The DPSP is a proposal to create a national program that fundamentally changes the inherent incentives in the U.S. dairy industry that promote constant production growth, regardless of the markets ability to absorb that growth.
The DPSP was formed by the Holstein Association USA, Inc. board of directors when they saw that no action was being taken during the milk price crisis in early 2009. People and organizations from around the country have provided suggestions to improve the original plan and endorse the concept of the Dairy Price Stabilization Program.
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Dairymen are no different from any other businessmen they respond to incentives. What incentives currently exist in the highly-regulated dairy industry? Today, the only incentive is to make more milk. Every morning, dairymen across the country wake up wondering how they can get more milk into their bulk tank.
Our current milk pricing system has created this mindset on the part of individual dairymen. However, in reality, such thinking should not make economic sense to dairy farmers across the country if they want to stabilize milk prices and ultimately increase their profits. Dairy farmers need to realign the incentives in our industry and the DPSP will do this. The proposal creates a real, tangible, financial incentive for dairy producers to watch and manage the amount of milk that goes into their tanks.
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It is a mandatory national program. This means every dairy in the U.S. operates under the same rules. The decision about whether to grow or not would continue to rest solely on the individual dairyman, as it does now. There is nothing in the DPSP that prevents growth by a producer.
The DPSP gives producers financial signals to react to supply and demand. In normal times, dairy product disappearance increases 1.5 to 3 percent annually. Supply can obviously grow at a similar rate if dairy producers have the opportunity to make a profit considering current expenses and revenue. We want to give producers an opportunity to make a profit by growing smart and not just growing fast.
Under the DPSP, a dairy farmer who produces under their cap of "allowable milk marketings" (that producer's production cap the previous year, plus the allowable growth) will not be affected negatively by this program. Dairy producers who want to grow beyond that annual growth level will pay a "market access fee" on their excess milk for one year, or until their milk marketings no longer exceed their newly established "allowed milk marketings" cap. In contrast, those who stay within their milk marketings, for any quarter period, will receive dividends, which are redistributed market access fees from dairy producers who chose to produce in excess of their "allowable milk marketings".
The program operates on a producer-by-producer basis and milk production is measured on a quarterly basis. Each quarter's production is compared to that same quarter in the prior year. Once it is determined that a dairy has expanded beyond the allowable growth, that dairy will have the market access fee deducted from their milk check beginning in the following quarter and continuing for the duration of a year. That producer's higher level of production then becomes the new benchmark on which the next year's production will be compared.
So for a dairy that chooses to expand, that dairy would need to budget for the market access fee during the first year of the expansion, at which point that new production is part of the dairy's benchmark production level. The program allows dairies to increase their production if they choose to, but essentially it requires they pay their fellow dairymen who are holding their production in check, which in turn allows the market to absorb the increased production. The program is not aimed at stunting growth, since in normal times we need some level of growth to allow the industry to keep up with population growth. What the industry needs is smarter growth.
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It is a national mandatory program, so all milk producers participate. However, the program does allow for milk producers' growth. Those electing to increase production have to buy their market share by paying a market access fee. The fee compensates their fellow dairy farmers who are holding their production in line so the market can absorb the excess new production.
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We expect the program will cost dairy producers less than $0.02 per hundredweight to administer. It is anticipated the program will improve the profitability of the nation's dairy farms. For the typical U.S. taxpayer, it won't cost a penny.
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Our program provides a provision to help new producers by giving them the opportunity to defer one-half of their market access fee payment to their second year, allowing them to obtain a bit of equity before being assessed the fee. In the Dairy Price Stabilization Program, producers also have the option to transfer milk marketings to other producers, without having to pay market access fees into the "system". New producers have always had challenges entering our industry and dairy farming is very capital-intensive. A new dairy with even a small number of dairy cows requires a large financial investment. Since the first day we began promoting our program, our goal has been to make the dairy industry better than it currently stands. A supply management program with the principles of the Dairy Price Stabilization Program can help dairy producers that are in existence today, and those that wish to join in the future.
