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Madison - As the state's thousands of dairy farmers brace for the potential devastation of drought, Congress is considering replacing a key subsidy program particularly favorable to Wisconsin producers.

Legislation being considered in Washington, D.C., would create an insurance system to replace the current straight subsidy which the government pays farmers when milk prices drop too low. The new system would still be subsidized by taxpayers but would cost the federal government less, in part, because farmers would be required to pay premiums to receive coverage when prices drop.

The legislation approved by the Senate in June and by the House Agriculture Committee on Thursday would pair the insurance program with a quota system that would block participating producers from being paid for a portion of their milk. That quota system is drawing concerns from farmers and U.S. Rep. Ron Kind (D-Wis.) over its possible effects on cheese plants in Wisconsin and the state's $26.5 billion dairy industry.

"I do have concerns about where the dairy provision of the farm bill is going and the impact it may have on our producers here in Wisconsin. I'm very leery about the (quota) component," said Kind, who opposes the House bill in its current form. "I don't know why we'd want to restrict our production capability here in the state."

Under current law, dairy farmers receive federal payments that cover 45% of the difference between a price threshold and the actual price of milk after taking into account the price of feed for cattle. The Milk Income Loss Contract program will expire on Sept. 30 if it's not renewed, and that appears unlikely to happen, though Congress could renew existing farm programs temporarily if legislators fail to pass a new farm bill before the current one runs out.

The MILC program has historically delivered more money to dairy farmers in Wisconsin than in any other state. That's because the program won't cover more milk than what a farm of about 150 cows produces, said Mark Stephenson, a dairy policy analyst at the University of Wisconsin-Madison.

In Wisconsin, a state of relatively small dairy farms, the average producer has a herd of about 100 cows, making for a much better fit with the MILC program than the western states such as Idaho and California, where farms can be much larger.

But the MILC is unlikely to continue under a new farm bill. The versions passed by the U.S. Senate and the House committee drop it as part of a general shift away from direct payments to producers and toward other methods of protecting farmers from the boom-and-bust cycles of their occupation.

"That battle's over," Kind said.

Instead, the farm bill would put in place a system of insurance paid for by both taxpayers and the dairy farmers themselves. After accounting for the cost of feed, the insurance would cover the difference when milk prices fall below a certain level up to $8 per 100 pounds of milk.

The insurance program is voluntary for the farmers to buy into but could pay off well. A relatively small farm with 100 cattle over five years would pay $3,250 to cover 25% of its milk and $11,700 to cover 90% - the maximum level of coverage, Stephenson said. Over the past five years, the program would have paid almost $63,000 to such individual producers choosing to purchase insurance for 90% of their milk, he said.

Pete Hardin, editor of The Milkweed, a monthly report on the dairy industry, said he has some concerns about the insurance system. Hardin said he questioned whether insurers would be able to weather the losses that could arise from the massive drought hitting southern Wisconsin and much of the rest of the nation's farm country.

The nonpartisan Congressional Budget Office has projected that compared with the current programs, the dairy programs under the Senate version of the proposed farm bill would cost $153 million less from 2013 to 2017. But Hardin said he feared the drought could change that calculus and raise the costs of the program for taxpayers.

"I don't see this as a very sustainable approach," Hardin said.

Before the dairy insurance program could take effect, the farm bill will have to pass Congress. The House might not take up the bill before it recesses ahead of the fall election, Kind said.

Keith York, a dairy farmer in Lake Geneva, said he was comfortable with the proposed switch to insurance from the MILC program. York is vice president of the Professional Dairy Producers of Wisconsin, though he did not speak for the group.

"We've got to control the government spending, and we're willing to do our part," York said.

But like Kind, York had serious reservations about the milk quota system in the farm bill, which would apply to any farmer participating in the proposed dairy insurance. If milk prices dropped below a certain level, the quota system would force the participating farmers to reduce their milk production by 2% to 6% by preventing them from getting paid for that milk. If the farmers delivered that portion of their milk to a processor, the plant would not pay the farmer for the milk as normally happens but would instead pay the government.

York said he was concerned that the quota system would hurt exports for farmers by disrupting the supply of dairy products to growing overseas markets such as Asia.

Both Kind and Hardin were concerned about the effect of the quota proposal on cheese plants in Wisconsin, which have struggled to get enough milk from within the state to operate at full capacity. Forcing farmers to cut their milk production could exacerbate that problem, they said.

"We need all the milk volume we can get to fill these plants," Hardin said.