Milking the Public

By Kevin McNew
December 10, 1999
Congress recently passed, and President Clinton signed into law, several changes to federal dairy policy that allow dairy farmers to milk American consumers, especially families with children, of even more of their hard-earned money. The first change extended the supposedly temporary Northeast Compact, a government-backed cartel that sets a price floor in New England to keep the cost of milk high. The second altered the formulas by which the government sets fluid milk prices in different parts of the country, in effect mandating high milk prices.

Under federal dairy policy, the U.S. Department of Agriculture, like Mafia dons, divides the country into territories. Milk processors in each territory are required to purchase milk at government established prices — forget competition! Milk processors are required to pay the price mandated in their territory.

The price in each territory is established by a bizarre federal formula that resembles old Soviet planning. Processors are charged higher rates for milk processed for drinking but charged lower rates for milk used to manufacture cheese, butter, and yogurt. The supposed market prices of certain manufactured products are used as a price base, on which is added a different price differential in each territory to establish the price of fluid milk in each region. That’s why milk prices can differ by over a dollar per gallon between states — because of federal mandates, not supply and demand. The bottom line, according to economists Peter Helmberger and Yu-Hui Chen, is that this so-called milk marketing orders system alone adds about $1 billion in costs to consumers of fluid milk.

Over the years more handouts have gone to farmers through the federal Commodity Credit Corporation, which buys up excess butter, cheese, and nonfat dry milk when the price dips below a certain level. Over the years, this price support program has cost American taxpayers plenty, with the CCC in 1983 spending a record $2.6 billion to purchase dairy products. Ironically, the USDA distributes for free the excess cheese it purchases to poorer Americans who can’t afford many dairy products because the USDA artificially inflates their prices.

The USDA estimates that American dairy farmers receive as much as $8 billion annually from various government price-distorting mechanisms. But the damage doesn’t stop there. Average milk consumption in the United States is about half the USDA recommended allowance, creating dietary deficiencies in calcium and other nutrients. Writing in the Journal of Consumer Affairs, Dale Heien and Cathy Wessells estimate that if the government dairy program were scrapped and milk prices allowed to drop, consumption would be above recommended levels.

In 1996 Congress mandated that the USDA consolidate marketing orders and revise its outdated price formulas. It also created the Northeast Compact which allowed price floors to be set up in New England until the revised system was put in place. Within a month after the Compact took effect in July 1997, the price of milk in Boston went from $2.44 to $2.64 per gallon. In Hartford, it jumped from $2.49 to $2.68 per gallon.

The Compact was supposed to protect small farmers. But in Vermont, the number of farms fell by ten percent, with the average number of cows per farm growing from 74 to 85 — a 15 percent increase. In other words, fewer but larger farms! By contrast, during the same period in Pennsylvania (a non-compact state), the number of farms fell by only 3 percent, while the number of cows per farm rose only slightly, from 56 to 57.

In 1999 the USDA finally issued its proposed new price differentials, which were slightly better than the ones in effect at that time, as well as a far worse formula for calculating future prices. Congress decided to keep the latter, naturally, but substituted generally higher prices for the proposed reform prices. Further, Congress extended for two more years the Northeast Compact, which will create even greater regional differences.

So, Congress has actually made a horrible dairy policy even worse. It is ironic that while Congressmen worry about whether Microsoft or Intel have monopolies, they have tightened a system that already restrains interstate commerce more than any private company could or would be allowed to do.

Kevin McNew is an assistant professor in the department of agricultural and resource economics at the University of Maryland and author of the recently published Cato Institute study Milking the Sacred Cow: A Case for Eliminating the Federal Dairy Program.