Our current system has market access fees, but they are represented in the milk price swings of $10, or greater, in just a few months. Modeling has shown that those price swings are likely to grow larger as each new cycle beings. With the DPSP, bankers and other businesses that extend credit to dairies, will have a better idea of when a new producer will be profitable.
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Yes, for the most part. The intent of the DPSP is to minimize the cyclical volatility that our industry has. While this cyclical volatility has been with the industry for many years, it has continued to worsen, with longer and deeper financial wrecks (i.e., 2009 is worse than 2006, which was worse than 2003, etc.). Cornell University's economic model shows that by implementing the DPSP, we can minimize this cyclical volatility.
If you recall, in 2007 the Cornell model predicted that without any policy changes, we were destined for a wreck in the dairy industry in 2009, before we ever experienced the dramatic rise in exports followed by the rapid collapse. The cyclical volatility alone was going to make 2009 a devastating year for the industry.
What we are experiencing in 2009 is a double-whammy. Not only was the industry destined to be on the losing end of the cyclical volatility this year, but at the same time we are dealing with a collapse of the global economy, drying up a chunk of the export market we have relied on in the past couple years, and rapidly driving our milk price to government support levels. While the DPSP could not have forecasted or prevented the sudden loss in demand, Cornell University's modeling has demonstrated that it could still be utilized to greatly shorten the amount of time we experience these low prices, and give us the hope of a stable market once we emerge from this wreck.
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The DPSP offers a uniquely American solution to this age old problem. Canada and Europe took a very different route when faced with supply-driven problems; they adopted rigid quota programs to get their domestic supply and demand in balance. That has never been an acceptable option to the vast majority of American dairy farmers.
Instead, the DPSP creates a modest incentive program which allows for growth and freedom of choice for dairy farmers without the establishment of quota, which becomes capitalized. Cornell University's Program on Dairy Markets and Policy has demonstrated that this type of program offers great promise for a stable and profitable future.
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We are going through herd reductions right now. Across the country, dairies are culling their herds at a higher rate than they were a year ago. This needs to happen in order for our supply to get back into balance with demand.
The intent of the DPSP is to keep supply and demand in better balance so we can avoid these massive wrecks, but in the event of a dramatic demand collapse, it is another aspect of the DPSP that could potentially be used.
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We need to get milk prices to a profit level. If the profit level attracts imports, so be it; we cannot survive without profits. If we were trying to set milk prices at $18 to $20, the import questions would be relevant. But with an average price in the $16-$17 range, it will not cause an increase in imports. We have good import protection on cheese and butter; in fact, we never fill the allowable quota amount even when U.S. prices are high, and above quota tariffs are high. When the world economy turns around – hopefully starting by the second half of 2010 – the growth in world demand may return to an annual growth rate of 2% plus, and world dairy product prices will increase opening up opportunities for U.S. exports. New Zealand cannot meet this growth opportunity themselves. If we want to stop imports then we also need to forget about exports because of the retaliation by others.
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First, if there were a way to get every dairy involved in the DPSP without Congressional action, we would be proposing that. But, that is simply not possible.
As for the political process, like it or not, Congress is always intricately involved in the development of U.S. dairy policy. On the other hand, producers have generally been able to have significant influence over how that policy is carried out. The DPSP is no different. For the DPSP to be implemented, there will need to be support for the plan among American dairy farmers.
USDA already carries out nearly all farm programs in the United States. Specific to the DPSP, we need to give clear guidelines to USDA in the authorizing legislation to guide their implementation. Those guidelines will be determined in the legislative process which producers will have a strong voice in.
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We recognize that after the dairy industry has had some good years of stabilization, a complete reorganization of all aspects of the milk marketing chain in the U.S. needs to be made. The system we currently have is broken and the DPSP is the only option that can provide price stabilization for the near and long term.
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The Holstein Association USA's Dairy Price Stabilization Program is being written into legislation. Keep checking this website and we will keep you informed as bills are being introduced. At that point, please contact your elected officials in Washington to urge their support of the Dairy Price Stabilization Program.
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