Dairy Consumers Could Benefit from a Reformed Farm Bill

Cato study documents the significant costs of the U.S. dairy program

November 9, 2006

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WASHINGTON – With Congress about to draft a new farm bill and world dairy market prices at record highs, U.S. policy makers have a unique opportunity to reform the costly and outmoded U.S. dairy program—to get government out of the business of farming and stop “milking the customers,” according to a study released today by the Cato Institute.

In the new Cato Trade Briefing Paper, “Milking the Customer: The High Cost of U.S. Dairy Policies,” Sallie James, policy analyst with Cato’s Center for Trade Policy Studies, explains that the dairy program is one of the most expensive and labyrinthine programs in U.S. agricultural policy. James argues that the U.S. dairy program, through milk production subsidies and dairy price regulations, “costs taxpayers more than $4 billion per year in subsidies and adds millions of dollars to the grocery bills of American consumers and to the costs of food product manufacturers.”

The study finds that artificially high prices, guaranteed income supports, and insulation from international competition encourage U.S. dairy farmers to produce beyond what the market demands, which puts a higher burden on taxpayers to maintain the price support system. The price support system itself results in above-market prices for consumers of dairy products and food processors who use dairy products as inputs.

James points out: “In order to preserve domestic prices above the world prices for dairy products, the U.S. government maintains prohibitively high tariffs on imported dairy products. That invites scorn and retaliation from our trade partners and is one more agricultural program that exposes the United States to charges of hypocrisy as it seeks to paint itself as a country in favor of free markets and opportunity for all.”

Current dairy policy aggravates trade partners and contributes to the rancor over global trade liberalization and therefore, as James argues, “is a burden to U.S. consumers and industries that would benefit from freer and more open markets in other sectors.”

James proposes significant reform of the Depression-era U.S. dairy policy by allowing milk prices to be set by the market rather than by impenetrable bureaucratic formulae and concludes, “Given historically high world dairy prices, now is an opportune time to implement fundamental reforms with a relatively small political and taxpayer cost of adjustment.”

Trade Briefing Paper #24