By Nathan Fretz
On February 7, the President signed the Agricultural Act of 2014 (the “Farm Bill”) into law. Over a series of blog posts, we will focus on various provisions within the Farm Bill, with a particular focus on some of the provisions that may not have received the level of media attention as others, yet are important nonetheless. Today’s post focuses on the changes to the dairy safety net, which has certainly received media attention, and the creation of the position of Under Secretary for Trade and Foreign Agricultural Affairs within USDA, which has not.
New Dairy Safety Net
The Farm Bill brought a sea-change in the safety net for dairy producers. Gone are the Milk Income Loss Contract (MILC) Program (which will be repealed once the new dairy program is implemented), Dairy Product Price Support Program, and Dairy Export Incentive Program, and in their place, the Farm Bill establishes the Margin Protection Program (MPP) for dairy producers and the Dairy Product Donation Program. The changes in the dairy safety net parallel the broader movement in agriculture programs over the past several farm bills towards risk management programs in which producers must choose coverage levels and make premium payments.
The Margin Protection Program will provide payments to dairy producers during times in which dairy margins, defined as the difference between the all-milk price and the average feed cost, fall below the coverage level chosen by a producer for a consecutive two-month period. The payment amount will be based on the producer’s production history, the difference between the actual dairy margin and the margin level at which the producer chooses to be covered (ranging from $4.00 to $8.00), and the coverage percentage that the producer chooses to cover (from 25% to 90% of the producer’s production history).
Importantly, the Farm Bill sets a producer’s production history for the five years of the program as the highest level of production that the dairy operation had during 2011, 2012 or 2013, plus a small, annual allowance for the normal increase in the national average milk production. Thus, if a producer decides to increase the size of his or her dairy herd, the additional milk production would not be covered under the program. Finally, it is worth noting that the stabilization program, which was frequently highlighted during the dairy debate over the past several years, was not included in the MPP.
The Dairy Product Donation Program (DPDP) is designed to supplement the MPP when margins are at extremely low levels. When dairy producer margins fall to $4.00 or less for two consecutive months, the Secretary must immediately purchase dairy products at market prices, until the date that is the soonest of the following: 1) the program has been in effect for three consecutive months; 2) margins rise above $4.00 for the immediately preceding month; or 3) world prices for dairy products are such that the statute requires the Secretary to terminate the program.
The Secretary must distribute the dairy products purchased under the program to low-income groups through the use of public and private nonprofit organizations. One essential aspect of the program prohibits the Secretary from either storing the dairy products or selling them back into the commercial market. No longer will USDA fill caves with dairy products, as done under past dairy purchase programs, because under the donation program the products must be delivered immediately to the appropriate organizations for distribution.
On its face, the Dairy Product Donation Program may seem similar to the now-repealed Dairy Product Price Support Program; however, in practice, the two operate very differently. Most importantly, the DPDP gives the Secretary discretion as to which dairy products to purchase. In fact, the Secretary is required to consult with public and private nonprofit organizations that are organized to provide food to low-income individuals to determine the types and quantities of dairy products to purchase – in other words, the Secretary is directed to determine which products people need and want, and then purchase them. With this consultation, the Secretary, in theory, will be able to make purchases more quickly, without requiring processors to meet unwieldy product specifications, and the donations will have a more immediate, focused impact. This purchasing discretion will bring far more products into the program that under the old price support program, and dairy processing companies be aware of the consultations between the Secretary and the public and private nonprofit institutions regarding which products to purchase.
As with any new program, the Margin Protection Program and the Dairy Product Donation Program come with both opportunities and questions. How many dairy producers will participate in the margin program, and at what coverage levels? What, if any, impact will the program have on the volume of milk produced over the next five years? Will the program help to end the devastating price volatility in the dairy market? Will the Dairy Product Donation Program work in tandem with the margin program to prevent long periods of low margins? Or, if there is a prolonged period of low margins, what will be the cost of the MPP to the government? Finally, will there be a market impact – and if so, to what degree – as a consequence of moving from the detailed specifications and limited products of the old price support program to the much more flexible, product-inclusive donation program? These are just a few of the many questions that warrant attention as the rules for the new programs are promulgated and the programs are implemented.
California Potentially Joining the Federal Milk Marketing Order System
No discussion of dairy and the Farm Bill can be complete without mentioning the possibility of changes for the nation’s largest milk producing state, California. Section 1410(d) of the bill authorizes the Secretary to begin the hearing process to issue an order, subject to a vote of California dairy producers, to designate California as a Federal milk marketing order.
New Under Secretary for Trade
Over the past 50 years, trade in agricultural products has grown tremendously, becoming not only an engine for growth of the agricultural economy, but for the U.S. economy in general. The agricultural trade surplus is a bright-spot in the country’s balance of trade, providing growth opportunities for fruits and vegetables, dairy, meat and poultry, grains, wine and other agricultural products. USDA’s Economic Research Service recently released its agricultural projections for the next decade, and emphasized that low- and middle-income countries will drive growth in consumption of meat, grains, and oilseeds (access the full report here).
In a move that emphasizes the critical importance of trade to the agriculture industry, the Farm Bill directs the Secretary to establish the position of Under Secretary for Trade and Foreign Agricultural Affairs. The position would be created as part of a reorganization of the international trade functions within USDA. The farm bill provision provides that the Secretary, in proposing the reorganization and creating the Under Secretary position, consider how the Under Secretary “would serve as a multi-agency coordinator of sanitary and phytosanitary issues and nontariff trade barriers” in agricultural trade (sec. 3208(b)(2)(B)).
As the bill language implies, many of today’s agricultural trade issues require multiple agencies – frequently including agencies outside of USDA – to work together to reach resolution. Given the all-too frequent and negative impact that nontariff trade barriers and phytosanitary issues have on U.S. agriculture exports, it is essential that the Department have a central trade authority that can react quickly with input from across multiple agencies to resolve disputes.
While the Under Secretary for Trade position is critical, determining the position’s authority will be challenging. For instance, the Animal and Plant Health Inspection Service and Agricultural Marketing Service, which currently fall under the Under Secretary for Marketing and Regulatory Programs, and the Food Safety and Inspection Service, currently under the Under Secretary for Food Safety, all have critical functions working every day to ensure the efficient and safe trade in agricultural products. Will the trade functions of these agencies be moved from their current agencies and placed under the new Under Secretary for Trade? Or, will the trade offices remain housed in their current agencies, but be subject to the new Under Secretary for the purpose of coordinating trade functions? As the reorganization unfolds, it will be essential to monitor whether and how agency jurisdictions are affected.
The Secretary has 180 days from the date of the farm bill’s enactment to send a report to Congress with a detailed proposal for reorganizing the trade functions at USDA and creating the new Under Secretary for Trade and Foreign Agricultural Affairs. It is incumbent on the food and agriculture industry to weigh-in on that proposal to ensure that USDA is organized to effectuate safe, predictable, and efficient trade on a daily basis, while also having the ability to respond quickly and authoritatively when challenges arise.
Nathan Fretz joined OFW Law on Monday, February 3. Prior to joining OFW Law, Nathan was counsel for the House Agriculture Committee. He previously worked at the U.S. Department of Agriculture’s Food Safety and Inspection Service.