Could a 'Made in America' version of supply management benefit U.S. dairy farmers?

U.S. Agriculture Secretary Sonny Perdue is a man of the people. There was no better evidence of that than this week when he sat with dairy farmers at the World Dairy Expo to listen to their concerns.

Quite simply, U.S. dairy farmers are in a tough spot. After five years of depressed milk prices, producers are leaving the industry at an alarming rate — Wisconsin has been losing about 30 farms per month. But from where he sat, Perdue confessed that he didn’t really have any answers. “In America, the big get bigger and the small go out.” He seemed resigned to the fate of smaller dairy farming families.

In these desperate times, more farmers are now calling for desperate measures. With production already exceeding market demand for their milk some farmers are asking if it’s time to start limiting supply. At one point during the town hall meeting, Perdue was asked if he would consider throwing his support behind a supply management program that would do just that. He replied with a polite and terse “no.”

Could supply management work in the U.S.? It’s certainly a question more farmers are asking, says University of Wisconsin-Madison Director of Dairy Policy Analyst Mark Stephenson.

Farmers are exiting at a very high rate and they’re asking could they have had a different outcome, says Stephenson. “Is there something we could have done that could have slowed the rate of exit, given us more controlled growth and better profitability on farms?”

To better understand the potential impacts of supply management, the Wisconsin Farmers Union recently asked Stephenson and Cornell University professor Chuck Nicholson to evaluate the potential impact of a supply managed system for milk in the U.S. based on 2014 to 2020 market conditions.

The experts looked at three different models, but Stephenson emphasizes that neither option comes close to the rigid controls exercised in Canada’s supply management model. The key focus was how best to signal and manage growth. When milk prices are high it should signal a growth opportunity and more milk production, “but when 37,000 producers all make that decision at the same point we can overshoot the market needs and that’s what happened,” says Stephenson. What he and Nicholson sought to achieve with their models was “more thoughtful growth.”

(Listen to Bernard Tobin and Mark Stephenson discuss how supply management could work in the U.S. Story continues after the interview.)

A key feature of the models was allowable production growth levels. Producers would be allocated an allowable amount of growth without a monetary penalty for the period of one year. Two of the models carried market access fees ranging from $0.015 to $3 per hundredweight of milk marketed. If producers did not exceed the allowable growth for their farm, they could apply for the return of those fees, Stephenson explains. They would also receive a portion of the pooled value of fees collected from producers who exceeded their allocated growth.

Stephenson says the approach was designed to enhance overall milk price for all farmers by discouraging over-production. It also gave producers the freedom to grow, but they would have to pay the penalty. “What that does is make producers thoughtful about where do I want to grow and by how much,” he adds.

In the final analysis, the researchers found that the positives of managing supply in this manner outweighed the negatives. While the price consumers pay for milk did increase, producers saw reduced price variation, enhanced prices, increased net farm operating income, a lower cost for government programs and fewer farm exists.

While a Canadian-style supply management system was never contemplated by the researchers, Stephenson does feel there are some measures that the U.S. industry could adopt to assist farmers. The challenge, however, is finding the political will and industry support required to drive change.

Another hurdle is the confusing nature of dairy programs. “Our milk pricing systems and a variety of other things just seem complicated to people and that includes Washington,” says Stephenson. But if the industry could come together as one voice and tell Washington that that they want supply management, “I think we could get it in a heartbeat.”

The real question is whether the industry could speak with one voice. “My guess is we can’t,” says Stephenson.

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