What are the five areas from which competitive pay prices would be reported? How and why were those areas selected?

The country is divided into five regions, each of which incorporates at least one federal milk marketing order. The regions were put together in an effort to incorporate an adequate number of cheese plants processing 250,000 pounds of milk per day to provide a competitive cheese milk price for the order(s) in the region, if possible.

Why does the federal reform proposal still include establishing a "national value of milk used to make butter and powder" using the current Class IV formula? Doesn't that still provide our industry with make allowance issues that almost everyone agrees we need to eliminate?

Plants that produce butter and nonfat powder primarily serve to balance the market demand for milk for other uses. In order to allow those plants to maintain a supply of milk, our FMMO experts agreed that what they have available to pay their producers should be supplemented when necessary. The best way to determine that, as well as the "higher of" for Class I pricing purposes, is to maintain the current Class IV formula. The formula is not used to set a minimum price upon which the butter/powder plant would pay its producers which is significantly different from the current situation.

Please explain how margins are determined for the margin protection and market stabilization programs. (Where does the milk price used come from? What about the costs of corn, protein supplement, and hay?)

The margin for the each program is determined in the same way - it is the All-Milk Price minus feed cost. The term All-Milk Price" means the average price received per hundredweight of milk by dairy producers for all milk sold to plants and dealers in the United States, as reported by the National Agricultural Statistics Service. The cost of corn and soybean meal is determined using the average daily settlement price for futures contracts under the Chicago Mercantile Exchange, Chicago Board of Trade, during the futures contract month closest to expiration of that month. The price of alfalfa hay for a month will be the price received during that month by farmers in the United States for alfalfa hay, as reported by the National Agricultural Statistics Service.

Why not use feed costs (for margin calculations) based on the NASS data that we now use to calculate a monthly feed cost for the Milk-Feed Price Ratio with adjustments to reflect the cost of feeding dry cows and young stock, as well as milking herds?

A review of the 30-year-old NASS feed ration by the dairy producers and others working on the development of the DPMPP revealed that it is not reflective of the ration today's producers are feeding to their dairy herds. In fact, the NASS ration has been determined to be very much outdated. In addition, NASS collects prices received by corn and soybean farmers for their products not necessarily equal to the prices paid by dairy farmers for the same products. The DPMPP development team believed that CME prices reflect more closely what dairy farmers paid for corn and soybean meal. The development team also reached out to animal nutritionists and other dairy producers as well as experts on rations from several cooperatives and feed companies, in order to create a modern ration that reflects today's cost of dry matter intake used in feeding all dairy animals on the facility. The new ration and margin also reflect the cost of producing 100 pounds of milk, which is not reflected in the NASS milk-feed ratio.

Why doesn't FFTF account for regional differences in costs of feeds used to calculate margins?

The FFTF programs that employ this new margin are national programs and, therefore, it is necessary to use national data rather than inconsistent or nonexistent regional data. The intent of FFTF is not to disrupt or impact the competitive forces at work between regions of the country. Even within a state or a region there can be significant differences between costs, however, analysis indicates that when margins as low there is very little variation between regions.

Since milk payments under FFTF would be based on competitive prices and we increasingly will be part of a global market, shouldn't some indication of world prices, perhaps Global Dairy Trade results, be added to the regional competitive prices be used to establish Class I minimums?

As the U.S. increasingly becomes part of the global market, the demand from overseas for U.S. dairy products will have an impact on the overall demand for those products and for the milk used to produce them. If a cheese plant needs more milk to meet global demand, the price it pays for milk will be directly influenced.

Why is there a producer board to spend market stabilization program monies under the FFTF, but not a producer board to oversee the entire program as is the case with some other proposals?

The developers of the FFTF determined that that the implementation of the various programs elements should be straightforward with as minimal government involvement as possible. Therefore, it was agreed that the involvement of a producer board would be limited to two purposes and only two purposes: (1) to determine how funds generated under the DMSP would be used in purchasing dairy products for feeding programs; and (2) to conduct a review of the DMSP program every two years and make recommendations to the USDA Secretary for possible changes.

Why doesn't FFTF include a provision that would give producers the option of participating in a continued MILC program or a margin protection program (or have MILC for smaller herds with margin protection for people above the cap as USDA's Dairy Industry Advisory Committee has suggested)?

A basic provision of NMPF policy is that all producers are treated equally. The MILC program does not do that. More importantly, the MILC program has been an inconsistent safety net program and, therefore, ineffective in providing assistance when farmers most need it. For example, it actually paid out more to producers in 2000 when the average margin was over $7 per hundredweight than it did in 2009 when the margin was under $4 for eight consecutive months. The MILC program is price driven while producers' financial wellbeing depends on margin.

