NMFP disputes Cornell study on milk supply management
By CAROL RYAN DUMAS
National Milk Producers Federation does not agree with a recent university analysis that finds deep disagreement among producer groups regarding milk supply management.
It also disputes the study's argument that a proposal for producer revenue insurance containing a supply management program would cost the government more than a revenue insurance program without supply management.
The study, by Cornell University professor Joshua Woodard, discusses some of the economic tradeoffs for dairy producing regions of the U.S. under the Dairy Security Act (DSA) and under the competing Goodlatte-Scott amendment.
Both bills offer protection for dairymen through federally subsidized insurance for the margin between feed costs, based on a national index, and the all-milk price. DSA also includes milk supply management for anyone participating in the margin insurance.
Analyzing the economic tradeoffs of the two proposals, the study catalogs the publicly stated positions of various producer groups based on their support of the measures.
The authors also present results that government loss ratios -- expected indemnity payments divided by insurance premiums -- are higher under DSA at virtually all coverage levels, particularly at the $6.50 per hundredweight of milk trigger and below, Woodard told Capital Press.
National Milk denies both analyses.
The study was too simplistic and not comprehensive, said Jim Tillison, National Milk's senior vice president of economic and market research.
The study states that virtually all dairy groups support the margin insurance programs in both proposals, but observes the differences among producer groups when it comes to milk supply management.
"The DMSP (Dairy Market Stabilization Program) appears to be supported by cooperatives and opposed by other processing and retailing groups. However, stated support among prominent producer interest groups (non-cooperative producer groups) remains split," Woodard, assistant professor of Agribusiness and Finance at the university, and graduate student Dustin Baker stated.
"The stated public position of various groups points to the reality that there is deep disagreement among producer groups regarding supply management," Woodard said.
A cursory look indicates that producer groups that tend to support supply management tend to have higher feed costs, import a larger portion of feed, have a higher concentration of large farms, and may/or may not be currently seeking to significantly expand production, the authors stated.
Meanwhile states/regions with a higher proportion of small farms and/or grow much of their own feed tend to reject the idea of supply management, although there are some exceptions, according to the study.
Tillison contends more producer groups than not in several of the areas the authors describe as being opposed to supply management are actually in favor of the market stabilization program.
National Milk's member co-ops, which support DSA, represent 32,000 dairy producers who produce 65 percent of the U.S. milk supply.
"We believe DSA has the majority of producer support," he said.
National Milk also disputes the study's findings that government loss ratios are higher with DSA as compared with Goodlatte-Scott, citing analysis by Scott Brown, ag economist with University of Missouri.
That analysis found that were the two proposals in place from 2009 to 2012, DSA would have cost the government $2.6 billion, whereas Goodlatte-Scott would have cost $3.6 billion.
The main reason loss ratios are greater for DSA in Cornell's analysis is that insurance premiums are typically lower than those in Goodlatte-Scott. Premiums paid by producers to the government offset the cost of the program to the government, Woodard said.
In addition, DSA allows for coverage up to 90 percent of production, whereas Goodlatte-Scott only allows coverage up to 80 percent. That would also contribute marginally to DSA having higher expected cost per unit of participation, he said.
The study points out an expected loss ratio of 20.56 percent for DSA compared with 6.71 percent for Goodlatte-Scott at the $4.50 per hundredweight of milk coverage level. The study also reports results for all other buy-up coverages.
Tillison argues the calculations stated in the study's modeling are not comprehensive, and the authors "picked a spot" in coverage options to make a statement on loss ratio.
"The key is what's the sweet spot," he said.
The sweet spot for DSA is coverage at $6.50 per hundredweight, and that coverage results in a whole different set of circumstances, he said.
He said the gap of loss ratios between the two proposals narrows significantly and quickly as buy-up coverage levels increase, but even at the $6.50 coverage level, the study found DSA has a slightly higher expected loss ratio.
Tillison argues the study did not factor in no-cost premium portions of DSA, its higher milk production coverage and the impact of market stabilization on producer milk prices.
Woodard, however, said the study did include those factors and calibrated its analysis with relevant futures and options market data -- rather than historical price analyses as used in Brown's study.