dairy heifer replacements
March 10, 2016

Is Government Policy Keeping Pace with Changing U.S. Dairy Structure?

 |  By: Jim Dickrell

The U.S. dairy industry has rapidly evolved over the past 30 years, and while government programs have changed, they will need to continually evolve to keep pace, according to a new report issued today by USDA’s Economic Research Service (ERS). 

“The Margin Protection Program—Dairy (MPP) has not developed complete rules for handling structural change in the [dairy] sector,” is one of two conclusions of the 66-page report. “Without rules for managing structural change, the program could reduce incentives to increase herd size. The [MPP-Dairy] program is designed to expire in 2018, and efforts to revise the program will have to consider structural changes.”

The other conclusion is that the program is so new that its impact on milk production, milk prices and government costs is still unknown.  “Because the program was only recently enacted, and because of the complexity of the program’s design, we lack strong evidence for the likely effects of the program on production and will learn from experience,” it notes.

Change in the U.S. dairy industry is stunning, if viewed over the past three decades. In 1987, half of all dairy cows were on farms with 80 or fewer cows. By 2012, the median herd size had grown more than 10-fold to 900 cows. At the same time, cost of production declined nearly 19%.

Concurrently, partly due to those lower costs and rising world dairy prices, the U.S went from being a minor player in dairy exports. In 2003, it exported $1 billion worth of dairy products. In 2014, those exports grew to $7.2 billion.

Despite that, dairy and feed prices have been much more volatile the past decade, resulting in record profits and losses. In 2009, dairy farmers lost $10 billion in equity ($150,000 per farm on average) and took on $4 billion in new debt. Much of that was used to finance on-going operations rather than expansion, note ERS economists.

As a result of this volatility, the U.S. dairy industry developed a new government program, moving away from price supports and direct payments based on milk prices. The MPP-Dairy now looks at the milk-feed price margin, presuming income over feed costs is much more important and relevant than milk prices alone.

But the program is complex, with farmers having to decide levels of coverage both in terms of their farm’s production history and the margins they wish to cover. The bigger problem, the ERS analysis suggests, is that expanding dairy farms cannot increase their MPP production histories. So as they expand to lower costs and attempt to be more competitive, less of their annual milk production is covered by the MPP.