Impact of the Dairy Market Stabilization Program *

The Farm Bill conference committee met recently for the first time to begin the process of reconciling the differences between the Senate and House versions of the Farm Bill. Both bills contain very similar language for dairy margin insurance. The Senate bill also contains the Dairy Market Stabilization Program (DMSP)—a set of disincentives designed to curb growth of U.S. milk production when income over feed cost margins fall below a critical threshold. The Dairy Market Stabilization Program is often discussed in terms of fairness. It is fair, proponents say, that all dairy producers who benefit from subsidized margin insurance should also help margins recover faster when times are tough. Looking at the period from January 2008 through July 2013, we find 16 months which satisfy conditions under which the DSMP would have been activated. If we focus at the national year-over-year milk production growth, it would appear that DMSP activation is well timed, as it nearly always coincides with declines in national milk production growth. And because national measures of milk and feed prices are used, the DMSP penalty rules are equal for everyone. But does it follow that the burden of the stabilization program is also equally distributed?

We should define burden as an additional effort that is exerted because of the stabilization program, and one which would not be done otherwise. For example, in only two of the 16 DMSP months does Minnesota milk production decline. In contrast, in all but two DMSP periods, California milk production is declining even without DMSP. This suggests that while both Minnesota and California might have equal imposition of penalties, Minnesota might have much higher burden of adjustment, as those producers would be forced to cut back milk supply which they otherwise would not do. In contrast, due to their different farm business model, it is possible that many producers in western states would be reducing milk production anyway.

It is important to keep in mind that there are limitations on the confidence one should attach to conclusions based on this brief write-up. For example, looking at the issue using state-level data may hide some critical aspects of the problem. It may be the case that in states exhibiting declines in milk production, the contraction is localized to producers that are exiting the industry, rather than widely spread across all producers with similar farm type. For this, and other important reasons, it is best to understand the present material as indication that a further thorough analysis is warranted, rather than read this text as conclusive enough to be taken in isolation as a policy guide.

You can select any of the 23 states for which NASS records monthly milk production in the interactive graph below to see the DMSP burden born by different states.

* Marin Bozic is the author in collaboration with John Newton and Mark Stephenson. The text was originally written for Minnesota in Numbers column in November 8, Minnesota Milk Producers Association weekly newsletter.