	Introduction

U.S. dairy producers are caught in a classic "price-cost squeeze," with farm milk prices declining sharply from record highs while feed costs remain high. From January through September 2009, the all-milk price received by farmers was 36% below a year earlier. Meanwhile feed costs, as measured by alfalfa prices, were down only 20% from a year earlier. The deteriorating economic picture has prompted calls for policymakers to consider how well current dairy policies are assisting dairy producers and what other options might be available. Second, the Milk Income Loss Contract (MILC) program was established in the 2002 farm bill as a government payment for dairy farmers in times of low milk prices. However, milk prices have since declined below the trigger for MILC payments. In late 2008 and 2009, after several years of relative inactivity, the price support program resumed purchases when dairy product prices approached support levels. As of September 11, 2009, USDA estimated that it purchased 111 million pounds of nonfat dry milk under the program in 2008 and expects to purchase 379 million pounds in 2009, along with small amounts of butter and cheese (including amounts exported under the Dairy Export Incentive Program). However, the conference agreement for the FY2010 Agriculture appropriations bill, which was enacted on October 21, 2009, provides for a different use of the funds ($60 million to purchase dairy products and $290 million in direct payments to farmers). The National Milk Producers Federation (NMPF), the largest trade association representing milk producer cooperatives, wrote to the Secretary of Agriculture on January 8, 2009, asking the Department to take several steps to assist dairy producers. In early May 2009, the National Milk Producers Federation reiterated its request that the U.S. government restart the Dairy Export Incentive Program to help remove excess dairy products from the market. USDA Actions To-Date

USDA has taken several actions in 2009 to support dairy farm income, including increasing dairy product price supports, transferring dairy products to domestic feeding programs, and activating the Dairy Export Incentive Program. Increase Price Support for Cheese and Nonfat Dry Milk

Following heightened industry and congressional interest in taking action to boost milk prices for farmers, USDA announced on July 31, 2009, a temporary increase in price support for cheese and nonfat dry milk from August 2009 through October 2009. Potential Policy Responses

Most policy responses that are currently being discussed fall into three categories: (1) maintain the status quo and allow remaining programs to operate, (2) implement a new program such as a dairy buyout, and (3) modify existing programs to enhance dairy farmer income. However, the full effect of the production decisions is expected to take several more months. Supporters of the status quo argue that current dairy programs already encourage additional milk production when the market is not calling for it. At any rate, any proposals that involve new budgetary outlays could be challenged as adding to an already large federal deficit and/or burdening consumers with higher costs. Proponents of additional action point out that many producers are facing significant income loss and that without additional assistance, they may not survive financially. However, opponents of this option argue that additional payments could slow the supply adjustment process needed to bring the dairy market back into balance.
In 2009, U.S. dairy producers have been caught in a classic "price-cost squeeze," with farm milk prices declining sharply from record highs while feed costs remain high. From January through September 2009, the all-milk price received by farmers was 36% below a year earlier, when prices were near a record high. Meanwhile, feed costs, as measured by alfalfa prices, were down only 20% from a year earlier.
Declining milk and dairy product prices in late 2008 and early 2009 reactivated government programs to support dairy prices and dairy farm income. During this period, after several years of relative inactivity, the dairy price support program resumed purchases of surplus dairy products as prices approached support levels. The U.S. Department of Agriculture (USDA) estimates that it removed 111 million pounds of nonfat dry milk in 2008 and expects to remove 379 million pounds in 2009, along with small amounts of butter and cheese. In February 2009, milk prices declined below the trigger for Milk Income Loss Contract (MILC) payments to dairy farmers for the first time in two years. Payments have been triggered in all subsequent months to date, totaling $775 million as of October 26.
The deteriorating economic picture has prompted calls for policymakers to consider how well current dairy policies are assisting dairy producers and what other options might be available. Throughout 2009, the National Milk Producers Federation (NMPF), the largest trade association representing milk producer cooperatives, has requested that USDA take steps to assist dairy producers. Members of Congress have also engaged the Secretary of Agriculture. On May 22, 2009, USDA restarted the Dairy Export Incentive Program to help remove excess dairy products from the market. On July 31, 2009, USDA announced a temporary increase in price support for cheese and nonfat dry milk. Since then, Congress has considered additional support for dairy farmers. In October, Congress passed the conference agreement for the FY2010 agriculture appropriations bill, which includes an extra $350 million for emergency dairy assistance ($60 million to purchase dairy products and $290 million in direct payments to farmers). The bill was enacted on October 21, 2009.
Given the economic climate, producers are making business choices that are expected to reduce milk production and lift prices. However, the full effect of those decisions is underway, raising the question of what, if any, policy changes are needed. Options to address the current dairy market situation include (1) keeping the status quo and allowing remaining programs to operate, (2) implementing a new program such as a dairy buyout, and (3) modifying existing programs to enhance dairy farmer income.
Proponents of keeping the status quo argue that current dairy programs—specifically the dairy product price support program and the MILC program—already encourage additional milk production, and that more production-related support will slow the supply adjustment process needed to bring the dairy market back into balance. At any rate, any proposals that involve new budgetary outlays could be challenged as adding to an already large federal deficit, and/or burdening consumers with higher costs. Proponents of additional action point out that many producers are facing significant income loss and that without additional assistance, they may not survive financially. Producer groups and processors alike want to increase demand as a way to bolster milk and dairy product prices.