Since a competitive pay price for cheese milk would be "at test," say 3.7 percent fat and 3.2 percent protein, and the product formula-based Class IV price would be reported at a standardized 3.5 percent fat and 3.1 percent, how would the "higher of" price be determined for setting Class I minimums?

The competitive price would be standardized on fat and skim as would the Class IV formula price.

The plan is that market stabilization measures would kick in after two consecutive months below certain margins. What deductions would producers see if the margin one month was below $6 and below $4 the following month?

The margin would have to be below $6 for two consecutive months, and the producer would be paid for 98 percent of their base production. The base production is chosen by the producer once a year and is either the average production for the three months prior to the announcement that the program is going into effect the following month or the same month in the previous year for each month the program is in effect. If the program is in effect based on the fact that the margin fell below the $6 level for two consecutive months and the margin subsequently falls below $4, producers will be paid of 96 percent of their base. The percentage of base on which the producer is paid will stay at the lowest level until the margin is above $6 for two consecutive months.

The plan indicates that a producer price differential would be calculated by the federal orders and that the money would be distributed to co-ops or directly to producers. How would an independent producer receive that money?

The market administrator in each order will make the PPD payment directly to each independent producer.

What's Plan B?

What if Congress thinks FFTF is too expensive and needs to be redesigned to operate on less taxpayer money? And, even if Congress accepts FFTF for the next farm bill, what is the long-range plan to reduce dairy's reliance on the federal treasury? Preliminary analysis indicates that the combination for the DPMPP with the DMSP will result in savings. The percent of production history covered could be adjusted somewhat if the Congressional Budget Office determines the program exceeds the budget baseline for dairy. NMPF believes that FFTF is an insurance program and not a subsidy. It is vital that our government provide some protection for those who take the risk of producing our food. An insurance-type program does that effectively. Ultimately, NMPF believes that producers in the future will have to take more responsibility in managing their risks and sharing the cost of receiving this program. All of the FFTF programs have been designed to be compatible with other existing or yet-to-be-developed risk management tools. We believe Congress will be asking for all producers to begin sharing the cost of the agricultural programs. Since FFTF does exactly that - we are ahead of many other ag sectors when it comes to preparing for the future.

If we use the market stabilization money for domestic food programs, aren't we shooting ourselves in the foot by preventing people from buying dairy products?

Unlike the massive giveaway program of the 1980s that gave five-pound blocks of cheese to large segments of the population and resulted in a significant displacement of commercial sales, the DMSP food donations will be targeted to those U.S. citizens who are most in need and not currently receiving dairy foods through food assistance programs. This will minimize commercial displacement and, hopefully, build additional demand in the future.

Won't the margin protection program encourage more expansion and result in more surpluses?

No, it won't because the level of basic coverage and the amount of milk on which supplemental coverage can be purchased is limited to 90 percent of the highest annual production in the three years prior to the program going into effect. The production history cannot increase. In fact, one could argue that this limitation could serve as a deterrent to indiscriminant growth. Lastly, it is important to keep in mind that even under the supplemental program, the level of coverage will not provide a profit to producers.

How can FFTF not have income caps with the margin protection program? (Farm Service Agency programs have caps by law, and FSA is designated as the agency that would administer the program. Also, how can you not have caps and still treat all family farms fairly, even large ones?)

The legislative language states very specifically that there will be no caps on payments to dairy producers who sign up for the program other than parameters specifying how the production history is determined and the percent of that history that shall be covered. The Congress is the final authority on public policy matters of this sort with the power to write dairy legislation in a manner that suits its purposes. As mentioned previously, the FFTF programs are designed to treat all producers fairly. To place caps on an insurance program like the DPMPP is like limiting the amount of insurance a person can buy on their house because their house is bigger than average. Ultimately, the purpose of programs like the margin protection plan is to make sure people are willing to produce safe and wholesome food for the American public. Public policy can have an impact on an industry's evolution but it cannot stop it. For example, the MILC program was supposed to protect small dairy farmers. Since its inception in 2000, there are 31,000 fewer dairy farmers milking between 30 and 200 cows in 2010. By this measure, MILC failed to achieve its goal. Dairies with 200 cows or more actually increased by 540 and 60 percent of the nation's milk is now produced by 3,500 dairies.

What assurances do we have that the margin protection program (both base and supplementary) will have enough funds (government monies and premiums) to cover all participants for the duration of FFTF (the farm bill)? What if we have another 2009?

By the time Congress passes legislation containing the elements of Foundation for the Future, the package of programs will have been fully analyzed to ensure that it falls within the budget baseline for the full term of the Farm Bill or other predetermined time period as specified by the legislation. Click here to return to the Milk Policy E-Sources