MPC Provides Testimony on Dairy Safety Net Programs, Federal Milk Marketing Orders at Farm Bill List

Geoff Vanden Heuvel

Director of Regulatory and Economic Affairs

Yesterday, Representative Jim Costa (D-16) hosted a listening session entitled “A 2022 Review of the Farm Bill: Perspectives from the Field” at California State University, Fresno. I provided testimony at the session, which was designed to gather input from farmers, agricultural businesses and consumers as lawmakers prepare to draft a new Farm Bill.

Below are my prepared remarks submitted to the Committee. You can also watch my remarks here.

U.S. House Agriculture Committee Listening Session

July 7, 2022, Fresno, CA

Remarks of Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs

Milk Producers Council

Chairman Costa and Members of the Committee.

Thank you for the opportunity to participate in this Farm Bill listening session. My name is Geoff Vanden Heuvel. I am the Director of Regulatory and Economic Affairs for Milk Producers Council, a California dairy farmer trade association founded in 1949. Prior to taking this position I was an active dairy farmer in Southern California for 39 years.

Given the limited time available I want to focus on two things in particular that are relevant to the upcoming farm bill discussions.

Safety Net Programs

The Dairy Margin Coverage (DMC) program is a very good safety net tool but the vast majority of the benefit of the program is concentrated on the first 5 million pounds of milk a dairy farmer produces annually. 5 million pounds is about what 250 cows produce annually. Dairy farms in California are much larger than that on average, and so while they receive coverage for a small part of their production through this program, the DMC fails as a safety net for most California dairy farms. We understand the financial and political constraints of raising the benefit level significantly higher than the 5 million pounds. We accept the DMC at 5 million pounds and oppose raising it any further.

The Dairy Revenue Protection (DRP) program, a subsidized crop insurance program overseen by USDA-Risk Management Agency is a dairy safety net program that is not size discriminatory. I believe this program provides the best return for the government dollar in providing risk management for dairy producers. The program has been quite successful in its initial roll out. It is a crop insurance product where the premiums are set by an actuarial sound formula and the government subsidizes the premium with producers paying the majority of the costs. The subsidy level for 90% and 95% coverage is 44% of the premium is paid by the Risk Management Agency. Those premiums have become larger in the last 2 years and if additional funds could be found, increasing the premium subsidy by 5-10% would likely increase dairy farmer participation in the DRP. Assuming our goal was to get 70% of U.S. production covered in the DRP, it would cost about $154 million to increase the premium subsidy by 10 cents per cwt. of covered milk. See Note #1.

Federal Milk Marketing Orders

I am a huge supporter of the Federal Milk Marking Order program (FMMO). Dairy farmers need to sell their milk every day to a buyer that does not have to buy it every day. This fundamental imbalance in market power means there needs to be a referee. We are very appreciative of Congressman Costa’s vital assistance in facilitating the adoption of an FMMO in California. This has made a meaningful difference in California producer income. See Note #2.

The FMMO system has been around for over 80 years. In my view it is one of the most successful government market regulatory programs in our country. It has allowed the dairy industry to innovate and grow. Over the decades, many regions have been able to exploit comparative advantages to build their dairy industries. The main reason for the success of the FMMO program is that it does not pick winners and losers. It does not dictate milk prices; it discovers the value of milk from prices established in the free market and then converts those prices into a pricing structure that is used for pricing producer milk. And just as important, for all uses of milk, except Class I beverage milk, the enforcement of those milk prices is voluntary. As the dairy industry continues to grow, which is a sign of health of the industry, it is true that the percentage of milk formally covered by the Federal Orders is decreasing, but this is not a sign of failure. In fact, the prices established by the FMMO for the various classes of milk are vital benchmarks used by the industry to establish contracts and pricing relationships between producers and processors even for milk that is not regulated by the FMMO.

The FMMO system is probably due for a little updating, but not reforming. The basic structure of pricing milk based on its ultimate usage is still a valid concept. Class I beverage milk, which is formally regulated by the FMMO system, while declining in market share, is still a huge usage of milk in America. The Class I formula would benefit from some thoughtful examination by USDA and the industry. The formal USDA hearing process is the best place for that to occur. As for the other classes of milk, the longstanding USDA policy of having a single national price surface for milk used in manufactured products is very important. We have a national and international market for manufactured dairy products and the government should not put themselves in a position of picking winners and losers in the regional competition for market share.

There is a need for better data so that USDA can carry out their function of updating the pricing formulas. Currently USDA does not have the legal authority to mandate access to manufacturing cost data. The manufacturing cost studies that USDA has commissioned lack credibility because participation is voluntary. We would support Congress giving USDA authority to access manufacturing plants cost data. And we would support providing funding for USDA to regularly conduct and update studies which would track the product yields and manufacturing costs from plants that participate in the mandatory dairy product price reporting program.

The final point we want to emphasis is that while getting accurate data is critical, the purpose of that data is to inform policy, not dictate it. For over 80 years USDA has had the job of balancing the interests of the producers, the processors, and the public. They do this through an open hearing process where all interested parties can participate. While the amount of time it takes to do a hearing can be frustrating, we have found through the decades that the results of this process are a regulatory program that is stable and accepted by the industry. That stability allows the industry participants to plan and the market to work.

Thank you for the opportunity to participate in this important process.

Geoff Vanden Heuvel –

Tulare, CA

Note #1

Cost to increase Dairy Revenue Protection crop insurance premium subsidy by 10 cents per cwt.

220 billion pounds of annual US milk production = 2.2 billion cwts.

A 10 cents per cwt. increase in the premium subsidy on 70% of that volume =

(2.2 billion x.70) x 10 cents= $154,000,000

Note #2

California became a Federal Milk Marketing Order as of November 1, 2018.

USDA has published the Mailbox Milk Price for individual states and a composite All FMMO monthly number for many years.

The California Mailbox price for the 40 months since November 2018 averages $17.93

The average All FMMO Mailbox price for that same time period is $17.99 a difference of 6 cents per cwt.

The California Mailbox price for the 40 months PRECEDING November 2018 averaged $15.41

The average All FMMO Mailbox price for the 40 months preceding the start of the CA FMMO is $16.48 a difference of $1.07 per cwt.

CONCLUSION: The CA FMMO increased mailbox prices for California producers by an average of $1 per cwt.

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