The legislation evolved to meet the needs of its modern-day constituents – farmers and consumers. Agriculture’s role in providing food security, and in turn national security, to the United States is more important than ever. And now work on the next farm bill has started during a period of volatility on every front – political, economic, weather and beyond.
Milk production remains an integral piece of agricultural production in the United States, accounting for almost 10 percent or $42 billion of all agricultural receipts in 2021 – not including the beef value of dairy animals. With wild market disruptions and supply-chain shortfalls underpinning milk-price volatility most of the past five years, understanding the farm-bill provisions intended to prevent further dairy farm closures is vital.
Dairy Margin Coverage
Title I, known as the “commodity title,” authorizes commodity-support programs for 2019-2023 – including the Dairy Margin Coverage program. Dairy Margin Coverage exists to provide risk protection to dairy producers when milk prices are depressed and-or feed costs, on average, are inflated. Unlike other dairy risk-management programs like Dairy Revenue Protection or Livestock Gross Margin-Dairy, this program is administered directly through U.S. Department of Agriculture’s Farm Service Agency instead of private crop-insurance providers. It’s completely voluntary and provides payments when the calculated national margin falls to less than a producer’s selected coverage trigger. The margin is the difference between the average price of feedstuffs – the price of a mix of excellent-quality alfalfa hay, corn and soybean meal – and the national all-milk price.
To fully understand the status of current Dairy Margin Coverage we must dive into its relatively recent but complex history. The Dairy Margin Coverage program is a result of multiple revisions and improvements to the previous Margin Protection Program, originally authorized in the 2014 farm bill. Enrollees in the Margin Protection Program paid a $100 annual administration fee for catastrophic coverage whenever the margin fell to less than $4 per hundredweight for a two-month period. Farmers with catastrophic coverage would then receive payments equal to the difference between the national margin and $4 per hundredweight, applied to 90 percent of their milk-production history. Margin Protection Program production history was defined as the greatest annual quantity of milk marketed during 2011-2013, adjusted annually for a national increase in milk production.
In its preliminary form Margin Protection Program enrollees could also purchase “buy-up” coverage for a premium in 50-cent increments from $4.50 per hundredweight to $8 per hundredweight, which provided coverage for the corresponding margin. Premiums were split into two separate tiers. Tier One included premiums for protection of milk on the first 4 million pounds while Tier Two applied to production more than 4 million pounds. Participants can then choose to cover 25 percent to 90 percent of their production history. During its 2015 initial offerings, 44 percent of participants and 62 percent of the covered production chose the catastrophic option. The percentage of participants selecting the catastrophic option only increased in subsequent years as premiums were set to increase. That resulted in 93 percent of producers and 98 percent of milk volume being enrolled at the minimum level by 2017. Those participation dynamics lead to minimal payouts in the program — $10 million in 2016 and only $19,000 in 2017.
With dairy producers frustrated with the program, some minor changes were made in the Bipartisan Budget Act of 2018. That included the increase in Tier 1 coverage to as much as 5 million pounds. Margin calculations were also calculated monthly instead of every two months, and Tier 1 premiums were reduced. Additional changes were made with the passage of the 2018 farm bill, which replaced Margin Protection Program with Dairy Margin Coverage. The following bullets summarize these changes as noted by the Congressional Research Service.
• Catastrophic coverage for both Tier 1 and Tier 2 was set at $4 per hundredweight, but was made available on 95 percent of a farm’s production history – compared with 90 percent under the Margin Protection Program – and remained available for a $100 enrollment fee.
• Farms could elect to cover between 5 percent and 95 percent of their milk-production history with buy-up premiums, compared with 25 percent to 90 percent under the Margin Protection Program.
• Farms could purchase buy-up coverage for margin thresholds ranging from $4 per hundredweight to $9.50 per hundredweight under Tier 1 coverage, compared with a range of $4 per hundredweight to $8 per hundredweight under the Margin Protection Program. Tier 2 premiums applied to coverage exceeding 5 million pounds of covered production history, and still provided coverage for margin thresholds ranging from $4 per hundredweight to $8 per hundredweight.
• Buy-up premiums were restructured under Dairy Margin Coverage; Tier 1 premiums were reduced from levels in the Margin Protection Program-Dairy, while Tier 2 premiums were reduced at smaller margin-coverage levels and increased at greater margin-coverage levels.
• The average national margin continued to be calculated monthly, as it had been calculated under the Bipartisan Budget Act of 2018.
