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AGRICULTURE; DAIRY PRODUCTS;

OLR Research Report


January 15, 2009

 

2009-R-0032

DAIRY FARMING

By: Joseph Holstead, Associate Analyst

You asked what (1) other northeastern states have done to help support dairy farms (subsidies, tax incentives, etc.) and (2) legislative proposals they have recently considered.

SUMMARY

Northeastern states have recently taken measures to assist dairy farmers that include providing subsidies, tax credits under certain conditions, and examining price adjustment mechanisms. (We will provide a separate report on measures legislatures have recently considered.)

We provide information in alphabetical order below on efforts in the New England states (except Connecticut) and New York. Rhode Island apparently provides subsidies to dairy farmers, according to an environmental organization's website, but we were unable to find more information at this time. We will follow up with more information on Rhode Island in a separate report.

The northeastern states have taken steps to provide subsidies and other funding to dairy farmers because the system for setting milk prices under federal law does not take into account the cost of milk production and consequently is frequently set too low for dairy farming to remain viable. Similar problems with prices in the early 1990s resulted in the New England states joining the federally authorized Northeast Interstate

Dairy Compact in 1996, which provided a system to subsidize farmers when prices fell below a set target price. However, the compact expired in 2001 and problems stemming from low milk prices soon cropped up again. We have therefore also provided background information below on the federal milk pricing system and the multi-state dairy compact, as well as a 2008 federal law to examine the federal pricing system.

Connecticut's latest effort to assist its dairy farmers is PA 08-164, which created a nine-member Connecticut Milk Promotion Board in the state Department of Agriculture (DOAG), and required the DOAG commissioner to work with USDA, or other appropriate agencies, to certify the board by October 1, 2008. It also required the DOAG and Economic and Community Development commissioners, within available resources, to make recommendations and propose legislative changes to lower dairy farm production costs and increase dairy industry revenues. The recommendations and proposals on reducing costs must be made in consultation with the Office of Policy and Management. The report is available here: http://www.ct.gov/doag/lib/doag/pdf/dairy_impact_report_-_1-12-2009_v6.pdf. (A copy is attached for your reference.)

MAINE

Maine appears to have had a subsidy program in early 2003 that provided subsidies to Maine dairy farmers when the price of milk fell below a certain level. Under that program, when the base price of milk fell below $16.94 per hundredweight (11.6 gallons) in any month from September 1, 2003 through May 31, 2004, the Maine Milk Pool administrator had to distribute to Maine milk producers the difference between the actual price and the $16.94 amount on a per hundredweight basis 40% for the months of January to May 2004.

The law specified that the amount distributed for milk produced during the period between January 1 and May 31, 2004 could not exceed $2.1 million. Under the law, the base price of milk was defined as the Suffolk County (Boston), Massachusetts Class I price of milk as determined for each month by the Northeast Market Administrator of the United States Department of Agriculture (USDA) (7 M.R.S. 3153-A ).

MASSACHUSETTS

In 2008, Massachusetts legislature passed “An Act Relative to the Preservation of Dairy Farms,” which seeks to provide various types of assistance to dairy farmers. In particular, the law created an income tax credit that provides assistance in years when the wholesale price of milk is below local production costs, protecting farmers from cyclical downturns.

The law requires the agricultural resources commissioner, in consultation with the revenue commissioner, to adopt regulations to implement, administer, and enforce the provision, including requiring that they establish a trigger price, which must take into account (1) the operating costs of milk production, including hired labor and some portion of the value of unpaid labor, and (2) the amount of the tax credit that is based upon milk production volume.  The law also caps the credit annually at $4 million (Mass. Gen. Laws. ch. 63 38z and 62 6).

