Dairy Policy and the Next Farm Bill

Dairy policy has been central to farm bills for nine decades and will be again in this round: Dairy products comprise a major share of consumer diets, farm milk accounts for about 10 percent of farm sales, and dairy feed production uses millions of acres of corn, soybeans, hay, silage, other harvested crops, and pasture.
The US dairy industry has become an export success in part because policy changes enabled the sector to be more responsive to market forces and facilitated productivity growth.
The Dairy Margin Coverage program, which pays subsidies to farms when milk prices are low relative to an index of dairy feed prices, slows slightly the exit of some unprofitable farms and delays productivity-enhancing consolidation.
Federal Milk Marketing Orders, a byzantine array of regulations that raise beverage milk prices, and other policies that affect dairy production, such as farm animal treatment rules, are also likely to be addressed in the farm bill.

Introduction

The US dairy industry has become more productive in recent decades and hence increasingly competitive in global markets. Over an even longer period, the mix of dairy products consumed in the United States has also changed to include less fluid milk and much more cheese, whey, butter, and milk powder—products that are also exported. These changes have important impli-cations for dairy policy that have not yet been fully incor-porated into farm bill programs and related legislation.

The 2014 Farm Bill required that the US Department of Agriculture (USDA) end dairy price support, stock-holding, and export subsidy activities that had propped up farm milk prices for about eight decades.¹ The replacement program, now called Dairy Margin Coverage (DMC), offers monthly payments to d airy producers based on variations in the national averages of milk and feed prices. In addition, as they have since the 1930s, Federal Milk Marketing Orders (FMMOs) continue to regulate milk prices by end use in much of the country. Other policies regulating and supporting the dairy industry may also be modified or introduced in the next farm bill.

Outside the farm bill process, the USDA began to implement pandemic compensation to dairy farms in the spring of 2020 under the Coronavirus Farm Assistance Program, which, along with the second round of payments, distributed about $3 billion to dairy farms in 2020 and 2021.² Since milk production and prices in 2020 were about average, many dairy farms had a good financial year in 2020.³ This report says no more about these ad hoc payments. However, going forward, farm subsidy programs should be evaluated in the context of the potential for large ad hoc compensation whenever there is large-scale market disruption.

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Notes

1. Daniel A. Sumner, “Dairy Policy Progress: Completing the Move to Markets,” American Enterprise Institute, January 29, 2018, https://www.aei.org/publication/dairy-policy-progress-completing-the-move-to-markets.

2. US Government Accountability Office, “Coronavirus Food Assistance Program: USDA Should Conduct More Rigorous Reviews of Payments to Producers,” September 2022, https://www.gao.gov/assets/gao-22-104397.pdf.

3. For more, see Daniel A. Sumner, Tristan M. Hanon, and Scott Somerville, “Effects of the COVID-19 Pandemic on the Western Dairy Industry,” Western Economics Forum 19, no. 1 (2021): 33–50, https://waeaonline.org/western-economics-forum/?fwp_ dropdowns=2021%2Cvolume-19-issue-1.