• Registration fees were waived for certain classes of producers, and refunds of Margin Protection Program premiums were to be paid retroactively to most enrollees.
• Removed was the prohibition on dairy farmers participating in both a margin program and Livestock Gross Margin-Dairy insurance program.
In 2020 when the Consolidated Appropriations Act was approved and made law, Supplemental Dairy Margin Coverage was based on 75 percent of the difference between 2019 marketings and the old base calculation number – 2011-2013 milk marketings. The new policy allows operations to opt for increased milk-production coverage if changes to herd size were made since the 2011-2013 basis years – within the 5-million-pound limitation. For that expansion of coverage, $580 million has been set aside by the USDA. It will apply to the 2021 calendar year – retroactively – as well as the 2022 and 2023 calendar years. After making any revisions to production history under Supplemental Dairy Margin Coverage, producers were able to apply for 2022 traditional Dairy Margin Coverage. That means future Dairy Margin Coverage contracts will include the updated production-history figures that account for 2019 marketings. The expansion of coverage is not in place past 2023.
Additionally the Farm Service Agency adjusted the calculation of alfalfa within the factored average-feed-costs figure using 100 percent premium alfalfa hay rather than 50 percent, in hopes of making future Dairy Margin Coverage payments more reflective of dairy expenses. That change reduced Dairy Margin Coverage milk margins by an average of 22 cents per hundredweight a month, linked to the updated alfalfa price being an average of $15.95 per ton more in the formula for 2021. For example in October 2021, the Dairy Margin Coverage margin decreased from $8.77 per hundredweight to $8.54 per hundredweight under the adjustment. That will allow enrolled producers to retroactively recoup payments they would have qualified for under the feed-cost-formula change – if the difference was large enough to trigger an increased payment level covered under their plan.
Currently producers are considering what further changes can be made to Dairy Margin Coverage under the next farm bill to make the program even more reflective of current market conditions without losing its effectiveness. Some are concerned that the 5-million-pound Tier 1 limitation no longer represents the average dairy farm in the United States. Others are hoping for more-regular updates to production-history reference points. Concern that only feed costs are captured in the margin calculation have also been aired as producers face many other cost increases like those for labor, fuel and equipment. In any case Dairy Margin Coverage remains a widely utilized program authorized by the farm bill. In 2021, 74 percent of all farms with production history were participating in the program, which paid out more than $1.1 billion due to diminished margins.
Dairy Forward Pricing Program
The Dairy Forward Pricing Program allows milk handlers to pay producers or cooperatives a negotiated price for producer milk, rather than the federal-order minimum blend price for non-fluid classes of milk – Class II, III, IV. It does not allow for forward contracting of fluid milk or Class I milk, though this is defined rather flexibly. The program is voluntary for dairy farmers, cooperatives and handlers; handlers cannot require producer participation in a forward-pricing program in order to accept milk. Regulated handlers must still account to the Federal Milk Marketing Order pool for the classified-use value of their milk. Each forward contract made under the program must be submitted to the regional market administration. It must contain a disclosure to ensure producers understand the program and the method in which they would be paid. Prior to the 2018 farm bill, the Dairy Forward Pricing Program expired Sept. 30, 2018, meaning new contracts under the program were prohibited. The 2018 bill reauthorized the program to allow handlers to enter into new contracts until Sept. 30, 2023, for milk delivered through 2026.
Dairy Indemnity Payment Program
The Dairy Indemnity Payment Program allows the Secretary of Agriculture to indemnify affected farmers and manufacturers of dairy products who, through no fault of their own, suffer income losses with respect to milk or milk products containing harmful pesticide residues, chemicals or toxic substances, or that were contaminated by nuclear radiation or fallout. The program was extended under the 2018 farm bill until Sept. 30, 2023.
The 2020 Consolidated Appropriations Act amended the regulations for the Dairy Indemnity Payment Program to indemnify affected farmers for depopulating and permanently removing cows after discovery of chemical residues affecting the commercial marketing of milk for the applicable farm and likely affecting the marketability of cows for a lengthy duration. That includes elevated levels of perfluoroalkyl and polyfluoroalkyl substances – PFAS – that are of growing concern across the United States. The amendment limits indemnification of milk due to chemical residues to three months to monitor chemical levels, removing the cows from production during that time. The indemnification of cows when the cows are likely not to be marketable for three months or longer is new to the Dairy Indemnity Payment Program. Bred – young dairy female in gestation – and open – young dairy female not in gestation – heifers that are not marketable due to elevated levels of chemical residues as the result of the same loss are eligible for cow indemnification through the Dairy Indemnity Payment Program. Affected farmers have the choice to receive
• 50 percent of cow indemnification after application approval, and the remaining 50 percent after the cows are depopulated and removed or
• 100 percent after the cows are depopulated and removed.
