The financial stress of 2009 and similar episodes over the years have led the industry and Congress to reconsider how to handle fluctuations in milk prices and financial prospects for dairy farmers. Some members have voiced interest in developing alternatives to current polices (which expire in 2012) and incorporating them in the next omnibus farm bill in the 112 th Congress or enacting the policies separately before then. Milk Income Loss Contract (MILC) Program

Section 1506 of the 2008 farm bill ( P.L. Dairy Policy Options

The dairy industry and members of Congress are currently developing or advocating a variety of policy changes in response to the difficult financial situation that began affecting dairy farmers in late 2008. Current proposals can be categorized as either supply management, market-based, or tiered-pricing approaches. Supply management attempts to prevent depressed farm milk prices while reducing price volatility by affecting the level of milk production. Under market-based plans, advocates argue that the best approach is one that helps farmers manage risk associated with volatile prices of milk and feed, because it is difficult to administratively manage milk prices and supplies. Each approach has implications for U.S. dairy farmers, competitiveness of the U.S. dairy industry, and international trade. Many of the group's 23 recommendations fall into the market-based approach. The committee narrowly passed a recommendation for a supply management program. Bills in the 111th Congress (H.R. 5288 ) and the Dairy Market Stabilization Act of 2010 ( S. 3531 ) would create a mandatory, nationwide program designed to manage the U.S. milk supply so that milk producers could avoid low and volatile farm milk prices. Views on Supply Management

Supporters of price stabilization and supply control say that inherent incentives to overproduce need to be offset by a program to control supplies in a more measured way. Critics of supply management, including dairy processors, contend that supply control could reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, raise consumer prices, and decrease demand for dairy products because, they argue, a pricing system based on supply control and/or cost of production potentially rewards inefficiency. Critics of a policy such as the NMPF margin proposal (described below) expect that incentives to overproduce (e.g., maintain or boost production as prices fall in an attempt to maintain revenue) will aggravate the financial woes of the dairy industry indefinitely; thus, controlling potential price variability and combating depressed farm prices with supply management is necessary, they say, for the long-term financial health of producers. The DPMPP would be a new safety net that protects a dairy farmer's "margin," that is, the national farm price of milk minus feed costs. Potential Impacts

While producers would likely see higher prices initially as minimum federal order prices are adjusted upward, some analysts say that the long-run competitiveness and stability of the U.S. dairy industry could be at risk because of the unknown effectiveness of provisions to discourage overproduction, given limitations on USDA to make adjustments. Recommendations by the Dairy Industry Advisory Committee

On March 3, 2011, the Dairy Industry Advisory Committee (DIAC) voted to approve its final report to the Secretary of Agriculture. The Secretary established the committee in August 2009 to make recommendations on how USDA can best address dairy farm profitability and milk price volatility issues.
Financial stress encountered by dairy farmers in recent years has led Congress and the industry to reconsider how to deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members have voiced interest in alternatives to current federal programs (which expire in 2012). Alternative policies could either be incorporated into the next omnibus farm bill or enacted separately before expiration.
The dairy industry is currently developing or advocating a variety of policy changes. All of the proposals discussed in this report—loosely categorized as either supply management, market-based, or tiered-pricing—have implications for U.S. dairy farmers, competitiveness of the U.S. dairy industry, and international trade.
Supply management proposals such as H.R. 5288 and S. 3531, introduced in the 111th Congress, are designed to prevent depressed farm milk prices while reducing price volatility through supply management. The National Milk Producers Federation (NMPF) also has proposed a market stabilization component as part of its comprehensive package of suggested reforms to dairy policy. Supporters of price stabilization and supply management say that inherent incentives to overproduce need to be offset by a program to manage supplies in a measured way. Critics of supply management, including dairy processors, contend that such measures could reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, and raise consumer prices, because, they argue, a pricing system based on supply control and/or cost of production potentially rewards inefficiency.
The market-based approach, including a separate element of the NMPF package, represents an opposing view on how the federal government should address the problem of farm milk price volatility and periodic financial stress for dairy farmers. This approach contends that, because it is difficult to manage milk supplies and prices administratively, the best approach is to provide a government program that helps farmers manage risk associated with volatile prices of milk and feed. Specifically, a new "safety net" would be established to protect a dairy farmer's "margin"—that is, the farm price of milk minus feed costs—regardless of current price levels. Critics expect that incentives to overproduce will aggravate the financial woes of the dairy industry indefinitely, and thus argue that controlling potential price variability and combating depressed farm prices with supply management is necessary for the long-term financial health of producers.
The third area of potential policy change is to alter the current pricing approach used in federal milk marketing orders (FMMOs) to directly increase dairy farm revenue. For example, one potential change to base milk pricing in FMMOs on the cost of milk production (i.e., S. 1645, introduced in the 111th Congress) would imply higher prices received by dairy farmers. However, some are concerned that the long-run competitiveness and stability of the U.S. dairy industry could be at risk because of the unknown effectiveness of provisions to discourage overproduction.
On March 3, 2011, the U.S. Department of Agriculture's Dairy Industry Advisory Committee approved its final report to the Secretary, who established the committee to make recommendations on how USDA can best address dairy farm profitability and milk price volatility. Many of the group's 23 recommendations fall into the market-based approach, including a recommendation for margin insurance on quantities of milk that exceed the cap for the Milk Income Loss Contract Program (MILC) and a tax-deferred savings accounts for dairy farmers. The committee narrowly passed a recommendation for a supply management program.