June 2002
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Why is the price support program so valuable and controversial, all at the same time? In many respects, this program is a victim of its own success. Over its lifespan of more than five decades, and particularly in recent years, the dairy price support program has prevented the collapse of U.S. prices down to the world level. By having the U.S. Department of Agriculture serve as a product buyer of last resort, manufacturers of cheese, butter and nonfat dry milk powder (NDM) can always rely on Uncle Sam to offer a fair price for these three products, even if the world price is significantly lower.
No other expenditure by the USDA is as effective in returning money to U.S. producers' pockets. Even direct payment programs – like the one included in the Farm Bill – don't have the overall same rate of return, because they can generate increased production, and thus lower overall prices to farmers. But the dairy price support program has been enormously beneficial in putting a foundation under domestic prices, at little overall expense to the government.
Now, there are fiscal budget hawks and philosophical libertarians who believe even a dollar's worth of government farm program expenditures is too much. For perspective, keep in mind that the government has spent more than $15 billion per year on government payments to agricultural producers since the 1996 Farm Bill was passed. But if you look at dairy's share of that expenditure – a total of only $1.3 billion between 1996 and 2001 – you can see that USDA dairy expenditures are but a drop in the bucket. Commodity Credit Corporation purchases under the program have gone up in recent years, but that's more a reflection of our inability to address the problem of runaway imports of Milk Protein Concentrate and casein than it is a flaw with the price support program.
While U.S. imports of MPC have risen dramatically since 1996, so have government purchases of nonfat dry milk. In fact, this parallel relationship is not coincidental; as imported dairy proteins have come in to this country, they have displaced domestically-produced dairy ingredients. The displaced products end up as surplus nonfat dry milk – and that surplus ends up in government warehouses.
If Congress were really interested in a win-win proposition, they could save the CCC some money, and improve U.S. dairy farm incomes at the same time, by passing legislation that would impose tariffs on imported MPC and casein. By putting a cap on how big a volume of these products could come in without tariffs, we could reduce the buildup of CCC milk powder supplies, reduce CCC program expenditures, and bolster U.S. farm prices.
As Congress dawdles on the tariff issue, USDA officials have complained openly about the level of price support purchases, and the buildup of NDM stocks. To its credit, the USDA is trying to tackle the program by offering to sell up to 300 million pounds of surplus nonfat dry milk for manufacture by U.S. processors into casein. This represents a positive sort of win-win thinking by USDA, because it will both reduce government stores of nonfat dry milk, and create a supply of U.S. casein to battle back imports of the product.
U.S. dairy processors, always looking for an opportunity to criticize our farmers' safety net programs, have said that the casein sales program is a waste of effort and it illustrates what is wrong with the price support program: namely, that it squanders government dollars by buying surplus skim milk powder. In looking at this program and its cost-benefit ratio, my reply is that the dairy price support program is an apt illustration of exactly what is right with how government programs like this one should function. By helping absorb surplus dairy products like NDM during slow periods in the marketplace, the government can play a meaningful role in bolstering producer income at a relatively small price.
It's time for U.S. dairy processors to demonstrate some loyalty to our dairy farmers by supporting programs like the USDA's nonfat dry milk sales effort. Processors, perhaps even more than farmers, will benefit from the casein conversion project because they'll have now have access to a lower-cost domestic ingredient. That's hardly something to complain about.
In the past six years, farm-level dairy receipts have totaled more than $125 billion – and government dairy price support purchases have represented about one percent of that figure. That's hardly an unreasonable premium to pay for a very valuable insurance policy.
