The collapse of artificial price supports for large scale commercial dairies may increase the number of raw milk producers. Apparently the government is too broke to support pasteurized milk producers and prices are likely to double in January.
Did you know milk, cheese, and other dairy products could double in January if the farm bill isn't passed before the new year?
At first I thought this was a veiled threat from the farm lobby to get their subsidies, but it looks like it goes deeper than that. In fact, farmers don't want the price to go up because they fear they'll be swimming in unsold milk.
"Few will buy milk the USDA will be forced to sell at prices consumers can’t afford, so Congress has no alternative but to stop the change," UW-Madison agriculture economist Bruce Jones told the Wisconsin State Journal. "We’ll be swimming in milk, with nobody to consume it."
He added that the dairy industry would experience a short-term windfall but the lack of demand would cause milk prices to eventually plummet which would be a catastrophe for dairy farmers.
But what is responsible for the price of milk, and why would it double without a farm bill?
The price of milk is not set by the free market as Jones suggests. It's set by USDA regulators that claim to use market indicators and a "variety of pricing regulations":
Over the past 125 years, a complex system of both public and private pricing institutions has evolved to deal with milk production, assembly, and distribution. The pricing of milk in the United States is part market-determined, and part publicly administered through a wide variety of pricing regulations. (Source: USDA)
This complex system is said to be used to create a balance between supply and demand to take the following into account:
The need for producer prices to be high enough to maintain production, but not so high as to encourage surplus production;
The willingness and ability of consumers to pay for milk and dairy products, and;
The interest of producers, handlers, and the public in the orderly flow of milk and dairy products from the producers to the consumers. (Source: PDF)
Apparently this formula is constantly evolving primarily due to economic circumstances, international trade negotiations, and the restructuring of dairy conglomerates which alter pricing relationships, according to the USDA.
And without a modern farm bill to factor in today's market costs, the pricing reverts back to a antiquated pricing system from 1949. According to the Wisconsin State Journal:
National agriculture policy forces the implementation of a 1949 system for pricing milk if the country does not have an active farm bill. That antiquated policy uses a complex formula — based on costs of producing milk by hand and including inflation and other adjustments — that will force the U.S. Department of Agriculture to buy milk at nearly double the recent market price.
There doesn't seem to be much hope that the farm bill or even a stopgap measure will be passed before next year. "There was nothing on the schedule for (this) week to deal with any of this," said Wisconsin Congressman Ron Kind.
"This is crazy. The thought to going back to mid-20th century policies when we’re in the 21st century now is inexcusable," Kind added. "The dairy cliff is going to be amazing if no action is taken."
It seems the "fiscal cliff" crisis has cleared everything else from Congress' agenda and America will go over the "dairy cliff".
How far away have we gone from the free market when an act of Congress is needed to prevent the doubling of a core food in the United States? This is precisely the problem with the government "determining" the price of anything.
As soon as regulators touch anything in the market, its genuine value is tainted forever; and it usually requires more meddling to try to set it straight, but inevitably always makes it worse.
Meanwhile, consumers and farmers alike will suffer.