Detailed Information on the
Dairy Price Support Program Assessment

Add price variability data for an annual outcome performance measure.

Establish policy within parameters of new Farm Bill legislation to improve delivery of the program.

Identify program improvements or program alternatives that could be less market distorting and more directly serve as a safety net program for all dairy producers.

Begin a biannual management review of the rate of price support between the purchase prices for nonfat dry milk and butter to assess whether expenditures are minimized. The review should consider the costs of donating or selling dairy products in CCC inventory in achieving objectives other than minimizing costs. The biannual reviews will be conducted on the schedule of the President's budget and budget updates.

Measure: Maintain per capita milk production.

Explanation:By providing a dairy price floor, this program encourages investment in production capacity above market clearing levels. This encourages milk production to be mantained and keeps production higher that it would otherwise be. This outcome is directly related to the goal of an adequate milk supply and production capacity to meet future needs. This measure targets maintaining per capita milk production at the baseline average from 2002 - 2004 of 585 pounds of milk per person.

Measure: Mimimum price support is at or above the average operating or variable cost of national milk production, measured in dollars per hundredweight.

Explanation:For this program to be successful, it should maintain market prices near average operating costs. This will ensure that efficient producers are able to stay in business until prices recover; however, less efficient productions will not have this protection.

Measure: Decrease program purchases when the manufacturing milk price is above $9.90.

Explanation:This is a Dairy Price Support Program specific measure that measures the efficiency of the program as an index. Baseline: average expenditures for 2002-2004 were $497 million and will be assigned the index value 1. Program efficiency increases as the index approaches 0. NOTE: The actual calculated index measure of .06 for FY 2005 is well below the FY2005 target of .6 and the FY2004 actual of .66 because purchases fell dramatically in FY 05 from FY 2004. The measure is indexed to 1 over the base period 2002-2004 when purchases averaged $497 million. Purchses in FY 2005 were $30.4 million. Thus, 30.4/497 = .061.

Is the program purpose clear?

Explanation: The Agricultural Adjustment Act of 1933, as amended by the Agricultural Act of 1949 and subsequent bills, authorized the first surplus purchases of dairy products. The stated purpose of the program was to ensure an adequate supply of milk and a level of farm income to maintain productive capacity sufficient to meet future needs.The current program, hereafter referred to as Milk Price Support Program (MPSP), was reauthorized iin the Farm Security and Rural Investment Act of 2002 (the Act), which extended the program through 2007. The purpose of the program is to support the price of milk in order to ensure an adequate supply of milk and a level of farm income to maintain productive capacity sufficient to meet future needs.

Evidence: The Agricultural Act of 1949; The Farm Security and Rural Investment Act of 2002, Subtitle E-Dairy, Section 1501;

Does the program address a specific and existing problem, interest, or need?

Explanation: The dairy sector, like other perishable agricultural product sectors, could achieve market equilibrium and still maintain national production capacity without a government surplus purchas program. Growth and consolidation in both the production and processing sides of the dairy industry have increased the sophistication of the industry to manage price risk, and stocks due to seasonal fluctuations. Large producers and processors are codependent upon maintaining a consistent supply of milk to meet growing demand in non-fluid products. The program's current price level has been less effective at reducing price fluctuations and maintaining a price floor compared to when the program was at higher support levels. Effectively, producers have learned to live with more price variation and the market has seen some commercial trading below support levels, even while U.S. production has maintained long term growth.

Evidence: Dairy Policy in the Next Farm Bill: An Early Assessment Ed Jesse March 2005 University of Wisconsin. United States Department of Agriculture??2007 Farm Bill Theme Papers Risk Management May 2006 Dairy Policy and Price Volatility Charles Nicholson and Tomas Fiddaman, Cornell University U.S. Dairy Programs and World Trade Policy Issues, Hal Harris, Clemson University

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: The MPSP is one of several Federal programs that address the issue of dairy production, safety net for dairy producers, and otherwise impact commercial dairy product markets. While the MPSP has unique features, its purpose of supporting dairy production is shared with that of the Federal Milk Marketing Order System, the MILC dairy income payment program, and the Dairy Export Incentive (DEIP) program.

