What do we (think we) know about the new dairy policy? Based on studies listed below, here’s my take-away:

  • Both dairy policy proposals are likely to be effective in providing catastrophic margin insurance. (Newton et al., 2013)
  • If effective, the stabilization program could reduce duration of low-margin episodes. (Newton et al. 2013)
  • Both policy proposals could end up costing substantially more than the CBO scored them. Dairy Freedom Act is likely to cost more than the DSA.  (Brown, 2013)
  • New dairy policy will redistribute program benefits toward states with large farms. The effect is strong for both competing proposals relative to the current policy, but could be more pronounced for the DSA (Woodard and Baker, 2013)
  • Design of both margin insurance and the stabilization program is fragile, and subject to strategic manipulations by participants (adverse selection and moral hazard). (Newton, Thraen and Bozic, 2013)
  • If risk in the dairy sector is substantially reduced, average milk prices will decline. (Nicholson and Stephenson, 2011)

The list is not complete, as I have omitted some older studies that analyzed early versions of policy proposals, and do not seem to add much beyond these five. In reverse chronological order:

1. (June 2013) Newton, J., Thraen, C. and Bozic, M. 2013. Actuarially Fair or Foul? Asymmetric Information Problems in Dairy Margin Insurance 

There is a wide consensus in the academic literature that asymmetric information in the form of adverse selection and moral hazard has resulted in sizable financial outlays for government sponsored crop insurance programs – ultimately becoming a costly means of transferring risk from farmers to the government. In this analysis we combine simulation and structural modeling techniques to forecast dairy income-over-feed-cost margins and show how asymmetric information problems may drive industry consolidation, production growth, and unforeseen program costs for a recently proposed government-sponsored dairy producer margin insurance program. We conclude by presenting second-best solutions in contract design to the insurance problems of moral hazard and adverse selection.

2. (June 2013) Woodard, J. and Baker, D. 2013. 2013 Farm Bill Dairy Title Proposal Redistributes Program Benefits toward States with Larger Farms.

While a new Farm Bill was not realized in 2012, the failed 2012 Farm Bill proposal would have enacted a significant overhaul of the Dairy Title. This short note highlights and compares some important aspects of the current proposals with each other and with current policy, and discusses differences in the context of who the apparent beneficiaries are of the various programs. Several observations are made that suggest that the current front-running proposal, the Dairy Security Act, which passed out the of House Committee on Agriculture in May 2013, appears to redistribute program benefits toward states/regions with larger farms relative to the main compet ing proposal, as well as relative to current policy.

3. (May 2013) Brown, S. and Madison, D. 2013. A Comparison of 2013 Dairy Policy Alternatives on Dairy Markets

This report provides a comparison of the discussion draft released by Chairman Frank Lucas of Oklahoma and Ranking Member Collin Peterson of Minnesota of the House Agriculture Committee entitled the “Federal Agriculture Reform and Risk Management Act of 2013’’ referred to in this report as “DSA” and the April 25th, 2013 release by Congressman Bob Goodlatte of Virginia and Congressman David Scott of Georgia entitled the “Dairy Freedom Act” referred to in this report as “DFA”. This analysis takes a monthly approach using a structural econometric model to determine what the effects of the two dairy policy proposals would have been over the 2009 to 2012 period. … Each of these programs could spend nothing or billions of dollars depending on the exact margin path experienced.

4. (April 2013) Newton, J., Thraen, C., Bozic, M., Stephenson, M., Wolf, C., and B.W. Gould. 2013. Goodlatte-Scott vs. the Dairy Security Act: Shared Potential, Shared Concerns and Open Questions

This paper reports our analysis, to-date, of expected short-term impacts of two major dairy safety net policy proposals popularly referred to as the Dairy Security Act (DSA) and the Goodlatte-Scott Amendment (G-S). Our results suggest that both DSA and G-S are very effective in providing catastrophic risk insurance and revenue enhancement for farms with stable and moderately growing milk marketings. For sufficiently high DSA participation rate, and sufficiently low price-elasticity of demand for milk in aggregate, the Dairy Market Stabilization Program (DMSP) has the potential to reduce government outlays and accelerate margin recovery in low-margin states of the world, relative to outcomes expected under DSA with low participation rates and high price-elasticity. Furthermore, the DMSP is not likely to provide long-term obstacles to growth for participating farms with an aggressive growth plan unless generous margin insurance induces a long-term oversupply of milk. Both programs share contract design features that may result in strategic annual supplemental margin protection sign-up and reduce demand for private risk insurance products – inadvertently increasing policy cost. Under DSA, this problem is somewhat reduced as DMSP provides disincentives for forfeiting supplemental margin insurance in years when anticipated margins are moderately above long run average. 

5. (October 2011) Nicholson, C. and Stephenson, M. 2011. Market Impacts of the Dairy Security Act of 2011 (H.R.3062) and the Dairy Provisions of the Rural Economic Farm and Ranch Sustainability and Hunger Act of 2011 (S.1658)

Two proposed pieces of dairy legislation could reduce variation in U.S. milk prices, reduce  average milk and product prices, have different impacts on government expenditures, and would not markedly affect milk marketed during the period 2012 to 2018. The programs would reduce the value of U.S. dairy exports, but also reduce the value of U.S. dairy imports. There are few differences in outcomes between the legislation, despite different provisions with regard to suspension of supply management programs.

 

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