13 March 1998

Whipping the dairy

industry into shape

US dairy policy has become a complex bureaucratic monster

that has so far remained untouched by the new Freedom

to Farm ethos. But thats all about to change, says

Illinois-based agricultural commentator Alan Guebert

(below). Whether it will stem the flow of dairy farmers

leaving the industry is another matter though

OF ALL the many complex and confusing farm programmes in America, none can match the complexity and confusion of US dairy policy.

Begun in 1927 as a simple tool to match domestic raw milk supply with market demand, the programmes Federal Milk Market Order (FMMO) system grew into a bureaucratic beast that indirectly influences – if not directly

controls – nearly every aspect of the US dairy industry.

It is so complex that not even Congress wanted to tackle long-needed programme reforms during the 1996 farm policy debate which resulted in the sweeping "Freedom to Farm" law now governing most American farm programmes.

Instead, Congress, in the apex of the political art, simply ordered the US Department of Agriculture to overhaul the antiquated FMMO system to make it more "market responsive".

And now USDA has. On Jan 23, secretary of agriculture Dan Glickman announced a massive, 1000-page reform plan that:

&#8226 Reduces the current 33 federal milk market orders on which farm prices are based to just 11

geographically huge FMMOs.

&#8226 Establishes a new method to calculate milks nationwide basic formula price, so prices paid to dairy farmers are more stable.

&#8226 And does virtually nothing to boost potential US dairy exports during the plans phase-in between Apr 1999 and 2003.

"It is fair to assume," says Richard McKee, the director of USDAs dairy division, "that the reforms suggested in the plan are aimed almost entirely at the US domestic market. In the 1996 Farm Bill, Congress ordered USDA to update the programme, and thats all that we tried to do."

But the driving idea behind the proposed reforms continues to be the market-oriented Freedom to Farm. As such, critics of the

proposal label it "Freedom to Farm for dairymen," whose end goal is to whip the US dairy industry into a less costly, more export-competitive business when the full effects of the plan are in place by 2004.

That view can be confirmed in what the plan is likely to deliver to US dairymen – lower prices. USDA dairy analysts estimate American producers will receive £52m less revenue a year during the programmes slow five-year adoption compared to what they would earn if the current programme was simply maintained.

But since the reform plan offers no clear export incentives, the

proposal really means US milk producers will receive about £300m less income in the

coming five years.

Without question, the loss of revenue – en route to a more market-driven, more global US dairy industry – will mean the loss of more US dairy farmers. Since 1992, 32,000 American dairymen, or about one in every four, have closed their barn doors forever.

USDAs plan is not the only earth-rattling event shaking the US dairy business. Early last November a US federal judge, in response to a civil lawsuit, declared the price-guiding federal milk market order system

"capricious" and ordered it be thrown out in 18 of the 33 FMMOs on Feb 15, 1998.

USDA immediately asked the court not to impose its ruling because if enforced it would toss the entire milk pricing mechanism nationwide into total chaos. On Feb 12, a higher federal court agreed with USDA and postponed the original orders implementation indefinitely.

But the initial ruling remains like a black cloud over the entire

federal milk order programme – even as USDA is busy trying to drum up support for its enormous effort to reform milk orders.

And just to add further spice to an already messy mix, US secretary of agriculture Mr Glickman bent to political

pressure recently and agreed to review a plan that would raise the absolute minimum milk price nationwide to 19p/litre. The very idea of boosting minimum guaranteed prices runs directly counter to USDAs new FMMO reform plan.

Mr Glickman, who has not endorsed the increase in minimum price, justifies debating the concept by describing it as "a transition payment" of sorts that will cushion dairy farmer income during the phase-in of FMC reform. And since milk processors would be forced to pay that minimum price – not the government – it amounts to free political cover for Mr Glickman as the industry

continues to consolidate.

As might be expected, dairy processors and some regional dairy co-ops are livid with the

secretarys manoeuvring, claiming the higher minimum price will cut domestic milk consumption, foster rapid US over-production, and "expose many dairymen to certain economic disaster" when the new FMMOs begin to take effect in April 1999.

That bleak forecast seems overstatement. Current US milk prices are a profitable 18.7p/litre, just 0.3p/litre under the proposed new minimum price, and milk consumption remains strong while dairy cattle numbers – and the number of producers – continue to drop. USDA has made no

decision on boosting minimum milk prices as of Feb 23.

Whatever the outcome of that fight, the debate over USDAs reform plan burns on. Dairymen have until Mar 31 to comment on the plan after which USDA will review its proposal and perhaps make minor changes to it.

Sooner or later, though, every US dairy producer will vote on it – a unique power in American farm policy that dairymen have retained for 60 years. No one is willing to forecast the outcome. If it is voted down, though, USDA would be required to formulate another reform plan because it must follow the order given it in the 1996 Farm Bill.

And as that percolates through, the FMMO system itself could be tossed out because of the November court ruling.

Confused? Sure you are. And so are American dairymen. But thats nothing new. Most US dairymen have been confused by complex American dairy polices for generations.