Evidence: Source: "Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing," USDA ERS, July, 2004, at page 60.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: To ensure adequate domestic dairy production, the program is structured to support the price of milk at an average of $9.90/cwt. When milk prices fall near the support rate, USDA purchases dairy products from the market in the form of butter, cheese or nonfat dry milk (NDM). The Secretary of Agriculture can balance the purchases by adjusting the prices between butter and NDM in a manner that will result in the lowest level of expenditures by the CCC or achieve such other objectives as the Secretary considers appropriate. The relative purchase prices of NDM and butter can create market distortions such as: increased production and reduced price for butter, and decreased use of nonfat solids in products other than NDM, and the retail price of fluid milk. The program can and has resulted in the accumulation and storage of large quantities of government owned dairy product. NDM inventories reached 1 billion pounds in April 2002. NDM purchase price reductions May 31, 2001 and November 15, 2002 helped to slow the growth in inventory and eventually led to inventory declines. However, the net realized losses to CCC for the inventory reduction during FY 2003-06 exceeded $2.2 billion.

Evidence: USDA ERS Report to Congress July 2004 "Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing." The FSA chart Number of cows, U.S. Class III, and support prices, monthly, Jan. 1981-Dec. 2005 shows that after November 2002, the Secretary, per authority granted in The Farm Security and Rural Investment Act, Subtitle E-Dairy, Section 1501, made no further adjustments to the purchase prices between butter and nonfat dry. CCC Commodity Estimates Book.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The milk price support program sets a floor for milk prices, and therefore, establishes a safety net for dairy farm income. To accomplish this, the CCC was given authority by the USDA, in the Farm Security and Rural Investment Act of 2002, to purchase a combination of butter, cheese, and nonfat dry milk (NDM) effectively supporting the average price paid for milk at $9.90/cwt. The price paid for raw milk is not supported directly because raw milk is not a storable commodity. USDA's standing offer to purchase and store dairy products effectively targets the resources to regions that have surplus milk. Purchases from any geographical area will reduce product available for markets and raise product prices nationally. Consistent price relationships between regions ensure transmission of price signals nationally.

Evidence: The Farm Security and Rural Investment Act of 2002, Subtitle E-Dairy, Section 1501.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The program has two long term outcome measures. The first measure is per capita dairy production. This measure directly relates to the program goal of ensuring an adequate supply of milk to meet current and future needs. The second measure evaluates whether the price support level covers minimal average variable costs of production, thereby ensuring continued adequate industry investment and capacity.

Evidence: FSA Draft FY 2005-FY 2010 Strategic Plan. ERS and NASS reports.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Targets have been set, but are not challenging due to the dynamic nature of the dairy industry and limitations in the program's underlying statutory authority. Structual changes due to technology, increased productivity, and economies of scale are largely responsible for increasing industry output per capita. The dairy price support program contributes to accelerating the structural changes, but industry per capita production levels would be maintained without the program's intervention. The impact of the program on supporting the price of milk at or above the target variable cost of production is constrained by the price support level set in law.

Evidence: USDA ERS Report to Congress July 2004, "Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing." ; and Public Law 107-171 - May 13, 2002, "The Farm Security and Rural Investment Act of 2002" Subtitle E - Dairy; Section 1501 Milk Price Support Program.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The program has one annual outcome measure. The first measure is annual per capita dairy production. This measure demonstrates progress towards the long term goal of ensuring adequate domestic milk production. An additional measure is necessary to demonstrate progress in achieving the program's long-term goals.

Evidence: USDA Draft Strategic Plan Framework; Monthly Class 3 and support prices, January 1985 - December 2005; Dairy Policy and Price Volatility; Charels F. Nicholson and Thomas Fiddaman, Cornell University and Ventana Systems, Inc.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: A baseline and targets have not been developed for measures under development.

Evidence: USDA NASS report, Milk Production, Disposition and Income, published annually in April, 2002-2005; and USDA Agricultural Baseline Projections to 2014: http://usda.mannlib.cornell.edu/data-sets/baseline/

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: FSA partners with the Agricultural Marketing Service (AMS) to provide adequate supplies of milk, and with the Food and Nutrition Service (FNS) to provide surplus dairy products to food aid programs for school lunch and the needy. The Federal Milk Marketing Orders provide the regional price differentials that ensure fluid milk distribution in each region, while FSA supports national prices through the MPSP. Additionally, the Program works with associations, such as the National Milk Producers Federation (NMPF) http://www.nmpf.org. NMPF represents about 75% percent of the dairy farmers in the US. In June of 2003, NMPF established a program called Cooperatives Working Together (CWT). This private initiative was designed to help balance supply with demand in the dairy marketplace and improve the prices that farmers receive for their milk.

