Regional and Structural Impacts of Alternative Dairy Policy Options

Milk and dairy product prices have fallen to their lowest levels in 3 years following the record highs of 2004 and 2005. The large government stockpiles of non-fat dry milk are gone, but threaten to build again as non-fat dry milk and cheese prices decline nearer the support price level. A new farm bill is scheduled to be written in 2007. The Milk Income Loss Contract (MILC) program included in the last farm bill was only authorized through September 2005. Subsequent legislation reinstated the MILC program through August 2007. WTO negotiations are on-going and could influence U.S. farm programs 1/. Dairy’s role in the U.S. amber box limit of $19.1 billion may necessitate some possible trade-offs with other commodities. Dairy counts about $4.2 billion toward the annual amber box limit, but actual spending only averages about $1 billion (Outlaw, et al). The pressure of low prices, WTO negotiations, MILC continuation, and a new farm bill has created the potential for a number of options and alternatives for dairy policy. This paper examines the regional and structural impacts of 3 dairy policy options: MILC continuation, a target price/deficiency payment program, and an increase in the support price. All three options are designed to spend $400 million in amber box payments per year. The analysis uses representative dairy farms in major milk producing regions of the country developed by the AFPC for policy analysis