happen. When he asked for a show of hands on how many of the 100 or more producers in the crowd here are taking part in a risk management program, only about a dozen hands went up.
At a meeting with a larger crowd recently in Georgia, Kozak said only three hands went up. If nothing else, the institution of DPIPP would force producers to make a decision on whether they want to participate or not and for what level of margin protection they’d be willing to pay in premiums.
DPIPP would not become an incentive for overproduction, Kozak promised, because only a portion of the production would be covered by a federal subsidy for insurance. To be effective, DPIPP would need to be open to all, have easy access and be user-friendly.
Because of production costs other than feed, Kozak emphasized that DPIPP is not designed to provide producers with a guaranteed profit. Under current conditions, even a milk price of $20 per hundred is not satisfactory if input costs are running at $21.
Under DPIPP, the minimum pricing for milk classes II, III and IV now determined by the federal milk marketing orders would be eliminated in favor of competitive pay prices, probably regional, that would be calculated from a survey of milk buyer and processors. DPIPP needs to include California and national legislation could make it happen if the program’s provisions are satisfactory to the state’s dairy industry.
One outcome of DPIPP could be the diversification to manufactured dairy products that would serve the global market, Kozak commented. He noted, for instance, that no casein is being made in the U.S.
Kozak called supply management, on which there are differences of opinion within NMPF’s membership, naïve and terribly misdirected. It is not a solution for price volatility. That is why we need DPIPP,” he said.
“I have a problem with supply management because it would penalize some producers,” Kozak stated. “Redistributing money to those who don’t expand is a penalty. It’s the wrong direction to go.”
DPIPP would allow for an expandable production base which would be established from a rolling historical average. “We have to decide yet how much of a new base would be covered by the subsidy. We need to control our own destiny,” Kozak stressed. “We can reach a consensus despite having some disagreements.”
Because of the effect that implementation of DPIPP would have on the nation’s dairy processors, Kozak said that a phase-in period of three to five years would be necessary. He also views DPIPP as a potential transition – to a new product mix and marketing opportunities – for the dairy plants which have their operations geared to FMMO rules and milk pricing. He does not expect the FMMOs to be voted out.
The milk price plunge in 2009 was not due to an oversupply of milk but rather to a fall in demand, especially in the 4 to 5 percentage point cutback in exports compared to previous years, Kozak remarked. Conversely, he said dairy ingredient imports did not play a large role in the drop of milk prices although they are an easy target for some observers and analysts.
Kozak commended U.S. Secretary of Agriculture Tom Vilsack for doing what he could to relieve the pain of the past year’s very low milk prices. He cited the reactivation of the Dairy Export Incentive Plan despite opposition by some other federal agencies, the support of food banks with dairy products and the $350 million relief package in late 2009 from which $290 million was paid directly to dairy farmers.
If Kozak could have had his way with that package, however, he would have put all $350 million rather than $60 million toward the purchase of cheese. He said this would have provided a return to dairy farmers of 67 cents per hundredweight of milk compared to the average of 17 cents in the direct payments; the actual payment rate for the eligible milk volume was 32.11 cents.
Within the NMPF, Kozak believes it is time for a retooling of the Cooperatives Working Together program which has concentrated on dairy herd retirements in recent years. He said one of the inherent problems of the voluntary checkoff program is the free ridership on benefits to those not contributing – 26 percent of milk production when the contribution was 5 cents per hundredweight of milk and 32 percent at the current deduction of 10 cents.
Among the possibilities of increasing CWT’s effectiveness could be partial rather than whole herd retirements, giving attention to how the use of sexed semen is offsetting the reduction of cow numbers, support of food banks and formation of an export agency in common, Kozak stated.
The NMPF is working on the DPIPP proposal as part of its Foundation for the Future project. The chairs of its committees are Ken Nobis of the Michigan Milk Producers; Dave Fuhrmann of Foremost Farms; and Wayne Palla of Dairy Farmers of America in New Mexico.
The NMPF board plans to vote on its task force’s DPIPP proposal in June. House agriculture committee chairman Rep. Collin Peterson, D-Minn., intends to start hearings on the new farm bill before the end of 2010. Kozak has no expectations that Congress will open the current farm bill for any revisions.
Looking back at 2009, Kozak suggested that, difficult as it was, it could be viewed in the long run as having been very helpful for changing the future of the dairy industry. Regarding his appearance at the DBA’s expansion symposium, he quipped that the CWT herd retirements don’t jibe at all with the association’s “Keep the Cows in Wisconsin” motto.
