DAIRY production spending versus receipts is not even 1%. In fact, it's 0.08%. This makes it hard to accomplish an effective program with such small annual outlays, University of Missouri dairy economist Scott Brown explained.
Last year, Rep. Collin Peterson (D., Minn.) helped write the Dairy Security Act (DSA), which features a margin insurance approach rather than the price programs of the past. As high feed costs continue to limit profits for dairy producers, dairy groups were seeking margin protection instead of just prices.
"Margin protection helps reduce government outlays," Brown said. "They are triggered less often than price supports."
The biggest threats to dairy profits are high feed costs and price volatility, Brown said. Margins help producers, as they are what is left to pay all costs -- beyond feed.
Margin protection is based on milk price less feed costs. The feed costs and milk production are negatively correlated. That is, as feed costs go up, producers tend to feed less. That reduces milk production. In turn, milk prices go up.
For policy-makers, calculating margin protection will be tricky, Brown said. Margins have fallen in recent years (Figure). That raises the question of the "correct" margin to use in the dairy bill.
Some margin proposals from 2012 could have led to surplus milk.
"We need to be careful to use correct triggers," Brown noted. "These are tough issues to score. It's the difference between spending millions -- or billions.
"Program details are always important," Brown said. "This new margin program has many facets, but, done right, producers gain program flexibility."
The current Milk Income Loss Contract price support program was extended for 2013. Agriculture Secretary Tom Vilsack noted that those payments may be adjusted due to the sequester, but it's unknown right now whether producers will have to reimburse some of the funds that were already paid out.
In last year's House Agriculture Committee farm bill debate, Reps. Bob Goodlatte (R., Va.) and David Scott (D., Ga.) introduced an amendment that would strip the supply management provision from DSA.
The provision initially was inserted to keep costs down by penalizing producers who overproduce when milk supplies are plentiful.
The Goodlatte-Scott amendment provided dairy producers with voluntary margin insurance protection without the administrative fees and wasn't tied to the supply management program that they said "manipulates dairy prices and penalizes consumers."
The two added that their amendment would provide "a viable safety net for producers without putting the government in the middle of market decisions."
The newly updated Congressional Budget Office (CBO) score of the farm bill found that the amendment would save $100 million over DSA as included in last year's House farm bill.
"We believe that the CBO score further proves that supply management does not work, and our amendment will provide producers with a viable safety net without supply management and added producer fees," Goodlatte and Scott said in a statement.
Speaker of the House John Boehner (R., Ohio) stopped short of giving advice to House Agriculture Committee leaders on how to handle the dairy program, but it is no secret that he's opposed to the supply management component and was one reason behind the full House not taking up the farm bill.
In recent weeks, Peterson has said often that he has had several discussions with Boehner aimed at reaching a compromise on the dairy provisions.
Boehner told reporters at his Farm Forum this month that no official agreement has been reached, but "Peterson is well aware of my concerns on the supply management provisions that he authored in last year's farm bill. I hope that won't be part of this year's farm bill."