Federal Dairy Program Benefits Inefficient Farmers at Consumers' Expense
Prices distorted by government policy, forcing milk farmers to overproduce

The federal dairy program is an "outdated relic of Depression-era legislation" that fattens the coffers of milk producers at the expense of consumers and should be replaced with a free-market system, according to a study released today by the Cato Institute. Congress included in its latest spending bill a new set of pricing guidelines that continues to keep the cost of milk for consumers high and also extended the Northeast Compact, a government-maintained cartel that protects markets for dairy products from competition.

In "Milking the Sacred Cow: A Case for Eliminating the Federal Dairy Program," Kevin McNew, assistant professor of agricultural and resource economics at the University of Maryland, argues that federal milk marketing order regions, price supports, and dairy compacts hike milk prices for consumers, thus reducing milk consumption, which adversely affects people's health. McNew notes that American dairy farmers received as much as $8 billion in assistance in the form of subsidies in 1995 alone.

The Department of Agriculture divides the country into several marketing order regions, setting prices in each region at different levels for milk sold for different uses, such as for drinking or for manufacturing dairy products like yogurt, butter and cheese. Efficient farmers are actually harmed by this system. Dairy price supports have used tax money to buy dairy products when prices drop to a specified support level, burdening taxpayers without any discernible benefits to consumers.

"The lesson of those policies is that it is unrealistic to expect government regulations and prices to send the appropriate market signals to the dynamically changing dairy industry," McNew notes. "Technology has significantly changed the production, transportation, refrigeration, and processing of milk during the past 60 years-without the aid of the federal orders."

McNew writes that if the current government system "were eliminated, the free-market system would function just as smoothly-but without price distortions." Congress should scrap rather than expand its complex, convoluted, and costly dairy policies, he concludes.

"Milking the Sacred Cow: A Case for Eliminating the Federal Dairy Program"