Once approved for cow indemnification, affected farmers will dry off the affected lactating dairy cows to stop further milk production. Affected farmers approved for indemnification of cows who subsequently restock the original farm with new dairy cows and commercially market milk at the original location of contamination are not eligible for Dairy Indemnity Payment Program indemnification for any future loss from the same contamination.
The Dairy Indemnity Payment Program should not be confused with the Livestock Indemnity Program because chemical residues are not an eligible cause of loss under the Livestock Indemnity Program.
Milk Donation Reimbursement Program
Under the Milk Donation Reimbursement Program, dairy organizations that participate in federal-order pools and incur expenses related to fluid-milk-product donations may apply and receive partial reimbursement to cover some of those expenses. Specifically, eligible handlers who account to a Federal Milk Marketing Order pool and donate packaged fluid-milk products to eligible nonprofit organizations may claim reimbursements for all or part of the Federal Milk Marketing Order cost difference between the Class I value and the plant, and the smallest classified value for the month. Handlers cannot claim reimbursement for other costs related to donating fluid milk such as processing, bottling and transporting the donated milk. The Milk Donation Reimbursement Program is meant to encourage handlers to make donations to food-assistance programs and reduce food waste.
The 2014 farm bill authorized the Secretary of Agriculture to create a program to reimburse eligible dairy organizations for a portion of the value of fluid-milk products they donate. The program was to be administered through the USDA’s Agricultural Marketing Service. In response, in 2014, the Dairy Product Donation Program was established but was subsequently repealed and replaced in the 2018 farm bill by the Milk Donation Reimbursement Program. Congress allotted $9 million for the first year of the program and $5 million for each of the following years.
Dairy Donation Program
The Dairy Donation Program was established as required by the Consolidated Appropriations Act of 2021 in response to increased prevalence of dumped milk during the early days of the COVID-19 pandemic. Under the program, eligible dairy organizations that account to a Federal Milk Marketing Order and incur qualified expenses related to certain dairy-product donations may apply for and receive reimbursements for those donations. Qualified expenses are incurred by either purchasing fresh fluid-milk products for processing into an eligible product or purchasing bulk dairy-commodity product for further processing. Like the Milk Donation Reimbursement Program, this program is intended to facilitate donations of eligible dairy products as well as to prevent and minimize food waste. It was also meant to help balance the supply chain during pandemic recovery. Congress authorized $400 million until expended for the Dairy Donation Program.
The Dairy Donation Program is an additional dairy-donation program that overlays existing USDA dairy-donation activities such as the Milk Donation Reimbursement Program but differs in that in covers more than just fluid-milk donations.
To qualify under the program eligible dairy products must
• be made primarily from cow or bovine milk produced in the United States;
• be packaged in consumer-sized packaging,
• meet the applicable standards for dairy products in the Federal Food, Drug, and Cosmetic Act as amended, and
• have a sell-by, best-by or use-by date no sooner than 12 days from the date the eligible dairy product is delivered to the eligible distributor.
Program provisions specify donated dairy products must be in consumer-sized packaging. That provision should be interpreted by the eligible partnership as to whatever consumer-sized-package format is agreeable to both partners.
Although program funds for the Dairy Donation Program and the Milk Donation Reimbursement Program are statutorily prohibited from being consolidated, the two programs operate as one from a stakeholder standpoint. Dairy organizations making Class I fluid-milk-product donations – which are covered by both programs – will be reimbursed through Milk Donation Reimbursement Program funds at the difference between the Class I and least classified price. They will receive a supplemental reimbursement of the smallest classified price plus the manufacturing- and transportation-cost reimbursement through Dairy Donation Program funds. Total combined reimbursement will be capped at the Class I price in Dade County, Florida.
Dairy organizations already enrolled in the Milk Donation Reimbursement Program will automatically be enrolled in the Dairy Donation Program. They will qualify to receive supplementary payments for fluid-milk products donated under their currently approved Milk Donation Reimbursement Program plans. As of July 2022 there were 30 eligible dairy organizations approved by the USDA. Four are in the Western region, six are in the Central West region, 12 are in the Central East region and eight are in the Eastern region. The map displays which states are categorized under which region.
