With profits tight, Connecticut dairy farmers look to Congress

WASHINGTON — Two years ago, Benjamin Freund’s dairy farm was teetering on a financial precipice as plummeting milk prices and skyrocketing feed costs squeezed his 270-cow operation in East Canaan, a village in the northwest corner of Connecticut.

“It forced us to go right to the end of our credit lines,” Freund recalled. “We owned a lot less of our farm and the bank had a lot more leverage… We got into a situation that was very uncomfortable.”

So it’s no wonder that Freund, along with many other Connecticut dairy farmers, is now looking to Congress to churn out an overhaul of federal dairy policy, before another crisis hits.


Part of the Freund herd.

The sense of urgency has been heightened by the work of the so-called “Super Committee,” a congressional debt-reduction panel tasked with finding at least $1.2 trillion in federal savings over the next decade. Agriculture subsidies are sure to be on that committee’s list, giving farmers across the country the political jitters.

“There’s no question that ag subsidies are going to be scrutinized heavily” by the committee, said Rep. Joe Courtney, D-2nd District, who represents eastern Connecticut and most of Connecticut’s dairy farms.

“It’s definitely something that people should be very, very aware of,” said Courtney, a member of the House Agriculture Committee. “To the extent that the subsidies safety-net is considered an item to be protected, it’s going to have to compete with obviously a lot of other issues before the deficit committee.”

Indeed, some lawmakers hope to put dairy reform on a fast-track, ahead of a broader re-write of the Farm Bill, which Congress is supposed to tackle in 2012. Rep. Collin Peterson, D-Minn., released a dairy reform plan last month, and he plans to introduce formal legislation when Congress returns to Washington next month.

“We need to move these dairy changes sooner rather than later,” Peterson said in an Aug. 17th interview with Dairyline.com. “A lot of the fundamentals in the market that were there in 2008, prior to the collapse in 2009, we’re seeing those same kind of things going on here in 2011, and I’m concerned that… we could have a another downturn, and the existing system just does not provide the safety net that we need.”

Connecticut dairy farmers agree with Peterson that sooner is better when it comes to enacting reform. But they might not like his proposal, which critics say would favor big dairy farmers over the smaller operations that typically operate in New England.

Courtney said he’s in the process of getting feedback from dairy farmers across his district. But some are already “very leery of it.”

There are two main federal programs that help bolster dairy producers. One is the Dairy Price Support Program, under which the government ensures a minimal price for dairy by purchasing excess milk (in the form of nonfat dry milk, butter, and cheese). The second is the Milk Income Loss Contract (MILC) program, which provides federal payments to farmers when milk prices fall below a certain level.

There’s broad consensus that both programs are outdated and inadequate. The disagreement is over whether to strengthen those two programs–or scrap them in favor of a new system. Peterson’s plan opts for the latter, eliminating both the DPSP and MILC.

In their place, his proposal would create a new initiative called the Margin Protection Program, a government-funded insurance program to protect against catastrophic losses. Payments to dairy farmers would be based not only on milk prices, as in the current system. Rather, federal assistance would be triggered if a farmer’s profit margins — the difference between feed costs and dairy prices — fell below a certain level.

In addition, his plan would create a supplemental insurance program, so farmers could purchase extra coverage with a federally-subsidized premium. Peterson says the reforms would provide a safety net that takes into account increasing production costs, including hikes in fuel and feed costs, and not just the ups-and-downs of milk prices.

“The proposed reforms would offer protection, create stability and inspire growth in the dairy sector,” his office said in a summary of his draft proposal.

But others say it might do just the opposite–and could exact a particularly tough toll on New England farmers. For one thing, the plan has no cap on the volume of milk for which farmers would receive the triggered payments. That means bigger producers could get huge checks if their margins take a dive.

The plan would “provide a full taxpayer subsidy to all farms for every last drop of milk they produce,” Steven Etka, coordinator of the Midwest Dairy Coalition, said at a Senate Agriculture Committee hearing earlier this year. “It would do so by greatly diluting the safety net to the overwhelming majority of dairy farms in the nation.”

To be sure, Connecticut’s 150 or so dairy farms are mostly small operations; the average dairy farmer has about 127 cows. In California and other states, by contrast, some dairy operations have 10,000 to 20,000 cows.

According to an analysis conducted by Etka, the average 100-cow dairy farm got $86,000 in federal assistance over seven years, from 2002-2009, under the current program. Under a margin insurance program like Peterson’s, they would have only gotten $27,000-about $60,000 less.

By contrast, a 10,000-cow farm would get $2.7 million under a margin insurance program-or about $2.58 million more than they got under the current programs in that timeframe.

“In times of scare federal dollars, it is not good fiscal policy or good dairy policy to be greatly diluting the safety net to the overwhelming majority of dairy farmers in order to subsidize multi-million dollar payments to a small handful of very large-scale farms,” Etka testified to the Senate Agriculture Committee. “Dairy policy should be focused on support dairy farmers, not milk production.”

Courtney said that he applauds Peterson for getting the dairy-reform conversation going, but he has concerns about that inequity. And farmers in his district are also worried about replacing two relatively straightforward assistance programs with a complex margin insurance program.

He noted that calculating dairy margins is “a moving target,” with constant fluctuations in animal feed, fuel costs, and other items. “If you are a dairy farmer with 50 cows, the thought of having to be consumed with spending time with the crop insurance agents to try and stay on top of this is really pretty unattractive,” he said. Some of his constituents have tried to use a similar state-level pilot program and found it “unbelievably complex,” he said.

Freund and other dairy farmers said they’re still evaluating Peterson’s proposal, but could accept some of these changes for the sake of compromise -and real congressional action.

“That’s a tough one,” Freund said of nixing the two current support programs. And the margin insurance plan is “direct pitting of larger versus small.” But he said he could probably live with that if other tweaks are made to the proposal, including modifications to a price stabilization program.

“I want to see something that helps us take these devastating bottoms out the pricing structure,” Freund said. The 2009 price collapse was “devastating,” and he’s not eager for a repeat.

Whether Congress can actually agree on a dairy reform proposal is far from clear. Some observers think Peterson will try to move his dairy plan as part of a debt-reduction package, in an effort to head off more blunt cuts to dairy programs.

The current dairy programs are projected to cost the federal government about $417 million over the next five years. Peterson’s proposal would save about $80 million over ten years, a small-but-not-inconsequential sum.

“That’s certainly an attractive selling point for it,” said Courtney, “but I think that [Peterson’s] the first to acknowledge that it’s going to be very controversial.”

Courtney said that while there’s certainly an urgency in the dairy farm community to see the current policies fixed, there also a sense of caution.

“I don’t think anyone is really thrilled with the status quo. And although the price of dairy has recovered since the 2009 collapse, there’s still a lot of difficulty out there because of the higher input cost,” he said. “So I think everyone would love to see if we could have a fix on this, but whether you’re going to find that sweet spot is really the question.”