Many dairymen are calling the government price support system broken, but just how to fix it isn't clear. There's debate over how much the government should step in to help in tough times and as to what degree it should let the free market govern.
The urgency to fix the dairy supports in the upcoming 2012 farm bill is spurred in part by the horrible hit milk producers took in 2009. Milk prices hit rock-bottom lows; the price of raw milk paid to farmers dropped to its lowest level in 40 years. Outdated government price supports didn't kick in until prices were already too low – and some dairies went bankrupt.
Not only did income plummet but dairymen's equity tanked, which is directly tied to their ability to finance their business. Between 2007 and 2009 the combined equity of dairies nationwide – how much their cows and equipment and business are worth – dropped by $20 billion, or about 20 percent, said National Milk Producers Federation spokesperson Chris Galen.
"They stayed in business, in most cases, by having understanding lenders and bankers," Galen said. "And what we've heard time and again is 'Boy, I barely hung on by the skin of my teeth in 2009, we can't go through that type of situation again.'"
The market nightmare stemmed from a host of factors: feed costs skyrocketed, struggling global and national economies soured the demand for milk, and government price supports were often too little, too late.
Terry Van Maanen's 600-cow family dairy in Sioux County, Iowa, survived the rough patch. They grow much of their own feed, which helped deflect some costs.
"Definitely it was an eye-opener when you have to borrow money to pay your bills,” Van Maanen said. “It was a tough year. It really was a tough year.”
But Van Maanen isn't complaining. He believes dairymen should have to respond to the market realities and the industry needs these swings of low prices.
"Without it, where would we be today if we did not have that? We'd have so much milk, we wouldn't know what to do with it," Van Maanen said. "So do I look forward to poor milk prices? No. Do I fear them? In some respect, yes, I do. And yet when they come, to me it's the process of supply and demand."
But other dairymen worry they couldn't survive another year like 2009. A new dairy plan proposed by the National Milk Producers Federation strives to walk the line between letting the market control prices, but also providing a safety net.
"What we'd like the Congress to authorize and have the USDA implement, is a new safety net that's not tied directly to the price of milk, but actually would help insure against poor margins," Galen said.
So when the difference between what dairies get paid for milk and the cost of feed is below $6 per hundred pounds of milk, some government support would kick in. At the same time, to stabilize market prices, the USDA would notify farmers that they won't be paid for 2 percent of their production, which would give them a few months to scale back.
Participation would be voluntary, Galen said. For a farmer to get this margin insurance, he'd have to agree to production cutbacks in tough time. These ideas were incorporated into the Dairy Security Act, which was introduced into Congress last year.
Lee Maassen, president of the Western Iowa Dairy Alliance Board, likes the basic tenets of the milk federation plan, that supports kick in when margins get tight. He runs a midsize dairy in Sioux County. But, he said, when it comes to controlling supply, the market should do that.
"I'm in favor of a market discovery system, more of a capitalistic approach, where there's a true supply-demand situation," Maassen said. “I don' t like the point where we really control supply so much that it flattens out the market discovery, because then on the long-term ... that lessens your true opportunity for the future."
However, the National Family Farm Coalition says that kind of approach would just perpetuate volatile prices. Spokesman Paul Rozwadowskiis, a dairy farmer himself, said the problem with the milk federation plan is that it starts to limit farmers' milk production aftermilk prices get really low.
"You're giving the farmers an actual double kick in the behind,” Rozwadowski said. “They're already getting low prices and then they have to reduce it to 98 percent.”
The coalition says the government instead should manage how much dairies produce to stabilize milk prices. It supports a bill that would have the USDA monitor and control milk supply at all times in order to keep dairies from overproducing.
That's similar to how it works in California, the nation's largest milk producing state. Each dairy is given a production goal for the year, said organic dairymen John Taylor, who runs a family farm near Point Reyes, Calif. Then if they overproduce, they can sell this milk to a processor, if the industry can take it. Otherwise, they're out of luck.
Taylor said price support and supply management go hand in hand.
"I think you need to look to the individual dairy owners and say are they over-producing or are they getting hit with high input costs?” Taylor said.
But agriculture economist Dan Sumner, former assistant secretary for economics at USDA, has qualms with plans that ask the government to manage the milk supply. He said even the occasional milk production cutbacks imposed in the National Milk Producers Federation's plan would have a stifling effect.
What it does, "is takes people my age, and say to us, 'You get to be grandfathered in to keep what you've got,’” Sumner said. “The next generation... are told, 'No you don't get to compete.'"
It's too soon to say what the odds of this bill passing are, but supporters are hoping to push it through with the 2012 farm bill. The farm bill comes around only every five years, so there's a limited window for dairy farmers to repair a system many describe as broken.