Milk Bulk Tanks
April 18, 2019

Supply Management, Version 5.0

 |  By: Dairy Talk

As the dairy crisis slogs into its fifth year of pain, there is renewed interest—once again—in some form of supply management. Base-excess plans and an innovative milk price reallocation plan from the National Farmer Organization (NFO) are gaining buzz. More on the latter later.

John Newton, chief economist with the American Farm Bureau Federation, has recently posted an excellent review of past U.S. supply management efforts, dating back to the dairy crisis of the 1980s. There have been four attempts at supply management over the past 35 years, three of which were activated. None provided long-term relief.

The first of these was the Milk Diversion Program of 1983. It offered to pay $10/cwt to farmers to reduce their milk marketings 5 to 30%. The program cost USDA nearly $955 million, and reduced marketings by about 4 billion pounds in 1984. But by 1985, when the program ended, milk production had rebounded to earlier levels.

The Herd Buyout Program was part of the 1985 farm bill, with a goal of reducing milk supply 12 billion pounds over 18 months. “While the growth in milk production remained flat through 1987, national milk production did not decline as non-participating operations expanded production during the 18 months of the program,” says Newton.

Version 3.0 of supply management came with the National Milk Producer Federation’s Cooperative Working Together program, where dairy farmers themselves contributed to a fund to buy out their neighbors’ herds. Over CWT’s seven-year run of dairy buyouts, it reduced cow numbers by an impressive 510,000 head. But it, too, proved ultimately ineffective—even resulting in a class-action consumer lawsuit that alleged dairy farmers were illegally conspiring to raise milk prices.

In the 2014 farm bill, the Dairy Market Stabilization Program (DMSP), Version 4.0, was coupled with the Margin Protection Program. It was an on-again, off-again program that would deduct up to 8% of a farmer’s milk check if he/she delivered more than his/her DMSP-assigned base when the milk-feed margin fell below $6 for two consecutive months or below $4 for one month. DMSP ultimately failed in Congress, with then Speaker of the House John Boehner (R., Ohio) calling such an effort “Russian-styled agriculture.”

Once again, in 2019, farmers and some of their organizations are floating supply management or income redistribution plans. The most ingenious plan to date comes from NFO. Rather than controlling milk supply, it is a massive reform of the Federal Milk Marketing Order program to redistribute milk income from large farms to small.

Essentially, it takes the first $4/cwt of the Federal Order price and pays this amount to a farm’s first 1 million pound of milk production each month (roughly 500 cows). The rest of the money is then distributed to all the milk in the pool. The idea is that small farms have a higher cost of production than large farms, thus deserving a higher price for their milk to level the playing field.

For example, if the current pay price is $16.83/cwt, a 120-cow herd would get $18.87/cwt under the NFO plan while a 2,400-cow herd would get $15.76/cwt. Because larger farms have lower costs of production per hundredweight, the margin per cow is almost equal. The 120-cow herd would have a margin of $46.27/cow/month while the 2,400-cow herd would see a margin of $47.83/cow/month.

Nevertheless, there’s no question such a plan would move the industry well beyond socialism because it would dictate the price of milk per hundredweight based on herd size. Karl Marx’s axiom comes to mind: “From each according to his ability, to each according to his needs.” I wonder what John Boehner would say about it.