After spending the better part of the 1980s trying to avoid price cuts with totally unprecedented programs, including the Milk Diversion Program (MDP), the Dairy Termination Program (DTP), direct assessments on farmers, and the National Dairy Promotion and Research Board, we ultimately ended up cutting the price of milk about 25 percent between 1984 and 1990. The challenge of that day was like getting the cat out of the tree without killing the cat. 

Today, we are looking at a dairy market where the price of milk has dropped like a rock in the span of a couple of months. The most recent USDA estimate is that the average price in 2020 will be about 23 percent below the 2019 average. The challenge today is more like getting the cat out of the well before it drowns. 

Whenever milk prices hit a low and profitability is seriously pinched, or worse, there are basically three choices for public policy: 

1. Income subsidies – give dairy farmers a check written on the U.S. Treasury.
2. Demand enhancement – buy or subsidize the purchase of dairy products that can be used in food assistance programs for needy families, sometimes for international food donations. 
3. Supply management – either pay farmers to voluntarily reduce their marketings of milk or penalize them if they market milk in excess of some base amount. 

All these approaches can work, but they work in very different ways and with very different individual and market effects. USDA recently announced the broad outline of what it is calling the Coronavirus Food Assistance Program (CFAP). At the time of this writing we know that $16 billion will be used for direct income subsidies and $3 billion is allocated to food donations, with healthy sums allocated in each category for dairy. 

Let’s take a look at the general effects of these kinds of programs and think about what CFAP may mean. 

The U.S. really didn’t use income subsidies, or direct payments, for dairy farmers until the Milk Income Loss Contract (MILC) program was initiated in the early 2000s. Following the alarming increase in corn and other feed prices in the mid-2000s, we replaced MILC with the Margin Protection Program for Dairy Producers (MPP). That seemed like a good idea at the time but proved to be entirely inadequate, so it was replaced with a much-enhanced version renamed as the Dairy Margin Coverage (DMC) program. The 11,000 farmers who were fortunate enough to enroll all the milk they could in Tier 1 at the highest coverage level will do very well. At the maximum of 5 million pounds, current price estimates suggest an annual payment of $160,000.   

It has been suggested that CFAP will allocate up to $2.9 billion for milk producers, but there are also rules on the magnitude of the per hundredweight payment and maximum payments to eligible producers. Until the rules are clearly laid out, calculating a precise benefit is not so easy, but a few things are clear. 

1. The amount of money will be substantial; over a year of milk production it will likely be over $1 per cwt, on average.   
2. Because there are eligibility requirements and payment limitations, it is likely smaller-scale farms will have a higher per cwt payment. 
3. Payment will likely be made on the basis of estimates of national average milk prices (not individual farm prices) and a production base (not current production). I would expect them to use producer and production information from the DMC. Remember, for this you don’t need to have taken coverage in 2020, you only need to have established a Production History. 
4. A hopeful scenario is that payments will be received in the second half of May or early June. 

As for demand enhancement programs, voluntary checkoff programs began in the 1920s. The National Dairy Board was created in 1984 to create a federal program to supersede state and voluntary programs and create a common national rate. The emphasis is on increasing the consumer demand for dairy products.  

A number of other programs have existed whereby the federal government buys dairy products for use in food assistance programs or provides consumers a voucher that they can use to buy dairy products in commercial markets. Either way, it is low-income consumers who are targeted for this assistance. 

CFAP includes $3 billion for demand enhancement in total with one-third allocated to dairy products. One-third is also allocated to meat; so this could assist farms looking to cull. Depending on what products USDA chooses to buy and its procurement methods, this program could have the following impacts: 

1. Put milk into dairy plants that have had reduced sales due to closures of foodservice and institutional outlets. Chief among these products are certain cheeses (especially processed), butter, creamers and probably ice cream. In other words, the closure of food service has hit the fat side of the market especially hard.
2.  Create new revenue to support not only the processing of those products but to pay farmers who sell their milk to those processors.
3.   Put food on the tables of low-income families, many of whom are newly unemployed. 

In times of low prices, such as much of the last five years, there are many farmers who advocate for some kind of supply management program. These can exist in the private sector, like when a co-op says it will pay less for milk produced over some base amount – the so-called Base-Excess Pricing system. It can also be a public program, like the 1980s MDP and DTP. In this case, government provides some kind of reward to farmers who voluntarily cut back. Obviously, the purpose of these programs is to create an incentive to balance supply and demand more quickly than happens with just a low price of milk. 

Although there have been calls to create a new supply management program much like the old MDP, which featured partial and temporary cutbacks, there is no plan by USDA or legislation in front of Congress to create such a program. 

Will the new CFAP programs work? Well, yes, although it depends a bit on what you mean by work.