Dairy subsidy reforms proposed

MILWAUKEE — When milk prices plummeted in 2009, wiping out years of savings and causing hundreds of dairies to go under, struggling farmers pleaded for the government to do something to help stabilize prices and inspire growth.

They may soon get their wish.

Lawmakers are beginning to discuss changes to the safety net for dairy farmers in an effort to make the milk industry more profitable and less reliant on federal subsidies. One plan would replace several programs with reforms meant to balance supply and demand.

Many dairy producers are grateful for the proposal, saying it would help end damaging roller-coaster price swings. Others say the real answer is less government interference, not more.

The crisis started when milk prices, driven up by overseas demand, plummeted from a high of $18 per hundred pounds in 2008 to about $12 amid the recession in 2009. Farmers began slaughtering their cows to cut production. At one point, an average of 50,000 cows a week were being killed in an effort to reduce the milk glut.

Hundreds of dairy farmers were forced out of the business. Those who survived saw their savings largely wiped out, and they fear another prolonged downturn could devastate what's left of the industry.

U.S. Rep. Collin Peterson, D-Minn., the ranking member on the House Agriculture Committee, has floated a proposal to strengthen their safety net.

His plan has three main components. First, it would eliminate a pair of rarely used federal programs designed to help dairy farmers in lean times. Second, it would strengthen an insurancelike program in which the government pays farmers when milk profits become too slim. Third, when profit margins shrink to a certain level, the government would limit how much milk is produced.

The last measure is the most contentious. The so-called dairy market stabilization program would provide incentives for farmers to produce less milk, thereby cutting the supply and helping restore prices. But some producers say the incentives represent unwelcome government intrusion.

Here's how it would work: When the gap between milk prices and the cost of producing it falls to a given level, farmers would face production limits. Income from additional sales would mostly go to the government, which would use it to buy the excess.

"The idea is to tweak production so supply and demand can quickly adjust," said Chris Galen, a spokesman for the National Milk Producers Federation based in Arlington, Va.

Cornell Kasbergen loves the idea. A dairy farmer with 3,000 cows in Tulare and an additional 1,500 in Brodhead, Wis., he estimates he lost more than $4 million in the 2009 downturn. He said Peterson's proposal could help prevent a recurrence of that crisis.

"When we're on a downward spiral we need a mechanism to put a little brake on the throttle," the 53-year-old said. "This is the mechanism that we as an industry have come up with."

But other dairy farmers are asking Congress not to interfere. They object to the idea that they, as small-business owners, could be told how much they can sell.

Jeff Opitz, who milks 950 cows in southeast Wisconsin, said capitalism is about outworking competitors, not inviting government interference. He said he protected himself financially by doing such things as investing in futures markets.

The International Dairy Foods Association also worries that the measure takes control away from farmers and introduces a new layer of bureaucracy.

The Washington, D.C.- based group does favor the other aspect of Peterson's proposal, however — a feature similar to a current program that resembles insurance. Dairy producers would pay premiums in good times that would let them collect more generous government payouts in bad times. If they chose to pay nothing, they would get a minimal subsidy.

The insurance program, called margin-protection, would benefit taxpayers by having dairy farmers pay more for their safety net. It would also give farmers more control over how much federal protection they are willing to pay for.

Even critics of the first half of Peterson's proposal favor the insurance program. It was unclear whether a bill would be written to would separate the two aspects. Peterson is soliciting feedback on the plan before introducing it in a few weeks, most likely as a measure separate from the 2012 Farm Bill.

It's not clear how much money Peterson's plan would actually save the federal government.

An economist who studied the plan said it would disrupt free markets to an extent. While extreme highs and lows in milk prices would largely be eliminated, a side effect would be more frequent cycles of volatility, said Mark Stephenson, the director of dairy-policy analysis at the University of Wisconsin-Madison. But, he said, most consumers wouldn't notice that since milk processors keep retail prices fairly stable.