Insurance a Part of Minnesota Congressman’s Proposed Dairy Subsidy Reforms

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When milk prices plummeted in 2009, wiping out years of savings and causing hundreds of dairy farms to go under, struggling farmers pleaded for the government to do something to help stabilize prices and inspire growth.

They may soon get their wish.

Lawmakers are beginning to discuss changes to the safety net for the nation’s dairy farmers in an effort to make the milk industry more profitable and less reliant on federal subsidies. One plan would replace several outdated programs with reforms meant to keep supply and demand in balance.

Many dairy producers are grateful for the proposal, saying it would help eliminate the roller-coaster price swings that have done so much damage. Others, however, say the real answer is less government interference, not more.

The crisis started when milk prices, driven up by overseas demand, plummeted from a high of $18 per hundred pounds in 2008 to about $12 amid the recession in 2009. Farmers began slaughtering their cows to try to cut production. At one point, an average of 50,000 cows a week were being killed in an effort to reduce the milk glut.

Hundreds of dairy farmers were forced out of the business. Those who survived saw their savings largely wiped out, and they fear another prolonged downturn could devastate what’s left of the industry.

U.S. Rep. Collin Peterson, D-Minn., the ranking member on the House Agriculture Committee, has floated a proposal to strengthen their safety net.

His plan has three main components.

First, it would eliminate a pair of rarely used federal programs designed to help dairy farmers in lean times.
Second, it would strengthen an insurance-like program in which the government pays farmers when milk profits become too slim.
Third, when profit margins shrink to a certain level, the government would limit how much milk is produced.

The last measure is the most contentious. The so-called dairy market stabilization program would provide incentives for farmers to produce less milk, thereby cutting the supply and helping restore prices. But some dairy producers say the incentives represent unwelcome government intrusion.

Here’s how it would work: When the difference between milk prices and the cost of producing milk, as determined by feed prices, fell to a certain level, farmers would be limited in how much milk they could produce. For the most part, income from any additional sales would go to the government, which would use it to buy up the excess.

“The idea is to tweak production so supply and demand can quickly adjust,” said Chris Galen, a spokesman for the National Milk Producers Federation based in Arlington, Va.

Cornell Kasbergen loves the idea. A dairy farmer with 3,000 cows in Tulare, Calif., and another 1,500 in Brodhead, Wis., he estimates he lost more than $4 million in the 2009 downturn. He said Peterson’s proposal could help prevent a recurrence of that crisis.

“When we’re on a downward spiral we need a mechanism to put a little brake on the throttle,” the 53-year-old said. “This is the mechanism that we as an industry have come up with.”

But other dairy farmers are asking Congress not to interfere. They object to the idea that they as small-business owners could told how much milk they can sell.

Jeff Opitz, who milks 950 cows in southeastern Wisconsin, said capitalism is about outworking one’s competitors, not inviting government interference. He said he protected himself financially by doing such things as investing in futures markets.

“Capitalism can be bloody,” said Opitz, 52, of Saukville. “We’ve got to turn into better businessmen. Unless you have hard times you don’t get better.”

A group that represents dairy farmers agrees. The International Dairy Foods Association worries that the measure takes control away from farmers and introduces a new layer of bureaucracy.

The Washington, D.C.-based group does favor the other aspect of Peterson’s proposal, however, a feature similar to a current program that works like an insurance system. In effect, dairy producers would pay premiums in good times that would enable them to collect more generous government payouts in bad times. If they chose to pay nothing, they would get a minimal subsidy.

“This is the type of program that should be used more extensively,” said Jerry Slominski, the group’s head lobbyist.

The insurance program, called the margin-protection program, would theoretically benefit taxpayers by having dairy farmers pay more for their own safety net. It would also give farmers more control over how much federal protection they wanted and were willing to pay for.

Even critics of the first half of Peterson’s proposal favor the insurance program. It was unclear whether a bill would be written that would separate the two aspects. Peterson is soliciting feedback on the plan before introducing it in a few weeks, most likely as a measure separate from the 2012 Farm Bill.

It’s not clear how much money Peterson’s plan would actually save the federal government.

An economist who studied the plan said it would disrupt free markets to an extent. While extreme highs and lows in milk prices would largely be eliminated, a side effect would be more frequent cycles of volatility, said Mark Stephenson, the director of dairy-policy analysis at the University of Wisconsin-Madison. But, he said, most consumers wouldn’t notice that since milk processors keep retail prices fairly stable.

He expected a tough fight in Congress because of the potential for production limits.

“I think it’ll be controversial,” Stephenson said. “There may be some fairly strong level of support, but overall it’s going to be a tough sell.”