Distinguished Panel of Agricultural Economists Analyzes Proposed Dairy Policy

Distinguished Panel of Agricultural Economists Analyzes Proposed Dairy Policy

Inter-University Program on Dairy Markets and PolicyDo we need the new dairy policy? That was one of the questions discussed at the symposium that took place as part of the Agricultural and Applied Economics Association’s annual meeting, held earlier this week in Washington, DC. The symposium “Whither Dairy Policy? Economics and Politics of New Dairy Programs” was organized and moderated by Dr. Marin Bozic, assistant professor of dairy foods marketing economics at the University of Minnesota. Distinguished panelists were Dr. Bruce Babcock (Iowa State University), Dr. Scott Brown (University of Missouri), Dr. Andrew Novakovic (Cornell University) and Dr. Daniel Sumner (University of California – Davis).

The symposium was opened by a presentation by John Newton, PhD candidate at the Ohio State University who is studying agricultural policy and dairy economics under Dr. Cameron Thraen. Newton outlined the provisions of dairy programs passed in the House and the Senate Farm Bills, and summarized the results of his most recent analysis with Thraen and Bozic on the distributional effects of new programs. In the paper released last week, authors reported that seventy percent of expected dairy policy benefits would accrue to just ten percent of dairy farms who also produce the majority of nation’s milk. If the policy objective was to prevent dairy farmers from going out of business, and they were poor people, Sumner commented, then means testing would be appropriate.

Writing on the need for the new farm bill in his recent article in The Atlantic, Sumner remarked that "Rationales that might have sounded credible in 1950 - e.g.: farmers tend to be poor; the free market just doesn't work - were shown over the decades to be weak rationalizations for transfers to the wealthy." In his reply to the question whether we need the new dairy policy, Sumner reminded the audience that the calls for new dairy policy needs to be justified. If the California Sec. of Agriculture was told by someone that she needs to be setting the price of Cabernet Sauvignon relative to Merlot, it would be dismissed as a silly idea. So, if we want to regulate milk, Sumner says, we need to explain why milk is all that different than Cabernet Sauvignon, bottled water or orange juice. No good reasons for that have been offered, according to Sumner. Dr. Scott Brown is not sure if he agrees or disagrees with Sumner. Brown said his role as an applied economist, as he sees it, is to offer analysis that helps illuminate consequences of public choices, rather than offering justifications and judgments whether some policy is good or bad.

Commenting on the margin insurance design, as found in both Senate and the House Farm bills, Bruce Babcock, who helped design the margin insurance in the Foundation for the Future program, reminded the audience that in the early drafts, the coverage level commitment for insurance was for five years. Now with an annual choice of coverage level, DPMPP, Babcock says, is no longer a margin insurance, rather a countercyclical margin payout policy instead, with huge potential for government expenditures to skyrocket.

Brown stated that potentially billions of dollars could be spent on margin insurance in low-margin environments. One such scenario may be if some event shuts down dairy trade, and all of a sudden the domestic price of dairy products drops. The market stabilization program (DMSP) in tandem with margin insurance, adds Brown, is an interesting idea of stepping on the break and the accelerator pedal at the same time to glide the markets to a better outcome which limits government exposure. Novakovic, speaking on DMSP, remarked that it may impact the farms of different sizes in different ways. In his opinion, the small and the very large farms are more resilient, while the most punished category would be farms with 250- 1000 cows. Is our policy objective, Novakovic asked, to get rid of the middle?

Alternative risk management tools were also discussed. Commenting on low LGM-Dairy indemnities received relative to premiums paid in, Babcock, who was one of the LGM designers, commented that it could be overpriced and that the rating method can be improved. Newton, who worked on several projects with Thraen and Bozic examining the performance of LGM-Dairy, added that research shows LGM-Dairy can be very effective in managing risk to margins, especially if distant months are insured. Turning to the effect of government policies on private risk markets, Prof. Babcock explained that in the grains sector crop insurance likely increased the use of futures and forward contracts, by removing some of the production risk of having a short crop and not being able to deliver on a forward contract. In contrast, dairy margin insurance may act as a substitute for dairy futures and options and may crowd out private risk markets.

On final question discussed at the symposium, regarding the farm bill timeline, Dr Brown said it is hard to see the light at the end of the tunnel. John Newton, who just finished his stint as a Fellow with the Senate Committee on Agriculture revealed that despite the perceived gridlock pre-conference negotiations were underway. However, Newton added, once House leaders declared they will pursue the nutrition bill with cuts amounting to 40 billion dollars, the optimism that the farm bill may be completed soon decreased. Newton remained optimistic that a Farm Bill could be complete by the end of the year, but added that one option considered was to attach some farm bill programs to a budget bill, and extend others by two years, as no one will want to deal with the farm bill in the election year.

The Inter-University Program on Dairy Markets and Policy is a group of U.S. agricultural economists dedicated to scientific analysis of dairy markets. Research and extension materials can be found at http://dairy.wisc.edu/ . This press release has been written by John Newton and Marin Bozic and does not necessarily reflect the views of other DMAP economists.

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8.08.2013