UNIVERSITY PARK, Pa. -- A pending dairy bill designed to provide a safety net for dairy farm families would provide increased support when market prices are low, according to a study by two dairy economists from Penn State's College of Agricultural Sciences. The study also suggests that the bill would provide greater support to small and medium-sized dairy farms.

Kenneth Bailey, associate professor of dairy marketing and policy, and James Dunn, professor of agricultural economics, present these conclusions in "Economic Analysis of the National Dairy Farmers Fairness Act of 2001," a report released this week.

The National Dairy Farmers Fairness Act of 2001 was proposed by U.S. Senators Rick Santorum of Pennsylvania and Herb Kohl of Wisconsin to create a sliding scale of financial assistance for small and medium-sized dairy operations.

"The bill provides for a supplemental payment to dairy farmers when the national average price of Class III milk -- milk used to make cheese -- falls below a certain level," Dunn says. "The program essentially provides some price protection to small and medium-sized dairy producers when milk prices are low."

"The bill has two unique features," Bailey says. "First, the size of the supplemental payment is tied to general market conditions. That means producers in the Northeast and Southeast, where most milk is used for bottling purposes, can benefit as well as producers in the Midwest and West, where more milk is used to make cheese."

"Second, the bulk of the payments are targeted to small and medium-sized dairy operations that have fewer than 150 cows. That's beneficial to many states that have large numbers of small family farms, like Pennsylvania," Bailey explains. "For example, a 'general' payment rate of 50 cents per hundred pounds (cwt.) of milk is made when the annual average Class III price of milk is below $10.50 per hundredweight. The Class III price of milk averaged about $9.74 in 2000.

"An additional payment of 30 cents per hundred pounds of milk is made if a producer did not expand milk production from the previous year. That makes the maximum payment under the dairy fairness bill equal to 80 cents per hundredweight -- a significant price increase. For a farm with 75 cows shipping 1.26 million pounds a year, they could receive $6,290 if they expanded and $10,065 if they did not."

The study shows the bill would provide a lower level of price protection when market prices are stronger, Bailey says. If the annual average Class III price of milk rises to between $12.01 and $12.50 per hundredweight, the general payment rate is 18 cents per hundredweight and the additional payment rate for not expanding is 14 cents per hundredweight.

"Our farm with 75 cows would then receive $2,265 if they expanded and $4,026 if they didn't," he explains.

Farmers receive the payments on the first 2.6 million pounds of milk produced, matching the criteria of the federal Dairy Market Loss Assistance program. While all dairy farmers are eligible to receive the payment, the bulk of the dollars spent under the bill would go to small and medium-sized dairy farms, typically under 150 cows.

Congress will consider the cost of the program as it decides whether to pass the legislation. The study estimates the cost will vary from $570 million in a low-price year to $206 million in a high-price year. Most of the payments will go to regions of the U.S. with a heavy concentration of small and medium-sized family farms and a lot of milk.

Bailey and Dunn observe that the bill would not completely solve the problem of 'too much milk' in low price years. "On the one hand, there is an additional incentive payment for producers to not expand their milk production," Bailey says. "On the other hand, producers have the option of taking the minimum 'general' payment and expanding milk production. However, these payments are only made on the first 2.6 million pounds of milk produced. Thus, the bill tries to limit the potential for expansion of milk production."

The complete study is available on the World Wide Web at http://www.aers.psu.edu/dairyoutlook/.

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EDITORS: For more information, contact Ken Bailey at 814-863-8649 or Jim Dunn at 814-863- 8625.

Contacts: Gary Abdullah gxa2@psu.edu 814-863-2708 814-865-1068 fax