Massachusetts' 2008 law also established a linked loan program to improve farm viability. It also established a dairy promotion board. Under the law, the nine member board must develop programs and policies to increase the consumption of Massachusetts dairy products. To fund its efforts, it must assess a fee of 10 per hundredweight on the milk Massachusetts milk producers deliver, or a fee that is commensurate with the credit allowed for producer contributions to state qualified programs under federal law.  The fees must be submitted in the dairy promotion trust fund established under the law. For more information, click the following link: http://www.mass.gov/legis/laws/seslaw08/sl080310.htm

NEW HAMPSHIRE

New Hampshire law established a milk producers' emergency relief fund in the state treasurer's office and an emergency relief fund board. Beginning July 2008, each month the federal marketing order price (base price) falls below the target price ($16.94), each eligible participating state milk producer may receive a payment equal to the month's production in hundredweight multiplied by the difference between the target price and the base price for the month. The Agriculture, Markets, and Food commissioner makes payments from the fund on a quarterly basis after all information necessary to compute payment amounts is available for the applicable prior three-month period.

The fund is non-lapsing and must be continually appropriated to the agriculture department. The treasurer may invest the fund proceeds and any income earned on the investment must be credited to the fund. In addition, the commissioner is authorized to accept, on behalf of the fund, public sector and private sector grants, gifts, or donations of any kind. The commissioner may employ legal counsel as deemed necessary.

In the event there is an insufficient balance in the fund to make full payment to all producers, the commissioner must prorate payments to each producer to the extent funds are available (N.H. Rev. Stat. 184:107 and 109).

NEW YORK

2007 Subsidies to Dairy Farmers

In 2007, New York's legislature approved a dairy assistance program that provided a subsidy to dairy farmers to compensate them for losses in 2006, which was a particularly bad year for milk prices paid to farmers. (The law was repealed after the program paid out the subsidies.) The law allowed subsidies to make up the difference between a target price and the Northeast Federal Order Statistical Uniform price plus the amount of the Milk Income Loss Contract X (or “MILC” payments, which the USDA Farm Service Agency provides to the dairy industry, “giving direct counter-cyclical style payments to milk producers on a monthly basis when the Boston Federal Milk Marketing Order Class I price for fluid milk falls below the benchmark of $16.94 per hundredweight”), (N.Y. Agri. Law 258pp). The subsidies expired when the fund, up to $30 million from the New York Development Corporation Act was exhausted in 2007.

Milk Hauling Study

A 2007 New York act, “An Act Directing the Department of Agriculture and Markets to Conduct a Study on the Impact of Hauling Costs on Dairy Farmers,” required the Department of Agriculture and Markets to study the impact of hauling costs on dairy farmers. The department's April 2008 report, entitled “Milk Hauling Study,” concluded, among other things, that part of the hauling cost is not charged directly to the producer (dairy farmer) and cited, “a recent study of Vermont's total hauling cost shows two-thirds of the actual cost of hauling is recovered from producers, while one-third is absorbed by cooperatives or milk handlers or is passed up the value chain.” It went on to state that New

York needs to carefully consider the possible market ramifications of legislation that would regulate how milk hauling costs are allocated between producers and those beyond the farm.” The entire report is available at: http://www.agmkt.state.ny.us/DI/MilkStudyCombined.pdf

VERMONT

A 2007 Vermont law requires the Vermont Milk Commission to establish a minimum producer price by emergency order that ensures the cost of picking up and hauling milk from the farm to the purchaser will be paid by the purchaser (Vt. Stat. Ann. tit. 6 2925).

In 1991, Vermont's General Assembly established the Vermont Milk Commission to recognize the importance of dairy farming to the state's economy and preserving its rural character (Vt. Stat. Ann. tit. 6 2922 et seq.).

On June 24, 2008 the commission adopted a proposed order to establish a retail fuel milk premium. According to an August 20, 2008 document entitled, “Vermont Milk Commission Proposed Order to Establish a Retail Fluid Milk Premium”:

The proposed order would establish a retail fluid milk premium for fluid or beverage milk products sold at retail within the state of Vermont, subject to certain exemptions. The proposed premium is primarily intended to interrupt the upward 'ratcheting effect' on Vermont retail milk prices caused by the volatility in federally regulated minimum fluid milk prices.

