As the dust settles on February's enactment of the Agricultural Act of 2014, commonly referred to as the farm bill, experts continue to analyze the bill's provisions to determine what the legislation means for farmers in Pennsylvania and beyond. With the U.S. Department of Agriculture busy writing new rules to implement the nearly 1,000-page law, it may be too early to know all the implications.
But one thing is certain, according to an agricultural economist in Penn State's College of Agricultural Sciences: The bill's dairy provisions -- the aspect of federal farm policy arguably most important for Keystone State agriculture -- continue the shift toward a greater reliance on risk-management approaches to provide a safety net for farmers.
Changes to federal dairy programs are watched closely by Pennsylvania's dairy industry. The state's top agricultural sector accounts for more than $1.5 billion in farm-gate receipts, generates an estimated $5 billion in economic activity and supports nearly 60,000 jobs. Pennsylvania ranks fifth nationally in milk production and second in the number of dairy farms with 7,400.
"The biggest thing about the 2014 farm bill is this continued move away from disaster and counter-cyclical payments and price supports to insurance-driven tools," said James Dunn, professor of agricultural economics. "Typically, the government will subsidize the insurance to make it more attractive for the farmer, but the insurance company basically covers the risk. That makes the budget impact of the farm bill more predictable."
The most important dairy provision in the bill, Dunn noted, is the new Margin Protection Program, which will go into effect by Sept. 1. Under the program, dairy farmers who participate will pay a $100 annual enrollment fee that will ensure them indemnity payments if their margin -- calculated by USDA using the all-milk price minus the average feed cost -- drops below $4 per hundredweight for a defined two-month period.
"The Margin Protection Program supports producer margins and not milk prices," Dunn said. "It's designed to help farmers deal with both catastrophic conditions, such as weather extremes, and prolonged periods of low margins."
The program also discourages unsustainable growth and provides a disincentive for overproduction by limiting first-year coverage to a producer's highest level of annual milk production during the previous three years, Dunn explained. In subsequent years, any increase in production that exceeds the national average increase will not be protected.
Producers can choose to cover between 25 and 90 percent of their production history and can buy additional protection for margins ranging up to $8 per hundredweight, with higher premiums for larger herds.
Dunn said looking at recent history provides a clue to how the Margin Protection Program might benefit producers.
"In 2009, when the costs of seed, fertilizer, chemicals, diesel fuel and other inputs were extremely expensive, milk prices were in the dumpster, averaging $14.41 per hundredweight for the year," he said. "If the Margin Protection Program had been in effect then, producers would have received payments for 11 of the 12 months of that year.
"But under the old system, which provided payments or price supports only when milk prices fell below a certain price, farmers in 2009 received little or no support because the target price wasn't reached," he said. "Unless they had bought insurance or used some other risk-management system, they were on their own. Some went out of business and defaulted on loans because the cost of production was higher than their income from milk sales."
Another provision in the farm bill established the new, margin-based Dairy Product Donation Program. Under this program, USDA will create demand by purchasing dairy products to donate to food banks or similar nonprofit organizations only if margins fall below $4 for two consecutive months. The purchases will occur for three consecutive months or until margins rebound above $4.
Three dairy programs were targeted for elimination or phase-out in the 2014 farm bill:
• The Dairy Product Price Support Program, under which the government supported prices with a standing offer to purchase cheddar cheese, butter and nonfat dry milk.
• The Dairy Export Incentive Program, which offered subsidies to exporters of U.S. dairy products to help them buy products at U.S. prices and sell them at lower international prices.
• The Milk Income Loss Contract Program, which compensated dairy producers when domestic milk prices fell below a specified level.
Although many Pennsylvania producers currently are doing well with milk prices at or near record highs -- more than $26/cwt. in February -- Dunn said the need for a dairy safety net remains. "History shows us that one thing is absolutely true -- prices will come down again."