Dairy Talk: Your 2 Cents Worth

It’s one of the Catch-22s of federal budgets: If you’re a big user of government programs, the Congressional Budget Office (CBO) assumes you’ll be a big user in the future. And if you’re not, it assumes you won’t be.

That’s the philosophy that produces the infamous government "baseline" budget projection. It’s this projection—not what is actually spent—that becomes the target number for new or renewed legislation.

Dairy’s baseline is $432 million over the next 10 years. That sounds like a big number. But not when it comes to government expenditures.

"Dairy stands out, or rather it stands apart by being virtually undetectable," says Andy Novakovic, a dairy economist at Cornell University and chair of USDA’s Dairy Industry Advisory Committee. "The projected share of government outlays, relative to the size of the [dairy] sector, is 0.1%."

The baseline for the total farm bill is $995 billion. Nearly 80% of that, $772 billion, is for food assistance and food stamp programs. Farm commodity price and income supports, including dairy price support and Milk Income Loss Contract (MILC) payments, account for $63 billion. (The remainder goes mostly to crop insurance, $90 billion, and conservation payments, $65 billion.)

If you take dairy’s $432 million baseline limit, divide it by 10 years, and divide it again by 200 billion pounds of annual milk production, you get 2.16¢ per cwt. Yes, maximum government assistance of 2.16¢ per cwt. per year.

Add to this the fact that both President Obama and Congress have decreed that the 2012 farm bill will bring the end of direct payments.

Say goodbye to the MILC program. Say hello to margin insurance. And to rein in the cost of that insurance, a market stabilization program, aka supply management, will be attached.

The market stabilization portion of the bill has many producers and processors, particularly here in the Midwest, up in arms. Some liken it to "Canada South," others to a step toward communism (or at the very least, socialism as practiced in the Low Countries of the European Union).

To avoid that step into the abyss, Sen. Michael Bennet (D-Colo.) introduced an amendment to the Senate Ag Committee’s farm bill that would eliminate the market stabilization program. To pay for the margin insurance, he would charge increased premiums.

CBO never publicly released a budget score on the Bennet amendment. So the National Milk Producers Federation released its own, claiming that the premiums on the basic margin of $4 would cost producers $37 million annually and $86 million for the $6 per cwt. supplemental insurance.

Backers of the Bennet amendment went ballistic. They point out, correctly, that the $4 margin insurance is not "free." To receive it, producers must agree to sign up for the market stabilization program, and if the program is triggered, they forfeit anywhere between 2% and 8% of their milk checks.

Either way, producers pay. If you have only 2.16¢ per cwt. of government assistance to work with, it can’t work out any other way.