Table 2 summarizes the reimbursement value by product for the Dairy Donation Program and the Milk Donation Reimbursement Program between October 2019 and the end of June 2022. During this timeframe, almost $4 million in reimbursements have been made and more than 15 million pounds of product donated. Note this is only a small fraction of the authorized $400 million amount.
The USDA clarifies that the Dairy Donation Program and the Milk Donation Reimbursement Program are separate and distinct from the USDA safety-net program Dairy Margin Coverage as well as from indemnity and disaster-assistance programs, risk-management tools through the public-private partnership of the Federal Crop Insurance Program or USDA purchases of commodities – which may include dairy products, depending on the market conditions and demand from school-lunch or nutrition programs.
Dairy Business Innovation initiatives
The Dairy Business Innovation initiatives were authorized under the 2018 farm bill to support dairy businesses in the development, production, marketing and distribution of dairy products. At first the program awarded grants to three initiatives – one at the University of Tennessee, one at the Vermont Agency of Food & Markets, and one at the University of Wisconsin. Each initiative provides technical assistance to dairy businesses and uses at least 50 percent of the award for sub-awards to dairy businesses – including makers of niche dairy products such as specialty cheese, or producers of dairy products derived from the milk of a dairy animal including cow, sheep and goat milk.
The percentage used by Dairy Business Innovation initiatives themselves must specifically focus on one of three items.
• Diversify dairy-product markets to reduce risk and develop increased value uses for dairy products.
• Promote business development that diversifies farmer income through processing and marketing innovation.
• Encourage the use of regional milk production.
Table 3 displays the outlays for Dairy Business Innovation initiatives in fiscal years 2019-2021. Note in November 2021 the Agricultural Marketing Service announced additional funding for a new fourth initiative at California State University-Fresno Foundation.
The USDA announced March 2 the availability of an additional $80 million for Dairy Business Innovation initiatives through the American Rescue Plan to further support processing-capacity expansion, on-farm improvements and technical assistance to producers. Additionally $22.9 million was announced for fiscal-year-2022 appropriations to support the same initiatives.
Other considerations
Since the 2018 farm bill the price for Class I milk – i.e. milk used to produce beverage-milk products – has been calculated using the simple average of advanced Class III – cheese – and Class IV – milk powders-skim-milk prices plus 74 cents. In years prior the formula was the most of advanced Class III and Class IV skim-milk prices. The legislative change was made at the request of dairy-industry stakeholders and was intended to improve risk-management opportunities for beverage milk. COVID-19-induced volatility combined with the 2018-farm-bill formula change resulted in hundreds of millions of dollars in Class I pool revenue losses compared to the old formula, renewing industry discussions regarding optimal Class I pricing methods.
That has fueled much recent conversation about whether the pricing change made in the 2018 farm bill has been helpful to dairy farmers. Between July and December 2020, the formula change resulted in $744 million less in the federal-order pool, causing widespread negative-producer-price differentials. The USDA provided a buffer to those losses through the Pandemic Market Volatility Assistance Program, which provided $350 million in pandemic-assistance payments to dairy farmers who received reduced value for their milk – primarily Class I suppliers – due to market abnormalities such as widespread de-pooling caused by the pandemic. But more recently the impacts of the formula change have been less noticeable. Between January 2021 and July 2022, the higher-of would have contributed an additional $5 million into the federal-order pool compared to the average-of. While that’s not insignificant, it’s incomparable to the $744 million targeted by the Pandemic Market Volatility Assistance Program from 2020.
Most recently the Class III price has drifted apart from the Class IV price once again, which will result in pool losses once class utilization and pool volumes are updated for August and September. Figure 1 displays a comparison of Class I prices between the current formula and the higher-of option – if it was in place – from July 2018 to the present, with all else held constant. To estimate the impact on dairy-farmer revenue, the difference in the Class I milk price between the current system and higher-of was multiplied by the Class I pool volume across all Federal Milk Marketing Orders. Those calculations are presented in Figure 2.
Conclusion
The 2018 farm bill reauthorized many programs important to dairy-farmer ability to hedge against risk, address unexpected losses associated with contamination, fight food waste, and access technical and innovative business support. The establishment of and flexibilities provided in the Dairy Margin Coverage program have proved vital to producers during a period of excess market variability. While most provisions have been well-received, others like the change to the Class I milk-base price formula have contributed to angst for some producers. As discussions ramp up for the 2023 farm bill, understanding the history of existing dairy programs and how they’ve performed under unprecedented volatility will allow for more informed recommendations.
