Another farm bill is approaching, and the dairy industry will be facing many changes and new challenges. In the 1960s, 70s and early 80s, the main policy question was simply the appropriate level of the support price. In the mid-1980s, the milk diversion and dairy termination programs were introduced to help the industry cope with excess milk supplies. By the time the 1990 farm bill was enacted, milk prices were moving free of support price levels and dairy farmers were forced to contend with increased price volatility. For the 1995 bill, milk prices and income will continue to be a major concern of dairy farmers, but issues that go beyond price supports are looming large as well. Policy issues for the next five years can be grouped into the following categories: price support policy, trade pol-icy, federal milk marketing order policy, environmental policy, and consumer policy, which includes food safety and nutrition.

Price Support Policy

The current price support policy calls for a government agency, the Commodity Credit Corporation (CCC), to purchase cheese, nonfat milk pow-der, and butter at prices that result in manufacturers paying farmers the support price for their milk. When supplies are plentiful relative to commercial use, the CCC purchase prices appear attractive and manufacturers are willing to sell their products to the government as well as commercial users. The government stores the products it buys and uses them for domestic food pro-grams or sells them back to commercial users when prices move higher. When milk supplies are scarce, product prices are bid up and manufacturers sell their products to commercial users rather than the government to obtain these higher prices. Since 1988, CCC purchases of cheese and nonfat milk powder have been small relative to early 1980s levels and prices have generally been above support. Under the 1990 Budget Reconciliation Act, dairy farmers were to be assessed 11.25 cents per hundredweight to help defray support program costs. Dairy farmers who did not increase milk marketings from one year to the next were eligible for and received refunds, but the assessment was then increased to limit budget out-lays. The result of this policy was that assessments were levied on farmers who were expanding milk production. Any time estimated CCC purchases exceed 7 billion pounds milk equivalent on a total solids basis, the Secretary is authorized to assess producers for the cost of government purchases in excess of that amount. Since, the legislation was passed, these “super assessments” have not been employed.

What could happen to the sup-port price program in the next five years and beyond? The basic options include more aggressive support of farm incomes, maintaining the status quo, and phasing out the pro-gram. Given the trends of recent years, it is highly unlikely that sup-port prices will be increased. The current method reduces effective prices when supplies grow faster than demand. Since 1990, government stocks have been at manage-able levels, so there could be sufficient inertia to keep many elements of the current plan. On the other hand, pressure to lower government outlays for agriculture still further could result in efforts to phase out the program, especially given the need to pay for tariff revenue losses under the new provisions of the General Agreements on Tariffs and Trade (GATT) and its successor, the World Trade Organization.

Trade Policy

The ratification of the GATT agreement was one of two important trade policy developments of the past few years; the passage of the North American Free Trade Agreement (NAFTA) was the other. NAFTA will result in more markets for US dairy products, but its impact on overall product demand and prices will be modest in the foreseeable future, especially given the recent turbulence in the Mexican economy. The GATT agreement has broader implications for the US dairy industry. Currently, the US limits imports of manufactured dairy products via quotas, and subsidizes dairy product exports through the Dairy Export Incentive Program (DEIP). Under the agreement, import quotas must be con-verted to tariff-rate quotas, which must be equal to five percent of domestic production by the year 2000. Tariffs on over-quota imports must be reduced by an average of 36 percent over the same period. Government subsidization of exports under DEIP must also be reduced by 21 percent in volume and 36 percent in value relative to the late 1980s base-period levels. The combined impact of these changes would raise the quantity of product entering the US and lower domestic milk prices. Estimates of this price reduction have been in the $0.50 per hundred-weight range.

Dairy farmers have looked for ways to secure some protection from falling dairy prices. In the past couple of years, the National Milk Producers Federation proposed and promoted a “Self-Help” program that would allow US dairy farmers to “assess themselves” the cost of dis-posing of excess milk supplies on the world market. The hope was that this program, or one like it, would work along side the existing price support program and make further reductions in the support price unnecessary. This program is essentially another form of subsidized exports like the DEIP, except that they are subsidized by dairy farmers instead of taxpayers. It remains questionable whether this type of program will be allowed by the World Trade Organization (WTO) which has the responsibility for enforcing the provisions of the GATT agreement.

Federal Milk Marketing Order Policy

The most controversial issue in federal milk order policy pertains to the level of Class I (fluid) price differentials. Currently, Class I prices increase with distance from the upper Midwest. Dairy farmer groups in that region have objected to this arrangement. Dairy farmers in regions distant from the upper mid-west would obviously like to continue receiving higher prices and have put forth reasons why the cur-rent pricing structure should continue. Last year, a federal judge ordered the Secretary of Agriculture to reconsider how these Class I prices are determined. Members of Congress from the Upper Midwest are making sure that this issue will not disappear anytime soon. Some have advocated eliminating federal orders altogether. However, industry support appears to exist for keeping the orders, making such extreme action unlikely.

Another aspect of federal orders that may see changes is component pricing. Component pricing basically means adjusting the milk price paid to farmers based on its component levels. Current provisions in some orders call for pricing based on fat and protein content, while other orders price based on fat and nonfat solids. Orders have been adopting these provisions on an individual basis, but there may be an effort at some point to harmonize these provisions across orders.

Environmental Policy

Dairy farmers are facing increased costs of complying with environmental regulation. The main concern of dairy industry environmental regulators has involved ground and sur-face water contamination. The Coastal Zone Management Act of 1990 is one piece of legislation that will be impacting dairy farmers in the years ahead, and there are likely to be more regulations involving changes in farming practices and increases in production costs.

Changes will likely include restrictions on manure spreading, requirements for manure storage during winter, maintenance of buff-er areas between dairy facilities and waterways, and the fencing off of all streams and waterways that run through cow pastures. It also seems likely that both small and large dairy farms will be subject to regulation. While the costs for large farms will be greater, the impact of regulations may be more burdensome to many small farms which already have higher per hundredweight costs.

Consumer Issues

Consumers are now much more concerned about how their food is produced than in prior years. Pressures from various consumer groups are being felt in congress and in the administration. Dairy farmers will likely see additional regulation that will increase their production costs, and using new biotechnologies could prove difficult because of low consumer acceptance, although bovine growth hormone (bST) usage has not affected milk consumption despite dire predictions by some.

The presence of antibiotic residues in milk has been a recent concern. Currently, dairy producers in some states face financial penalties if antibiotic residues in their milk contaminate a tank load of milk. Milk processors and manufacturers will find themselves subject to additional regulations and will probably bear much of the cost of ensuring the safety of the dairy products they pro-duce. Dairy farmers may ultimately be forced to share these costs with manufacturers and processors.

Because of increased consumer awareness of the link between diet and health, the dairy industry has been trying to educate consumers about the positive nutritional aspects of their products. The chief vehicle for this effort has been advertising by the National Dairy Promotion Board, which is funded by assessments on milk marketed by dairy farmers. While some producers have fought for the elimination of the Dairy Board, claiming it to be ineffective, a producer referendum last year resulted in a continuation of funding for the Board’s activities.

In Summary

While not all of these issues may be addressed in the 1995 farm bill, they constitute the backdrop against which the legislation will be drafted. The goals of current agricultural policymakers might go beyond the traditional notions of supporting farmer incomes, and the next farm bill could reflect this. On the other hand, another major election looms one year beyond and many politicians are hesitant to make major changes to existing programs when their seat is in jeopardy.