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The Reform of the Dairy Industry in the 2012 Farm Bill and what it does for Organic

By Ed Maltby, NODPA Executive Director

Added November 13, 2011. The provision in the Dairy title of the upcoming Farm Bill, whether enacted in 2012 or 2013, presents a unique opportunity to the organic dairy industry to work together to create a federal system that is relevant to organic dairy producers and processors. The last few years of surplus milk, loss of national and local organic processors, and producers suffering low returns and loss of equity, have highlighted that organic dairy has reached the beginning of maturity as a commodity, suffering some of the adverse effects that the conventional dairy market has historically experienced. With changing conditions on the supply side, tightening of the market on the demand side, and changing relationships between processors and producers as the initial founders of organic transition out, it is necessary to look at how we want organic dairy to look when the next Farm Bill comes up for consideration. These Farm Bill discussions are a unique opportunity for organic dairy to examine, in depth, the role that organic national supply management/market stabilization will play. Organic producers need organic insurances, safety net programs, and the opportunity for more transparent and independent reporting through an organic dairy Federal Milk Marketing Order.

2012 Farm Bill process or lack of one

As this article goes to press, it remains to be seen what the agriculture committees of the House and Senate will send to the Joint Select Committee on Deficit Reduction (more popularly known as the Super Committee) and beyond that, whether the Super Committee accepts or rejects the agriculture committees' recommendations, modifies them or writes new policy altogether. Time will tell what the outcome will be, though it must tell before November 23, and by the week of November 7th to meet the requirements of the Congressional Budget Office (CBO) which will verify the budget calculations. If the Super Committee includes a farm bill (amended or not) in its package, and succeeds in coming up with a package that can get a majority vote later in December, then the House and Senate will be voting on the farm bill as part of a mega-package of spending cuts and revenue increases, not subject to amendment. If they fail, then the deficit reduction efforts will shift forward into 2012, as Congress attempts to find other ways, perhaps, of preventing the automatic cuts to kick in October 1, 2012. In that case, it is not known what would become of the Farm Bill. It could proceed under a more normal legislative process through both the House and Senate committees early next year, or the current Farm Bill could be extended for a year, with the committees coming back to work on a new Farm Bill in 2013.

Summary of proposed changes in the Farm Bill for the dairy industry

In the ever moving scenarios of the fast tracked Farm Bill and its submission to the Super Committee of Congress, the Dairy title went through some rapid changes in name though not in content. Rural Economic Farm and Ranch Sustainability and Hunger Act (REFRESH) a broad based Farm Bill introduced into both House and Senate replaced and incorporated the Dairy Security Act which replaced the couple of iterations that Representative Colin Peterson made of the National Milk Producers Foundation (NMPF) Foundation for the Future.

For the Dairy title of the Farm Bill, the REFRESH and Dairy Security Act legislation includes the following key elements which it is assumed will be presented to the Super Committee by the chairs of the House and Senate Ag Committees and their ranking members:

  • Expiration of traditional milk support programs: the dairy price support program (DPPSP) and the milk income loss contract (MILC)) will end.
  • Creation of a voluntary margin protection program that would operate as a form of insurance and safety net. The federal government would provide a fully-subsidized level of protection for producers on 80% of their production history when the margin between an all milk price and feed cost falls below $4.00/cwt. The program also includes supplemental coverage with partial premium subsidization available to producers seeking additional and affordable protection at higher margin levels on up to 90% of their production history.
  • To participate in the voluntary margin protection program, producers must also participate in a market stabilization program to address market imbalances. Producers would be required to cut production and pay into a common fund in times of surplus.
  • USDA is required to eliminate end-product pricing formulas for determining the Class III (milk used to make cheese) price and develop a competitive milk pricing system. The system will maintain all other provisions as they currently exist including maintaining the "higher of" for establishing the fluid use (Class I) minimum base price, current Class I differentials, and the number and basic structure and provisions of federal orders. This will be determined through formal hearings.
  • USDA will conduct a study of the effect of the elimination of the Federal Milk Marketing Orders.

