The debate on the next farm bill continues to intensify, and dairy policy has been near the top of the discussion. One key talking point centers on the fact that the Margin Protection Program (MPP-Dairy) did not make significant payments during 2016 when dairy producers faced financial headwinds. Paying MPP-Dairy premiums last year without receiving significant payments resulted in many producers declaring that MPP-Dairy is broken and must be fixed.

While many dairy producers had significant financial difficulties in 2016 as a result of lower milk prices and drought conditions in some areas of the country, aggregate U.S. milk supplies expanded by 1.8 percent and expanded in every month of 2016 relative to the same month in 2015.

The 2016 milk supply situation must be compared to other years of financial stress to understand the unique situation faced by the dairy industry. For example, in the economic downturn of 2009, U.S. milk supplies declined by 0.4 percent, while in the high feed cost year of 2013, U.S. milk supplies grew by only 0.3 percent. Going back further to look at years of financial stress shows that in 2001, milk supplies contracted by 1.2 percent. The growth in 2016 milk supplies suggests that the structure of milk supply is changing.

Safe but not too safe
Returning to the MPP-Dairy discussion, it is important to remember that although having a safety net that is not strong enough is undesirable, having a safety net that is too strong is likely even more problematic. Those of us with more industry history can remember times when the dairy safety net was too strong and muted market signals.

The structure of the U.S. dairy industry has been undergoing the transformation to fewer farms and more milk for decades so the direction of change is not unexpected. However, the lack of milk supply contraction in response to the lower milk profitability in 2016 should remind us that perhaps the industry is reaching a point where it will be more common to see little to no milk supply reduction in low profitability periods.

As changes in federal dairy policy are debated in development of the next farm bill, we must acknowledge that the dairy safety net needs to be flexible enough to handle this changing milk supply situation. Finding suitable dairy policy alternatives will remain a challenging task in this changing structure.

© Hoard's Dairyman Intel 2017

June 12, 2017