Will the 2018 Farm Bill breathe new life into dairy risk coverage?

Carol Spaeth-Bauer
Wisconsin State Farmer
Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, discussed the Farm Bill and how it will help or hurt producers during a seminar at World Dairy Expo on Oct. 5 in Madison.

With the current Farm Bill technically expired as of Sept. 30, at the end of the fiscal year, what can producers expect? 

While the Farm Bill Conference Committee pushed to wrap up the bill by the Sept. 30 deadline, that would have been unusual, University of Wisconsin Director of Dairy Policy Analysis Mark Stephenson said during a seminar at World Dairy Expo on Oct. 3. 

"We seldom get a farm bill on time," said Stephenson. 

And while there is talk of getting the farm bill done before the end of the year, Stephenson is suspicious. 

"I don't think that's going to happen," Stephenson said. "There's a lot of enthusiasm for getting some legislation done before we actually go to the polls in November, so maybe they will make it happen." 

However, Stephenson predicts passage of the bill to happen in January once a new Congress is seated "and that's quite normal," he said. 

The stumbling block for passing the Farm Bill comes down to the Supplemental Nutrition Assistance Program (SNAP) that is part of the farm bill, Stephenson explained.

Since the Farm Bill is an omnibus, "a big fancy term meaning we're packaging a whole bunch of bills into one thing and we're passing it in a single stroke through Congress," Stephenson said, "occasionally we get some folks coming into a farm bill that we don't really think about too much."

Major differences in the Farm Bill lie in changes most Republicans would like to see in the form of strengthened work requirements for SNAP recipients, Stephenson explained, whereas Democrats don’t want such large changes, fearing people who really need assistance would not get it under those requirements. 

Despite this difference, the Farm Bill has historically been a piece of legislation that enjoyed bipartisan support, Stephenson added.

"This is one of the places where an entangled Congress can often get together and agree that this is a package that we ought to do. This year we are seeing a bit more in the way of partisan politics," Stephenson said. 

With the House version of the bill narrowly passed on June 21 and the Senate version passed on June 27, "We have to go back in and find where those differences are and come to some kind of agreement," Stephenson explained. 

Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, shows spending increases ove the years in each part of the Farm Bill during a seminar at World Dairy Expo on Oct. 5 in Madison.

Those differences are ironed out in Conference Committee, which met for the first time on Sept. 5.

"Although we don't have the committee reporting the bill back out at this point in time, we will continue the conference until that happens," Stephenson said. 

What happens once the bill expires?

When the Farm Bill expires, Stephenson said there are a few things that will happen. A few programs could cease to operate unless they are reauthorized. Programs like the Margin Protection Program (MPP) would continue through the end of the calendar year, but would stop after that. 

"Some programs, like SNAP, they can keep going by giving appropriations," Stephenson explained. "Farm commodity programs not only expire, they would revert back to permanent legislation, so by the time we get to January, we can start talking about whether or not we are going to be invoking parity prices for milk. I think that's highly unlikely, but can understand that's a pressure point for them."

The Dairy Price Support Program, one of those permanent pieces of legislation that was part of the 1949 Agricultural Act, is suspended while the current Farm Bill is active. When the Farm Bill expires, the permanent legislation again becomes active, according to Stephenson. This could mean the Secretary of Agriculture would be required to purchase storable dairy products consistent with a milk price target within 75 to 90 percent of parity with the milk price of 1910-1914 or about $52 per hundredweight if a new bill isn't in place by January. 

"So this becomes a kind of the Damocles sword that hangs over Congress and lets them know you better do something because if you don’t we have to invoke what is there in the permanent legislation," Stephenson said.

Other programs, like crop insurance, have permanent authority, meaning the program doesn't need a farm bill to reauthorize it. 

"So even if the Farm Bill doesn't get passed, crop insurance programs keep going," said Stephenson.

According to Stephenson, a vast majority of the Farm Bill is mandatory spending, so once the bill is passed, Congress has mandated the programs and "we would pay whatever we have to pay to satisfy that program."

Will the 2018 Farm Bill help or hurt? 

Stephenson expects changes to the MPP for Dairy to come out of the new bill. MPP Dairy has experienced a lot of controversy and producers may be sick of it but Stephenson suggested giving it another look.

"They're trying to fix this thing and make some significant changes," Stephenson pointed out. "Honestly, I think it's just good basic risk management for farms that can consider that first 4 million pounds of historic production."

Mark Stephenson, director of dairy policy analysis at the University of Wisconsin, points to differences in premium levels proposed by the House and Senate in each version of the Farm Bill during a seminar at World Dairy Expo on Oct. 3 in Madison.

One thing the House and Senate agree on is changing the name of MPP so dairy farmers don't think it is the same program. The House wants to call it the Dairy Risk Management Program. The Senate wants to call it Dairy Risk Coverage. "They will work that out," said Stephenson.

The idea about production history will stay the same, going back to the highest milk production that was achieved in 2011, 2012 and 2013, according to Stephenson. Farmers new to dairy or a new facility will have mechanisms for establishing production history. Producers can still sign up for the program even if they hadn't done so the previous year. 

Stephenson said both the House and Senate would change the parameters of the milk percentage that is covered. Now producers have to choose between 25-90 percent of their production history. The House and Senate would allow producers to go down in 5 percent increments. 

"What this means is that even larger farms could ratchet down to get the first 4 million pounds of milk in that Tier 1 coverage level," said Stephenson. "They also want to move new margins up to a $9 level, not the $8 level we currently have. So they put two new ones in there, $8.50 and $9.

The cost of Tier 1 premiums would be lower through the House — $0.09 compared to $0.14 for an $8 margin coverage. New levels would cost up to $0.17 through the House and $0.18 through the Senate for $9 margin coverage." 

The higher levels of margin coverage "mean quite a lot," Stephenson said. From March 2014 when the MPP was implemented until the present day, the margin has been below $9 about half of the time. Program payments at that level would have averaged about $0.56 for a $0.17 (House) or $0.18 (Senate) Tier 1 premium cost.

"Either one of those would have been a pretty good buy if I could spend 18 cents and get 73 cents back, I'd do that every day all day long," said Stephenson. "That's a 400 percent return on your investment, so they are really making this a lot more sensitive than it had been before."

However, Tier 2 premiums are higher, Stephenson pointed out. 

A primary difference between the House and the Senate versions for MPP Dairy is in timing of choosing levels of coverage. According to Stephenson, the House version would have producers choosing the percentage of coverage one time and it would remain for the entire length of the Farm Bill. The Senate version would keep that selection as an annual decision. 

Other than revising the MPP program, both the House and the Senate versions would change the Federal Milk Marketing Order formulas for Class I pricing.

"We currently have Class I being priced off of the higher of Class III or Class IV skim solids, and what they would do is to say, we’ll take the average of Class III and Class IV and add 74 cents per hundredweight," Stephenson explained. 

Stephenson said he thinks the Farm Bill has given life to this new program, whether it's called Dairy Risk Management or Dairy Risk Coverage.

"That’s not the be all and end all either, but it's another tool in the toolbox and it's something that we can look at and in some years it's going to be a fairly low cost risk management option for folks," said Stephenson.