The commission held two meetings, one in September and one in November 2008. The commission is apparently still deliberating acceptance of the proposed order. The November 2008 hearing transcript is available at: http://www.vermontagriculture.com/milkcommission/documents/11-18-08MilkCommissionHearing.pdf.

MILK PRICING

Federal Pricing for Class I Milk

Federal law governs the price paid to dairy farmers for milk. Generally, USDA marketing orders set the price for milk and milk products by region. One order prescribes the price paid in New England and the Mid-Atlantic states. The order is broken down into class 1 (fluid) milk and various other classes of milk products.

Critics of this pricing scheme argue that the price a dairy farmer receives is not tied in any significant way to the cost of production. New England farmers typically need $15.40 per hundredweight to break even, according to a 2006 study, but the price set by federal milk order has often fallen below that in the past several years. From 1996-2001, the Northeast Interstate Dairy Compact assisted New England dairy farmers when prices dropped too low, but Congress did not renew the compact, which expired in 2001.

Northeast Interstate Dairy Compact

In the past, as now, the federal milk order pricing system often left northeastern dairy farmers without enough income to cover their expenses. In 1993, to help Connecticut dairy farmers, the General Assembly authorized the Northeast Interstate Dairy Compact, under Public Act 93-320, stating that it would become effective when consented to by Congress and adopted by any two or more of the following states: Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia. The compact was open to states contiguous to named or participating states. The act also repealed a milk pricing regulation statute that was legally unenforceable.

In 1996, Congress authorized the creation of the compact and empowered it to set a minimum price for fluid milk, which could exceed the price set by the relevant order. The compact consisted of the New England states. It did not have jurisdiction over the prices paid for milk sold for other milk products (e.g., butter).

The New England states joined the Northeast Interstate Dairy Compact and formed a commission consisting of representatives of the member states, including five from Connecticut, which governed the compact. In setting the minimum price under the compact, the commission had to consider various factors, including the price needed to provide a reasonable return to dairy farmers and milk distributors. For example, in July 2000, the price under the order for fluid milk was $15.71 per hundredweight (11. 6 gallons); the price set by the compact was $16.94 per hundredweight.

When the federally regulated fluid price in Boston fell below $16.94, fluid processors paid the difference to the commission, which then distributed the proceeds to compact farmers in monthly checks, according to a winter 2001 article by Pennsylvania State University's

Kenneth Bailey entitled, “Congress' Dairy Dilemma,” in the CATO Institute's Regulation magazine. (The CATO Institute is a libertarian oriented nonprofit, public policy research foundation.)

Congress did not extend the compact and it expired September 30, 2001. More information is available in OLR report 2003-R-0765.

Federal Milk Marketing Order Review Commission, 2008

Section 1509 of Public Law 110-246, An Act to Provide for the continuation of Agricultural and Other Programs of the Department of Agriculture through fiscal year 2012, and for other Purposes, became effective Jun 18, 2008. The act establishes a ''Federal Milk Marketing Order Review Commission,” subject to funding availability (which has not been available). Under the law, the commission (when funded) must conduct a comprehensive review and evaluation of:

1. the federal milk marketing order system in effect on the date of establishment of the commission and

2. non-federal milk marketing order systems.

As part of the review and evaluation, the commission must consider legislative and regulatory options for:

1. ensuring that the competitiveness of dairy products with other competing products in the marketplace is preserved and enhanced;

2. enhancing the competitiveness of American dairy producers in world markets;

3. ensuring the competitiveness and transparency in dairy pricing;

4. streamlining and expediting the process by which amendments to federal milk market orders are adopted;

5. simplifying the federal milk marketing order system;

6. evaluating whether the federal milk marketing order system serves the interests of dairy producers, consumers, and dairy processors; and

7. evaluating the nutritional composition of milk, including the potential benefits and costs of adjusting the milk content.

When funding is available, the agriculture secretary must appoint the 14-member commission. For more information, visit the following link to the act: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ246.pdf

JH:ts