The Dairy Security Act itself represents a 20% savings compared to the current dairy program budget, amounting to a savings of $131 million over 10 years, according to the Congressional Budget Office. There have been various modeling projections completed by leading dairy economists on the participation in and the effect of the insurance program on government spending. The level of participation will obviously affect the cost of the program to the government. While participation in insurance programs by dairy operators has been traditionally very low, reports from meetings with lenders suggest that they might insist that their dairy clients participate in this insurance program to mitigate some of the losses of previous years. As with the Foundation for the Future, major dairy producer organizations have endorsed dairy provisions of the House and Senate bill, while the major dairy processor organizations oppose it.

The Effect on Organic Dairy

When the Foundation for the Future was drafted by NMPF, and the initial Bill was presented by Representative Peterson, the ranking member of the House of Representatives Agriculture Committee, the organic dairy industry was concerned about the mandatory requirement of the market stabilization programs which would directly penalize organic producers. Added to this was the ongoing concern about the approximately $30 million annual payments into the Federal Milk Marketing Order (FMMO) by organic processors because approximately seventy-five per cent of organic milk is sold as fluid beverage product (Class 1). Under the FMMO, which currently doesn't distinguish organic or any other value-added marketing of milk, milk sold at a higher price on the Class 1 market is balanced by the lower price paid for milk sold as manufactured product to produce a blended price, which theoretically helps to stabilize the marketing of milk and payments to producers.

In response to the initial proposal from Peterson, NODPA, the Organic Trade Association (OTA), and the National Organic Coalition (NOC) joined many other groups in advocating that the market stabilization program should not be mandatory. With the publication of the Dairy Security Act of 2011 by Peterson and Representative Mike Simpson, the market stabilization program became voluntary, with the provision that any producer who participated in the insurance program would need to take part in the stabilization program. In advocating for a voluntary program, NODPA, OTA, NOC and others were able to present the case that organic existed in a completely different pay price and marketing system and as such the FMMO, the proposed supply management program, the safety net insurance program and the proposed changes to the FMMO held no benefit for the organic producer and unfairly penalized the organic processor.

Opportunities for Organic in the new Farm Bill

Margin Protection/Insurance Program

Organic dairy producers can opt into the non-organic insurance and supply control program that is currently being proposed and essentially gamble that the profitability of the organic dairy will follow the same pattern of the conventional market. Organic producers may also have to accept being penalized in times of surplus in the conventional market, which is increasingly dominated by the world market. They can also opt out of the conventional program and this will be an individual decision by each producer, not subject to block votes of the cooperative as some FMMO order votes are. The Milk Income Loss Contract Program will be eliminated and was the only safety net program available to all producers and directly benefiting the 70% of producers who provide 30% of the total volume of milk.

As we seek alternatives to ensure that all producers have some protection from extreme market fluctuations, now is the time to advocate for an insurance program based on the commodity prices for organic feed and a calculated blend price for organic milk. Organic production is approximately 2% of the total dairy production so the program will not affect either the scoring by the CBO or the cost to the federal government.

Having an organic insurance program will:

  • Protect those operations that are more financially leveraged, traditionally new entrants and smaller operations, that can't withstand the fluctuations in feed prices that are outside of their control.
  • Protect those producers whose processors do not accept their responsibility to mitigate the fluctuations in the market. In the last surplus, organic milk was being sold at $14/cwt. and under. Some producers were being paid on utilization and HP Hood/Stonyfield Farm dumped producers (thankfully Organic Valley went out of its way to take those producers in and Horizon Organic actively took on producers even in times of surplus).
  • Improve organic producers' ability to access limited financing and credit – with insurance on the conventional market, lenders will automatically ask organic producers where their insurance is, citing their concerns that the worst might happen, not relying on the long history of responsible action by organic processors (as bankers always do).

