Washington Insider -- Wednesday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Funding for Climate Change Studies Dropped from Defense Authorization Bill

The House has decided that it does not want the Department of Defense to conduct or participate in any research on climate change, making that point clear last week in an amendment to the Defense authorization bill. The amendment was approved 231-192, almost entirely along party lines, with only three Republicans voting against and only four Democrats voting in favor.

The amendments, offered by coal-state Rep. David McKinley, R-W.Va., focuses on contributions by DOD to the National Climate Assessment, reports by the Intergovernmental Panel on Climate Change, the United Nations' Agenda 21, and the Social Cost of Carbon index.

Agenda 21 is a plan of action taken globally, nationally and locally by UN organizations, governments, and non-governmental organizations in areas in which humans affect the environment. The Social Cost of Carbon is a measurement used by federal agencies to estimate the climate benefits of rulemakings.

Rep. McKinley referred to climate change as an "ideology" and questioned whether the DOD's funding should be targeted away from fighting rogue nations and terrorism in support of the ideology. Rep. Henry Waxman, D-Calif., an opponent of the amendment, observed that "To say that the defense department cannot recognize damage caused by climate change looks like it is trying to overturn the laws of nature."

The House defense reauthorization bill is likely to require a conference with the Senate's version, at which time the issue likely will be revisited.

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Administration Plans Second SelectUSA Summit to Boost Exports, Increase Jobs

Efforts to convince manufacturers and investors around the world that the United States is "the premier location for new business investment," the Obama administration is going forward with plans to hold a second SelectUSA Summit next March in Washington. To prepare for the summit, President Obama and top administration officials met last week with chief executive officers of companies in the United States and abroad who have chosen to locate their operations in this country.

The SelectUSA campaign is overseen and coordinated by the Department of Commerce (DOC), with federal, state and local governments providing information about the incentives they offer to foreign companies that choose to re-locate to and/or invest in the United States.

The effort appears to be paying off. According to DOC, foreign direct investment flows into the United States and its territories rose from $160 billion in 2012 to $187.5 billion in 2013.

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Washington Insider: New Dairy Program

The U.S. dairy industry is widely dispersed across the nation and includes many and various types of operations that focus on very different markets. As a result, dairy stabilization programs have traditionally been among our most complex and frequently the most intrusive.

In addition, they have long focused on old policy tools — mainly supply controls — even as other commodities shifted toward programs to boost competitive access to growing global markets. More recently, however, global export markets have become increasingly attractive to U.S. dairy producers who worked to develop and propose new policies intended to move away from dependence on direct market interventions toward "margin insurance" in order to better stabilize producer returns and to boost competitiveness in export markets.

The new farm bill ended three of the main dairy support programs: the Dairy Product Price Support Program, the Milk Income Loss Contract program, and the Dairy Export Incentives Program. These were replaced by two new support programs, the Margin Protection Program and the Dairy Product Donation Program. Both are authorized through fiscal 2018.

The new margin insurance program is very different from the price supports it replaces. It is a voluntary indemnity program that uses a formula-based national margin calculated using the average farm price for all milk minus a national-average feed cost ration. USDA pays indemnities when this indicator falls below a producer-selected "insured margin" that can range from $4.00 per hundredweight (cwt.) to $8.00/cwt., in $0.50/cwt. Increments, with premiums depending on the "insured margin" selected.

The program carries an annual administrative fee of $100 for each participating operation as well as premiums pegged to coverage levels starting at $4.50/cwt. But it also offers a free "minimum coverage" of $4.00/cwt. that is fully subsidized by the government and requires no premium.

The premium structure also reflects size of operations, with lower premiums for the first 4 million pounds of annual marketings and higher premiums on sales above 4 million pounds. As an added incentive to encourage participation by smaller operations (with annual milk marketings under 4 million lbs.), premiums are to be reduced by 25 percent across the board for all coverage levels except the $8.00/cwt. level during calendar 2014 and 2015

Separately, federal milk marketing orders have permanent statutory authority and continue intact, as does the Livestock Gross Margin for Dairy Cattle program and the constellation of Dairy Import Tariff Rate Quotas.

In case you wondered, the widely feared permanent snap-back legislative fail-safe, the long outdated Dairy Price Support Program authorized by the Agricultural Act of 1949 is suspended — but would be reactivated should the new Margin Protection Program expire at the end of FY2018 without replacement or extension.

So, what will these changes mean for producers and the program? Nobody is quite sure.

The Congressional Budget Office notes that the outlook for dairy product prices is strong for the next several years, so the new policy could result in relatively small net outlay projections. Still, CBO notes a few areas of concern: For example, it thinks the margin protection program will have a risk reduction effect and "a significant federal subsidy component" is embedded in it — although the actual extent and effects of the implicit subsidy have yet to be assessed.

In addition, CBO says the nature of USDA's Dairy Product Donation Program implementation will affect its effects on markets, but the agency doesn't know how much. Unlike early versions of the Dairy Security Act with its "strong production disincentive component" in the form of the proposed Supply Management Program, the Margin Protection Program has only a mild disincentive in the form of its exclusion of new milk production in excess of the national average milk production growth rate, CBO says.

Significantly, the Budget Office says that MPP "does not follow sound insurance principles since premiums are not set to reflect the risk environment in milk and feed markets but instead are fixed over the life of the Act, and this fixed premium structure combined with producers' ability of the producer to annually choose a margin insurance level creates "strong adverse gaming incentives" for participants in the MPP. CBO says its analysis suggests that adverse incentives can be reduced or mitigated by specifying an earlier sign-up date for coverage decisions.

CBO also points out that by repealing the Dairy Product Price Support Program (DPPSP) and the Dairy Export Incentive Program, U.S. dairy programs have been freed from comparisons with world prices, so it is much easier to comply with the World Trade Organization's domestic support commitments. U.S. notifications on dairy have been running at $5.5 billion annually for almost two decades. This represents the single largest U.S. domestic support outlay, accounting for almost 40 percent all U.S. amber box (trade-distorting) notifications. The repeal of DPPSP certainly will contribute significantly to keeping U.S. domestic support outlays well below the $19.1 billion U.S. ceiling.

So, if CBO is right in its price expectations, favorable market conditions, near record high milk prices in early 2014 coupled with prospects for relatively low feed costs should give the new policies a running start toward a favorable reception, especially if, as expected, market incentives dominate producer decision making for the foreseeable future.

If that sounds too good to be true, it may be. Still, improved market access and a more favorable image in terms of international trade policies could well give the sector a powerful boost away from its heavy domestic focus toward growing global markets, Washington Insider believes.

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