The new US Farm Bill:
Reinforcing agricultural insurance subsidies and counter-cyclical safety nets
Center for Economic Analysis and prospective studies (CEP),
Alexis Grandjean1, Frédéric Courleux2
After two years of delay and intense negotiations, the 2014 Agricultural Act was adopted on 7th February with the signature of President Barack Obama.
One of the Farm Bill’s main objectives is to guarantee farmers with a safety net ensuring them minimum revenue and sufficient margin levels in order to establish America’s agricultural competitiveness in the US and abroad.
Since 2002, the counter-cyclical and particularly the insurance dimension of the Farm Bill has evolved, confirmed by the rise of crop/revenue insurance programs to guard against market volatility and climate hazards. So, the 2014 Agriculture Act currently being implemented is counting on multiple, complex counter-cyclical insurance-programs.
For Alexis Grandjean and Frederic Courleux, this new Farm Bill is therefore aiming at protecting farmers while ensuring the competitiveness of exports of agricultural produce. In this article (extract here3), the two experts present in detail the mechanisms of the dairy sector which are among the key mechanisms of this new law-framework.
The main feature of the new 2014 milk policy within the Farm Bill is to protect margins, and in view of this, abandon pricing practices for milk, cheese and butter which no longer offer a sufficient guarantee against market volatility. This substantial reform aimed at margin insurance, confirms the strategic importance of the dairy sector in the United States, which along with sugar, is the most subsidised agriculture in the United States according to the OECD (OECD 2009).
In Europe, the dairy sector is about to experience a new twist with the disappearance of quotas in the spring; it is unprepared and is moving on headfirst with no real strategy.
Why don’t decision makers in Brussels learn from these US practices adapted to agricultural realities, eventually saving thousands of breeders?
momagri Editorial Board
Milk: guaranteeing breeders’ margins, FMMO and new intervention tools
Since the 1930s, the US dairy sector has been subject to special arrangements in order to reduce price volatility and balance supply and demand4. The 2014 Farm Bill introduces a number of changes by retaining, removing and introducing various tools.
The Federal Milk Marketing Orders (FMMO) remain unchanged. These are regional federal government agencies created at the initiative of producers and are responsible for organizing the negotiation of milk prices. Designed to promote a stable supply of fresh liquid milk, they administer over 70% of US milk production. Similar systems are directly managed by some states, including California. Their complex workings fix a minimum price for producers every month. This minimum price (blend price) is defined in terms of the evolution of prices of processed products in four categories depending on their valuation levels.
To enable manufacturers positioned on the lowest valued products (powder) to pay the blend price, there is equalization between processors. Indeed, each regulated processor is forced to contribute to a mutual fund to the amount of its valuations relative to Federal Order weighted average price. Manufacturers who sell their milk best, pay those who specialize in productions with lower added value, for example, the producers of fresh milk pay part of their results to powder producers5.
In addition, three programs, the DPPSP (Federal State purchases of cheese, butter and milk powder), the MILC (safety net for prices) and the Dairy Export Incentive Program,
have been removed, while two new programs, the Dairy Producer Margin Protection Program (DPMPP or MPP-Dairy) and the Dairy Product Donation Program (PDS) have been created.
The DPMPP insures producers with part of their margin from the state.
Each breeder chooses a percentage of their production to be protected (from 25 to 90% of the reference production) and a margin to be protected of between 4 and 8 USD for 100 pounds (about 8 cents to $16 per kilo). The breeder is compensated when the Federal margin calculated by the USDA passes below the chosen level for two consecutive months. To access the program and its free minimum level of protection, they simply pay a $100 yearly registration fee. Then, depending on the chosen level of protection and the size of the farm (farmers pay more for milk in excess of 2 million kilos annually), the cost of the subscription varies (the “premium” fixed and adjusted by the US Treasury ranges from 0 USD to 1.36 USD for a 4-8 USD margin per 100 pounds, the latter price corresponds to the maximum protection of 8 USD for production over 2 million kilos)6.
A study by the USDA’s economic services7 sought to estimate the undesired effects of a similar insurance (LGM-Dairy) on milk production, particularly the possible increase in production volumes, which would be detrimental to the functioning of the program. The study concludes that the LGM-Dairy should effectively fulfil its role of risk management without causing a significant increase in production. However, other analyses point to a risk of optimizing the protection level by anticipating the price of food and milk powder.
A new program, the Dairy Product Donation Program, aims to enable the federal government to intervene in the dairy market when producers’ margins fall below the threshold of $4 per 100 pounds (approximately 6 euro cents per kilo). If the average margin drops below $4 for two consecutive months, the state can buy processed milk products and distribute them in the form of food aid (food banks and charities) to stimulate demand and unclog markets.
Their free and immediate distribution is imperative, and the organizations in charge of the distribution do not have the right to resell the merchandise. The degree of purchases depends on several factors, including the ability to move the products, and is decided at the time of the crisis by the administration.
Note that in the event of a significant deviation between domestic prices and international prices, the program is suspended so as not to limit competitiveness in exports.
Finally, an incentive mechanism for reducing production in crises, which had been established during the negotiations, was not retained, the United States Congress choosing not to use tools for regulating supply. This dairy market stabilization program8 was aimed at giving incentive to farmers to produce less in exchange for aid. A mild form of incentive to produce less in crises was nonetheless incorporated into the DPMPP described above. Indeed, farmers cannot guarantee the margin related to a possible increase in production, if the increase exceeds the increase in the average US production. In other words, if a farmer produces 10% more, while domestic production only increases by 5%, the latter can only guarantee 5% and not 10% of the margin increase allowed by their surplus of production.
(...) In total, even though decoupled and direct payments are to disappear, the new Farm Bill means that the federal government retains a fundamental role in the regulation of the agricultural sector. Counter-cyclical guarantee schemes on prices or turnover are strengthened as well as subsidized insurance, although cotton farmers lose their counter-cyclical safety net in favour of insurance following a dispute at the WTO. In addition, new policies regarding the dairy market provide a strong public security tool for farmers’ margins in the event of crises, as well as a procurement mechanism on dairy products. In the event of a sharp fall in prices or production, direct payments exceed forecasts and federal government expenditures increase, as observed during major crises. Thus, this reinforcement of insurance which generally covers the least frequent risks is associated to a reinforcement of “amber box” counter-cyclical measures (whose expenditure is limited, unlike those of “green box” decoupled aid which is judged more distorting for markets), the United States aim to keep producing and exporting agriculture, whilst guarding against growing economic and climate risks, even if this means risking going beyond WTO ceilings.
1 Project leader Economics of production and agricultural policies
2 Chief of the Evaluation Office and the Center for Economic Analysis and prospective studies
3 The entire article is available from
4 J.-C. Kroll, A. Trouvé, M. Deruaz, 2010, Output of milk quotas. Volume 2: analysis of the different modes of regulation of dairy markets in the world, INRA, CESAER, UMR 1041, Dijon.
5 OCDE, 2011, Evaluation of Agricultural Policy Reforms in the United States.
6 Pour plus d’information concernant ce dispositif, consultez les analyses du conseiller agricole à Washington (http://fr.ambafrance-us.org/spip.php?article1824).
7 K. Burdine, R. Mosheim, D. Blayney, L. Maynard, 2014, Livestock Gross Margin-Dairy Insurance : An Assessment of Risk Mangement and Potential Supply Impacts, USDA, Washington DC.
8 M.-S. Dedieu, P. Claquin, 2012, US Agricultural Policy: towards the removal of decoupled payments and dynamic milk supply management?, Monitoring report n° 53, Centre for analysis and prospective studies