Senator pushes subsidy boost

WASHINGTON — If the government pays dairy farmers more, will they ultimately make less?

That may be the sticking point Sen. Kirsten E. Gillibrand faces as she pushes legislation this week to double the subsidy farmers are paid when milk prices sink. Mrs. Gillibrand, D-N.Y., highlighted the proposal as one way to address record-low milk prices hurting farmers in Northern New York and around the country.

The subsidy program, called the Milk Income Loss Contract, "is not even helping dairy farmers break even," Mrs. Gillibrand told New York reporters in a conference call.

But the proposal faces a stiff challenge from food companies and milk processors, which predict that higher payments will have the opposite effect to that Mrs. Gillibrand is seeking, by spurring farmers to overproduce. And it could split dairy farmer groups as well, because the MILC program is targeted toward medium and small farms that benefit the most from the payments.

"My perspective is that the proposal to increase the MILC payment might actually result in lower farm milk prices," said Robert D. Yonkers, chief economist with the International Dairy Foods Association, representing companies such as Kraft Foods and Great Lakes Cheese.

Farmers are paid by dairy plants based on minimum prices set by the government, a system in place since the 1930s. California, the biggest dairy state, is not part of that system, however.

The MILC program pays farmers when the market price for milk used in beverages falls below $16.94 per 100 pounds. The payment rate is 45 percent of the difference between the actual market price and the target; Mrs. Gillibrand proposed to increase the rate to 90 percent, and to pay farmers that rate retroactively to March, when prices bottomed out.

The increase will cost the government about $200 million, she said, although the Congressional Budget Office has yet to make a firm estimate. The cost depends on the price of milk in the future, because once prices recover — as economists say is likely next year — government payments will stop.

She also said she will introduce legislation to index the target price to inflation, adding that the target has remained the same since the late 1990s despite increases in farmers' cost of production. She said it is "absurd" that farmers are paid about the same amount for milk as 30 years ago, even as retail prices have climbed and farmers' costs have increased.

Farmers in New York spent $25.71 per 100 pounds to produce milk in April, including overhead costs such as labor and taxes, the U.S. Department of Agriculture reported. Operating costs alone were $14.60, including feed and supplies.

Dairy farmer groups may not be united on Mrs. Gillibrand's proposal. The National Milk Producers Federation, representing farmer-owned bargaining cooperatives, has not taken a position, said a spokesman, Christopher Galen. The NMPF has been focusing on other ways to boost prices, such as selling more dairy products to other countries.

"That's obviously something that will help some producers, but not all," Mr. Galen said of the MILC proposal.

The program already targets smaller farms by limiting payments to 2.9 million pounds of milk a year, or about what a farm with 140 cows would produce. The limits have sparked objections from farmers in states such as California and New Mexico, where farms with more than 1,000 cows are typical.

The program survived in the last five-year farm bill and was expanded slightly. But dairy industry lobbyists said they were lucky to preserve it at all, given regional divisions and pressure to hold down government spending.

Mrs. Gillibrand said she will take on other, more fundamental questions about the government's role in the milk business as well, from her seat on the Senate Agriculture Committee. The panel will hold public hearings on milk pricing, including one in Batavia in August, she said.

She said the government should find a new method for setting minimum milk prices by the time Congress considers the next farm bill, in 2012. The current farm bill requires a study of milk pricing, which could provide momentum, although major changes have long eluded Congress.

When Congress tackles the issue, two of the major questions it will face are how to keep the Northeast dairy industry healthy and whether to bring California into the system — and how doing so might affect regions such as the north country. Regional fights, as well as conflict between farmers and processors, have made big changes politically difficult.

This time may be different, Mrs. Gillibrand said, if policymakers see milk pricing as a food security issue. If farmers go out of business and the industry becomes more consolidated, she said, some parts of the country may no longer be able to count on a wholesome supply of dairy products.

"We do have a national security concern that we did not have then," Mrs. Gillibrand said.