U.S. Dairy Update: Exports and Policy Top the List

Dr. Cameron S. Thraen, Associate Professor and OSUE State Dairy Markets and Policy Specialist, Department of Agricultural, Environmental and Development Economics, The Ohio State University

U.S. Dairy Export Industry

As I write this article for Buckeye Dairy News, it is remarkable that U.S. exports of milk, measured on a skim solids basis (ssb), are now exceeding 15% of total U.S. production.  For a recent dairy outlook presentation I put together, you may find a few points interesting and perhaps surprising.  First, a look at what it means to export over 15% of total milk solids.  Back in 1997, when milk production in the U.S. was just over 150 billion pounds, our exports totaled 4.5% of production.  At that time, it required about 16 days of national production from just over 400,000 dairy cows to meet this demand.  The U.S. average milk price in 1997 was $13.34/cwt.  Now jump to the present day.  In 2013, the United States Dairy Export Council (USDEC) estimates that the equivalent of 15.6% of national milk production was exported to others around the globe.  To accomplish this feat, it took over 56 days of production from 1.4 million dairy cows.  The U.S. average milk price for 2013 was $19.80/cwt.  Another astounding fact is that U.S. milk production increased by 33 billion pounds from 2003 to 2013, and during this period, U.S. exports grew by 22 billion pounds.  Export demand has absorbed 66% of the growth in U.S. milk production over the past 11 years.  U.S. dairy exports in the form of whole milk powder, skim milk powder, whey, and lactose flow to Mexico, Canada, South America, the Middle East/North Africa, Southeast Asia, China, Japan, and South Korea. In 2013, the market value of this trade has been put at over 5 billion dollars.  This is truly outstanding and a nod to the superb job that USDEC and other organizations in the U.S. dairy industry have been doing over the past 15 years to transform the U.S. dairy industry into a truly dynamic export industry.  At this juncture in 2014, it appears that the influence of U.S. export demand on market prices and the farm price for milk will only strengthen in 2014.

Dairy Policy and the Farm Bill

I will open with this quote from U.S. House representative Frank Lucas, chair of the U.S. House Senate farm bill conference committee, upon the completion of Conference Committee draft legislation:

 "If I expire in the next three days, I want a glass of milk carved on my tombstone—because it's what killed me,"  Frank Lucas, as quoted in the National Journal. http://www.nationaljournal.com/congress/frank-lucas-is-thrilled-that-this-whole-farm-bill-thing-is-finally-over-20140127

By the time you read this, the text of the bill and those provisions pertaining to the dairy safety net and the other dairy provisions will have been widely reported, so I will only add a few comments.  As readers of BDNews may recall, John Newton and I wrote earlier that a compromise solution was available to end the deadlock over the Dairy Security Act as passed by the U.S. Senate, and the Dairy Freedom Act, as passed by the U.S. House of Representatives.  This compromise included a modified Milk Income Loss Contract (MILC) program, with the production cap increased to 4 million pounds, and the addition of an insurance program with a coverage level capped at $6.50.  We argued that with this combination of programs, there would be no need for a supply management program, one of the more contentious issues in the entire farm bill negotiations.

After much debate, some of which included the MILC – Insurance idea, the proposed dairy safety net comes close to this concept.  MILC is in fact terminated and is replaced with an insurance type program.  Supply stabilization is also off the table. With the proposed insurance program, participating producers will establish a base production history (bph) based on the highest annual production from the 2011, 2012, or 2013 calendar year. Once established, a farm’s production base will be allowed to increase by the U.S. average production growth.  Production over this level will not be eligible for the program.  Premiums follow a two-tier schedule.  For a production base at 4 million pounds or less, there is one schedule, and for those farms with a production base over 4 million pounds, another more expensive schedule is used.  Those producers whose annual production is at or below 4 million pounds, the cost of coverage all the way up to $6.50 remains very reasonable, only become more expensive at the $7 to $8 levels.  For a producer whose annual production base is above the 4 million pounds, the cost is still modest up to the $5 level, but then increases rather significantly above that point.  For a comparison, a producer with a bph of 4 million pounds will be able to purchase $6.50 coverage at a cost of $0.09/cwt, while a producer with a bph over 4 million pounds would pay $0.29/cwt. 

There are other provisions for new farms, farms with multiple owners, and owners with multiple farms.  Producers will not be allowed to simultaneously use Livestock Gross Margin Insurance and this program.  The program will not start until September of 2014 and decisions on coverage will be made on an annual basis.  Also in time of severe milk price stress, the Secretary of Agriculture is directed to implement a dairy product purchase program to augment commercial demand with the intent of increasing the milk price.  Much of the operational details for this program have now been passed along to the Secretary of Agriculture and the USDA, which in my opinion, is a change for the positive.

If you would like to hear more about the proposed program, tune in this Friday, January 31, to the Dairy Markets and Policy (DMAP) website (http://www.dairy.wisc.edu/) and listen to a podcast by Dr. John Newton.