Congress wants to ditch the usual subsidies for dairy farmers and replace them with a new type of insurance to protect farmers' bottom lines during hard times. But some California dairymen aren't lapping it up.
The measure would replace outright subsidies with a voluntary insurance plan to pay farmers enough to maintain a profit margin when milk prices drop too low.
Farms that opt into the insurance plan, however, would be required to produce less milk whenever prices fall below a certain point, based on the idea that a glut of milk forces prices down.
The bill cleared the House Agriculture Committee on a 35-11 vote Thursday and now goes to the chamber's floor.
Supporters argue that insurance is the best safety net for the nation's dairies, which have had a rocky three years since milk prices plummeted in 2009. Higher feed and transportation costs have been draining dairies' bank accounts. In 2009, about 20% of the state's 1,800 dairy farms shut down.
Some dairy farmers, however, don't like provisions that could restrict their operations.
If farmers scale back production, "it makes them a much less reliable supplier, and a supplier who can't compete as efficiently," said Daniel Sumner, a UC Davis agricultural economist who studies the dairy industry.
That is why countries such as New Zealand and Australia, which also export dairy products, would welcome such a supply-management requirement in the U.S., he said.
"The California industry, just over the last several years, has become efficient enough to become competitive internationally," Sumner said.
Two members of the House committee, David Scott (D-Ga.) and Robert Goodlatte (R-Va.), tried to amend the bill Wednesday to eliminate the supply-management provision, but their amendment was voted down, 29 to 17.
California is the country's largest dairy producer, with sales of milk and cream totaling almost $6 billion in 2010. The state's exports of butter, cheese and other dairy products helped the nation nearly double its dairy exports to $3.7 billion in 2010 from $1.4 billion the previous year, according to data from theU.S. Department of Agriculture.
Farm subsidies, including milk price supports, grew out of the Great Depression when farms collapsed by the score.
Farmers have seen low milk prices before, but the last farm bill, passed in 2007, does not take into account feed costs, which have since skyrocketed as more corn was being diverted to ethanol production.
Worse for California farmers, that bill provides dairy subsidies only to smaller farms. So even though the bill provides subsidies when prices fall below $16.94 per 100 pounds, or about $1.45 a gallon, very few dairy farms in the state qualify to receive them.
During the Great Recession, prices fell to about $10 per 100 pounds, according to the California Department of Food and Agriculture. To break even, farmers generally need $16 or more, depending on their debts, feed costs and other factors.
The untested insurance provision makes many California farmers uneasy.
Tom Mendes, who owns a 1,200-cow dairy in Riverdale, just south of Fresno, said feed costs are about 65% of his production costs — up from about 55% in previous years. Although he wants some type of financial safety net, he opposes the current bill's supply-management requirement.
"As a producer in California, 20% of my milk will be exported," Mendes said. "Our international buyers say they'll go somewhere else if there's a supply-management program" that could disrupt the amount of milk available.
Mendes, who struggled to keep his business going when prices slumped, said he and others are pressing for an insurance calculation of feed costs based on an average of those costs in top dairy-producing states.
The current bill's formula, he said, is skewed to benefit Midwestern dairies. Most feed is produced in the Midwest, so transportation costs to dairies there are low. Feed costs can be more than 35% higher for California farmers, according to state agricultural data.
"We constantly have struggles with various regions of the dairy industry," said Rob Vandenheuvel, general manager of the Milk Producers Council, a California trade group representing dairy farmers.
"It's a delicate balance," said Vandenheuvel, who supports the current version of the bill. "Each area has their own issues and concerns. What's been developed here [in the bill] is a common approach. I'm not going to dispute the fact that our feed costs are different than the upper Midwest. But to try to craft a bill that treats us differently — that's the quickest way to kill this thing."
Vandenheuvel said that fears of exports slowing are overblown and that the current bill is the best solution for farmers because it treats them all fairly. He supports the supply-management provision as a way to curtail falling milk prices.
"Our dairymen here feel there is a huge step forward," he said.
The farm bill is a "step backward," said Rachel Kaldor, executive director of the Dairy Institute of California, a trade association for dairy processors.
"It doesn't facilitate the kind of market expansion and efficient production that we need," she said.
Without changing how feed costs are calculated, the margin insurance may not be enough to buffer steep price drops for California farmers, said Michael Marsh, chief executive of the Western United Dairymen, a Modesto-based group.
"If we got into another economic downturn, how many family farms will expire?" he said.