(Washington, D.C. – March 15, 2012) I commend the Senate Agriculture Committee for holding the hearing today on how the federal government can provide appropriate and cost effective risk-management tools for farmers. Although I recognize that the committee’s time is limited, it is unfortunate that dairy is not represented on your panels as our nation’s dairy industry is in the middle of a heated, and very unresolved, debate over its future.
The committee is facing a very difficult task in developing a farm bill that will save billions of dollars over the coming years. Yet, before the committee endorses and funds programs for an entire array of commodities, it should consider whether dairy farmers deserve basic catastrophic insurance or other risk management tools without also being subjected to a new program that will involve government not only in their everyday business decisions, but will also damage our industry’s ability to grow and create jobs.
The U.S. dairy industry is different from what it was ten, or even five, years ago. Dairy farmers, just like other farmers, must now compete in world markets. Yet, the only authority USDA currently has to offer dairy producers an effective risk management program is limited to a pilot insurance program started in 2001 with funding capped at $20 million per year for all of livestock. Dairy producers were allocated only $7 million in 2012 and demand was so strong that the funding was exhausted in less than a day. Dairy producers need more and better risk management tools to manage volatile prices as well as feed and other costs.
Instead of more and better risk management tools, however, some stakeholders believe that the government should intervene in markets to control price volatility. Such programs, often called supply management, have been tried and have failed in dairy and other sectors of U.S. agriculture. Similar policies have been rejected and are being eliminated around the world because they simply don’t work. Although policies that involve the government in commercial transactions between buyers and sellers are generally being discarded, a supply management program for dairy was proposed in the Dairy Security Act, H.R. 3062, introduced by Rep. Collin Peterson (D-MN). Furthermore, according to many reports, the legislation was included in the farm bill proposal sent to the Joint Committee on Deficit Reduction a few months ago.
The Dairy Security Act proposes that future subsidies to dairy farmers be provided under a new program called margin insurance. Although a true insurance program would be a true risk management tool and would place dairy on more equal footing with other commodities, there is substantial merit to this approach. But, the Act then loses its bearings by mandating that dairy farmers who take advantage of margin insurance must also participate in a supply management program that will periodically “incentivize” less milk production by withholding payments owed to them. This is fundamentally unfair to dairy farmers, as other farmers are not similarly burdened, and unfair to the dairy industry because supply management programs have significant, negative consequences that far outweigh any benefits.
Dairy supply management as proposed by H.R. 3062 is a direct government intrusion into dairy markets. The program would manipulate both the supply of and demand for milk in order to push milk prices higher than open markets otherwise provide. Instead of helping dairy farmers with ways to manage their businesses, dairy supply management would have the government manage their businesses for them. Unfortunately, consumers of dairy products who end up paying artificially and unnecessarily high prices for milk and other dairy products get to pick up the check. This is why the Consumer Federation of America wrote to Congress last fall urging the rejection of such a policy.
Supporters of the Dairy Security Act have claimed that it is essentially free. Truth be told, it is anything but. Increased costs to consumers for dairy products also means that entitlement programs like the Supplemental Nutrition Assistance Program (SNAP) will pay more for dairy products. Even a small increase in the way SNAP benefits are calculated will result in significant costs, likely in the hundreds of millions of dollars, for a program whose costs have been approaching $100 billion per year. SNAP spending will be increased with no tangible benefit to the program or its recipients.
The Dairy Security Act will derail what has been a remarkable success story for our industry. Just a few years ago, our country was a net importer of dairy products. Last year, we had a dairy trade surplus of nearly $2.4 billion, and we now export the equivalent of nearly 15 percent of the milk produced here. In recent years, dairy companies have invested in new or upgraded facilities in Colorado, New York, South Dakota, and Iowa, significantly increasing demand for milk production in many areas. Without the export success story, many of these investments would not have been possible, costing thousands of new jobs.
It’s simple. Government programs that routinely increase our domestic prices above international prices will make our dairy industry less competitive. Export markets will be ceded to our global competitors who are not similarly restricted. Other commodities reached this conclusion years ago and as a result have moved to insurance and other risk management tools instead of government price intervention. Not only will dairy exports decline if Congress imposes such a policy, but dairy imports will be encouraged, causing problems for future trade negotiations.
There is a clear middle ground in this debate. Dairy food companies have endorsed the margin insurance program, provided that it is not attached to a supply management program. Such a program could be offered, even within the limited dairy baseline, by charging a small fee for a subsidized base coverage. We have supported making the USDA pilot program, called Livestock Gross Margin – Dairy, permanent and increasing funding beyond the current $20 million per year cap. Dairy savings accounts would also help dairy farmers manage their businesses through the volatility of world dairy prices. There are many dairy producers, as well as at least one of the largest dairy coops in the country, who support these alternative approaches.
This committee should not attempt to fix what has a long history of being a fundamentally flawed approach to agriculture policy. The negative consequences of directly involving government in dairy export markets cannot be whisked away with triggers that close the barn door after the cows have left. Making the program mandatory for producers who want the margin insurance does not remove the budgetary sleight of hand that pushes increased costs to consumers and significantly increases government spending overall.
Better risk management tools, including margin or other insurance products, for dairy farmers is the correct path forward for our industry, not direct government intrusion into dairy markets and increased regulatory burdens on food businesses.
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International Dairy Foods Association (IDFA), Washington, D.C., represents the nation's dairy manufacturing and marketing industries and their suppliers, with a membership of 550 companies representing a $110-billion a year industry. IDFA is composed of three constituent organizations: the Milk Industry Foundation (MIF), the National Cheese Institute (NCI) and the International Ice Cream Association (IICA). IDFA's 220 dairy processing members run more than 600 plant operations, and range from large multi-national organizations to single-plant companies. Together they represent more than 85 percent of the milk, cultured products, cheese and frozen desserts produced and marketed in the United States. IDFA can be found online at www.idfa.org.