Evidence: The Federal Milk Marketing Orders (http://www.ams.usda.gov/dairy/orders.htm ) http://www.fns.usda.gov/fdd/policy/stateproc-policies.htm; http://www.nmpf.org.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Studies are carried out on a regular but unscheduled basis. USDA is currently evaluating responses to field hearings on Farm Bill programs, including the Dairy Price Support Program. The Office of the Chief Economist recently analyzed risk facing agricultural producers and evaluated current programs and other options that may be considered to better manage risk. In 2004, a Congressionally-mandated study was done by ERS entitled, "Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing." This study indicated that the MPSP has marginal price enhancing effects during low price years and can have price moderating effects during high price years. Over the years, studies mandated by Congress have been carried out and academics have also studied the impact of the program and its operations. In addition, surveys of dairy product manufacturers and suppliers are conducted by USDA/Rural Development, as needed, to ensure that the appropriate internal controls and required program parameters are met.

Evidence: United States Department of Agriculture??2007 Farm Bill Theme Papers Risk Management May 2006 Kwansoo Kim and Jean-Paul Chavas, A Dynamic Analysis of the Effects of a Price Support Program on Price Dynamics and Price Volatility, Journal of Agricultural and Resource Economics 27(2): 495-514, 2002. Rural Business-Cooperative Service, Marketing Operations of Dairy Cooperatives, 2002, RBS Research Report 201, February 2004.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The FY 2007 budget submission is directly linked to the FSA Draft Strategic Plan Framework, and the USDA and FSA Draft FY 2005-2010 Strategic Plans. FSA is leading the USDA pilot for developing an activity-based cost management system to bring greater refinement and accountability in reporting on program efficiency. (A Yes answer would also require that the program report all direct and indirect costs needed to attain the performance results, including applicable agency overhead, retirement, and other costs that might be budgeted elsewhere. )

Evidence: FSA Strategic Plan Framework; FSA Draft FY 2005-2010 Strategic Plan; FY 2007 President's Budget; and MPSP measures are also included in the Management Information Tracking System (MITS).

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: USDA is conducting a strategic review of all Farm Bill programs through field hearings and analytical briefing papers. This strategic review will consider all USDA dairy programs in the context of their integrated performance at achieving USDA strategic goals. FSA has developed a comprehensive, outcome-based Strategic Plan Framework and the FSA Draft FY 2005-2010 Strategic Plan.

Evidence: FSA Draft Strategic Plan Framework; FSA Draft FY 2005-2010 Strategic Plan; FY 2007 Presidents Budget; Management Information Tracking System (MITS).

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: Program implementation data are collected on every dairy commodity transaction to ensure that the required standards of quality, weight, and packaging are met. In addition, surveys of dairy product manufacturers and suppliers are conducted by USDA/Rural Development, as needed. Program managers use survey information to minimize market price distortions that might result from program purchases triggered by declining prices. The information also helps program managers set purchase prices that more accurately reflect market realities, and maintain the $9.90/cwt safety net floor. AMS Dairy Programs Division issues dairy product commodity grade certificates, which ensure the quality of the NDM, butter and cheese which may be purchased under the MPSP. Rural Cooperative Business Service conducted surveys of dairy industry suppliers and product manufacturers in 2004, which are used to compare selling costs to CCC versus commercial sales costs, and for formulation prices under the MPSP.

Evidence: Rural Business-Cooperative Service, Marketing Operations of Dairy Cooperatives, 2002, RBS Research Report 201, February 2004. This study presents information on cooperatives dairy product marketing activities. See data in MITS.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: Agency managers are held responsible for performance and cost efficiency of operating the price support program through individual performance plans. Managers are responsible for accomplishing the broad objectives of the FSA, USDA, and the Administration. Dairy forecasts are conducted monthly by the Interagency Commodity Estimates Committee of the World Agricultural Outlook Board, throughout the fiscal year. FSA has linked performance measures from the FSA Strategic Plan to the individual performance plans of all employees starting in FY 2005. Managers performance reviews are evaluated at least annually for responsiveness to the objectives and requirements of the Agency.

Evidence: USDA Senior Executive Sevice Performance Agreement

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: The Milk Price Support Program is a non-apportioned program; therefore, no un-obligated funds are remaining at the end of the FY. The obligation occurs simultaneously with the disbursement. The program was determined low risk, under a risk assessment of erroneous payments conducted in 2005, as required by the Improper Payments Information Act (IPIA). Program expenditures and net realized losses are reported annually in the Commodity Credit Corporation's Commodity Estimates books.