Market Stabilization/Supply Management Program

The conventional dairy industry has seen the wisdom of having some controls on the supply side and to tie the production of milk to the margin between milk price and the cost of feed. This would ensure that when the price drops, producers do not just produce more milk to compensate for the loss of income. The organic market is more complex and currently allocates the power of controlling supply to the processors who can choose to pay on utilization, impose a quota system, or exercise clauses in contracts to limit supply. Any excess is diverted to the non-organic market. While this may be effective for the two national brands, which have a financial and market based commitment to their dedicated supply in the long term, it doesn't take into account the production of the independent producer handlers/processors (approximately 20% of production) and those producers that aren't able to sell to the two national brands.

In order to protect the long time interest of all producers and to send a message to the consumer and key stakeholders (for example, lenders) that the organic dairy industry is committed to providing a secure livable wage for producers, the organic dairy industry of producers and processors need to work together to design a supply management system that is at least as effective as the conventional industry. If organic was to follow the same broad criteria as the conventional dairy proposal, the income generated by the penalty for over production could be allocated by the stakeholder committee to increased advertising of organic dairy and fund other areas that would benefit organic sales and producers income. The Federation Of Organic Dairy Farmers (FOOD Farmers) supply control committee has started that process with the support of producers across the country and we continue to invite the processors to actively join with us to develop a viable program that allows for ongoing effective producer input into these decisions which the conventional producers already have.

The Federal Milk Marketing Orders (FMMO)

While everyone agrees that the FMMO's are overly complex and do not reflect the current reality of dairy marketing, they do serve the purpose of regulating pooling of milk nationally and provide some protection to producers who do not market all their milk in a Class 1 area. Organic processors pay into the Federal Pool as currently more organic milk is marketed as beverage milk than as manufactured product. By being in the FMMO, organic processors can balance any surplus milk within the non-organic system, plus get paid for any line loss or unused organic milk while packaging product. The ability to balance the savings on small volumes of milk does not reflect the cost to processors of being in the FMMO and paying into the Pool. Producers gain nothing from any blend price within the FMMO as their pay price is decided by individual processors based on their business model and the processor's market position. This resulted in some producers being paid exceptionally low prices for their organic milk in the last surplus. Producers do gain from both the data collection and auditing that the FMMO performs which gives some basic information on volumes of milk sold as beverage milk. This service can potentially be improved by tapping into more information already available within the system but would be impossible to replicate outside of the FMMO because of the number of independents packaging organic products over a wide geographic area.

If organic dairy were to unilaterally leave the FMMO, it would benefit the processors' bottom line to the tune of $30 million per year but would deprive producers of many opportunities. As USDA examines the future of the FMMO as proposed under the present draft of the Farm Bill, we suggest the following for areas of discussion:

  • Organic dairy should be a separate commodity within the FMMO, with its own Pool of milk and its own criteria for determining payments into that Pool.
  • USDA needs to look at ways of tapping into existing information and existing forms for gathering data that can also be used to provide information on organic dairy. Currently the FMMO is the only method of having audited data on the volumes of beverage organic milk that is sold. This data is used by producers to evaluate the existing market and historical trends when they enter negotiations with individual processors. It is also used by organizations to advocate for research dollars for organic; is used by lenders as the only independent source of information on the organic dairy market, and is used by the media to reflect the state of the market.
  • With organic being a separate commodity within the FMMO, it would be able to provide timely information and an organizational structure that can form the basis for organic dairy market stabilization and insurance programs. Any restructuring of the FMMO should be designed to accommodate these options.

There is a tendency to assume that we, as producers, can have limited effect on the outcome of the Farm Bill and legislative actions in Washington DC. Once we start to subscribe to the inevitability of the power exercised by trade groups, processors or lobbyists that ensure legislative proposals are geared to their interest, we will lose the potential for the future generations of organic dairy family farms. When we have something as good as organic for dairy farm families we need to fight for its future and protect the future of all organic dairies. The 2012-2013 Farm Bill is rapidly becoming a pivotal time for organic dairy and we must have informed organic dairy producers at the table representing producers' interest.