During times of low margins, it is in the collective interest of dairy producers to reduce production to boost margins quickly to sustainable levels. However, even in absence of coordinated collective action, periods of low margins are generally a temporary phenomenon. Through herd liquidations, milk supply naturally adjusts to return margins to average levels, as evidenced by historic IOFC margin patterns and the term structure of forward IOFC margins (Bozic et al. 2012). The downside of relying exclusively on markets to govern the supply correction is that the recovery may be delayed for as long as revenue from milk production covers at least variable costs. Thus, to expedite IOFC recovery Dairy Security Act couples DPMPP with a supply management-type program.
Additionally, supporters of Dairy Security Act argue that a highly subsidized stand-alone margin insurance program offering coverage only $0.30 per cwt less than the historical average of $8.30 per cwt will make the milk supply less responsive to negative price signals, and in the long run result in lower average milk prices and higher indemnity payments from the taxpayer to the dairy farmer. Such a scenario may be undesired, but would not be unforeseen.
Opposition to Dairy Market Stabilization Program
The DMSP portion of the DSA package has wide-spread support within the dairy farming community and its cooperative leadership, but this support is not nearly unanimous. Significant resistance with regard to the DMSP has been registered by dairy cooperatives, restaurant and food marketers, consumer groups, dairy food manufacturers, and their trade associations. These groups are concerned that artificial enhancement of milk prices through DMSP milk supply reductions will have detrimental effects on procurement costs, throughput efficiency, retail prices, consumer demand, and dairy export opportunities.
In addition, opponents fear that once DMSP becomes part of legislation it could be easily amended by Congress to be non-voluntary or more severe in the financial penalties, a slippery slope opposition groups seek to avoid.
A MILC and Honey Compromise
With both sides in the dairy policy debate set in their positions it is difficult to see a path to compromise. How can we offer a retooled dairy farm safety net that: (i) works for small and large-scale dairy farm managers; (ii) is fiscally responsible; (iii) does not mute market supply and demand signals; and (iv) does not require a market stabilization program? We propose a new policy alternative, one we decorously label "MILC and Honey". This program would accomplish all of these goals by increasing eligibility of MILC to 4 million pounds per year and allowing farms an option to choose annually between 1) MILC participation, or 2) a stand-alone margin insurance program as their elected safety net. Specifically our proposal is for a combined program we term MILC-Insurance. This program will provide for:
- continuing to offer the MILC program and increase the MILC eligibility to 4 million pounds per fiscal/calendar year.
- farms not wishing to participate in MILC would be able to purchase margin insurance from $4.00-$6.50 per cwt.
- the choice for either MILC or margin insurance can be made each fiscal or calendar year.