Penn State: Dairy farmers dependent on milk price supports

UNIVERSITY PARK, Pa. — Federal plans to phase out dairy price support programs may be premature and could harm the American dairy industry.



In a new analysis of federal order reform, Ken Bailey, Penn State dairy marketing and policy expert, and James Dunn, ag economist, use economic forecasting models to analyze the implications of the USDA reforms of federal milk pricing.



The study also looked at the effects of ending the dairy price support program, a federal program that has provided stability to farm-gate milk prices since its inception in the 1950s.



Bailey said the study shows the new class prices in the final rule are much more dependent on the price of dairy commodities than the formulas used prior to order reform.



Under the new system there is a direct linkage between changes in cash market prices for cheese, butter, nonfat dry milk and whey, and component prices for butterfat, protein and other solids. These component prices in turn drive the prices for Class I (fluid), II (yogurt and ice cream), III (cheese) and IV (butter and nonfat dry) milk.



If the dairy price support program is eliminated, the study indicates the wholesale price of nonfat dry milk will decline by more than 13 cents per pound annually. That, in turn, would lower all other class prices, and hence farm prices for milk.



“If they’re going to change something in Washington, I want to show what it will do to Pennsylvania dairy farmers and their milk checks,” Bailey said.



“Our study shows that, because of new formulas for milk pricing, farmers are more dependent on the price support program than we thought they were.



“For example, if we end the price support program and prices for nonfat dry milk fall, it drops all the other dairy product prices. That has a direct impact on Pennsylvania milk checks.”



The price that farmers receive is an average of the prices of the four classes of milk. Every month, market administrators calculate this average for 11 regions of the country, and that becomes the basis for the farm price.



“Pricing is complicated because milk is a perishable product that is used for so many different things,” Bailey explains. “That complexity did not go away with order reform.”



Federal milk price supports were implemented in the 1950s to stabilize milk and dairy prices. Under the original system, dairy producers paid a per-hundredweight (100 pounds of milk) assessment and received support when the market price dropped.



But dairy farmers chafed under the assessments during the more prosperous 1990s, and began pushing for an end to the program.



Then in 1996, USDA started to overhaul the milk pricing system. Order reform took effect on Jan. 1, 2000.



“We never thought we would need the price support program for cheese,” Bailey said. “But twice this year, the price of block cheese has fallen below the price guaranteed by the support program. As a result, the Class III price fell to a 20-year low.”



The Penn State study shows that the new definition of the Class III price is about 20 cents to 56 cents less per hundredweight than the old one, but current lower Class III prices were offset by higher prices for Class I, II, and IV milk.



Bailey said the USDA held hearings earlier this year on the Class III and IV prices.



Dairy producers and farmers can read the report at Bailey’s Dairy Outlook Web site at www.aers.psu.edu/dairyoutlook/.