Evidence: USDA OIG audit No. 03601-10-Ch; Improper Payments Information Act of 2002; and FY 2005 Milk Price Support Program Risk Assessment.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: USDA's internal procedures have incorporated automation and IT improvements to faciliate efficient government dairy product purchases. Approximately $24.6 million in Milk Price Support Payments were made in FY 2005, and nearly 100% were made by electronic funds transfer (EFT) rather than check. However, the cost of holding and disposing of government owned dairy product inventory via donation and sales does not mimimize costs. Net realized losses for reducing government owned nonfat dry milk stocks during fiscal years 2003 - 2006 exceeded $2.2 billion. Program execution could be done at a lower cost if USDA excercised the authority to allocate the rate of price support between nonfat dry milk and butter more efficiently to achieve lowest government cost.

Evidence: FSA Inventory Cycle Memo to KPMG, January 12, 2005. P.L. 107-171 Subtitle E. Sec. 1501(d)(1); CCC Commodity Estimates book.

Does the program collaborate and coordinate effectively with related programs?

Explanation: USDA purchases of nonfat dry milk and other dairy products acquired under the Milk Price Support Program are donated through USDA nutrition programs, including: the Commodity Supplemental Food Program, Food Distribution on Indian Reservations, and National School Lunch Program. A pilot program was established in April 2003, with the Food and Nutrition Service (FNS), to allow CCC-owned NDM to fortify shelf stable milk drinks for use in the National School Lunch Program. The program allowed FNS to monitor the popularity of the product in its programs, and allowed FSA to reduce storage costs. In addition, nonfat dry milk acquired under Milk Price support is donated through the National Nonprofit Humanitarian Initiative (NNHI), and internationally through the P.L. 480 and 416(b) programs.

Evidence: http://www.fns.usda.gov/fdd/policymemo/pmfd001_SP-NFDM.pdf; and http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2005/10/0452.xml

Does the program use strong financial management practices?

Explanation: The Independent Auditors' Report of the consolidated financial statements of the Commodity Credit Corporation (CCC) as of September 30, 2005 and 2004, reported conditions needing improvement in information security controls: financial system functionality, budget executions process, financial accounting and reporting policies and procedures. These reportable conditions were considered material weaknesses.

Evidence: USDA OIG Audit No. 06401-20-FM.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: The Secretary of Agriculture can change the butter and nonfat dry milk (NDM) purchases price biannually to reduce CCC expenses or to attain other objectives the Secretary deems appropriate. The Secretary made two purchase price adjustments, one in May, 2001 and another in November, 2002, to minimize costs. No further adjustments have been made. In the FY 2006 and FY 2007 Budgets, the Secretary proposed legislation to require automatic purchase price adjustments to minimize costs. There is no evidence of a process to evaluate program efficiency through price changes, or management actions taken consistent with and in support of the legislative proposals.

Evidence: Notices may be found at: http://www.usda.gov/wps/portal/usdahome Budget of the U.S. Government Fiscal Year 2006 and 2007.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: The program has new measures, for which data is not yet available.

Evidence: See Measures tab.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The measures are new and there is no data for assessing successful performance.

Evidence: See Measures tab.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The program's efficiency measure is to decrease program purchases when the manufacturing milk price is above $9.90. Changes made to relative purchase prices for NDM and butter in 2001 and 2002 have allowed the program to become more efficient, however no changes were made in subsequent years. No evidence is presented of an on-going process to evaluate purchase price efficiencies (tilts); or to compare the cost efficiencies of inventory decisions after products are purchased. Purchase prices appear to be set at levels that maintain average reported Class III and Class IV well above $9.90.

Evidence:

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: MPSP is unlike any other Federal commodity price support program and, therefore, it is difficult to compare to other price, income support, and risk management programs. Dairy products must be processed in order to be stored. Government purchases under this program are made instead of private sector inventory stock management. The comparison to other USDA farm support and risk management programs should be done to evaluate how government stock holding compares to more direct income, price, or risk management tools.

Evidence: Analysis comparing MPSP to other types of agriculture support and risk managment programs should be pursued.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Academic and ERS studies have shown that the four current dairy programs have supported the milk price and increased production levels. The ERS Congressionally mandated study found that U.S. dairy programs have had a long-term minimal impact on milk prices, milk production, and cow numbers, contributing to about a 1.5 percent increase in the all milk price, over a 5-6 year period. The results showed shortrun effects are greater as the industry adjusts production to price and income changes, but that other factors such as technology and changin consumer food preferences have more influence on long-term industry trends. Another USDA study estimated that if the MPSP were eliminated, a short run (1-2 years) decrease in farm milk price of 5 - 7 %, with long term adjustments of a 1% reduction that could be offset by higher commercial exports of nonfat dry milk.

Evidence: Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing. USDA Report to Congress July 2004. Effects of U.S. Dairy Policies on Markets for Milkl and Dairy Products, USDA ERS Number 1920 May 2004.