Policy Analysis No. 14

Dairy Price Supports: Still Milking the Public

By Michael McMenamin
August 19, 1982

Executive Summary

Last December it seemed a safe enough observation that the dairy lobby was the biggest loser when the Agriculture and Food Act of 1981 was approved by two votes in the House after earlier passing the Senate by the far more comfortable margin of 65-31.[1]

It is not uncommon, however, for a legislative victory to dissolve before the victor has a chance to savor it. The Reagan administration discovered this anew in May 1982 when it admitted that despite its successful efforts in the 1981 Farm Bill to keep dairy price support levels from rising, the continuing overproduction of dairy products for 1982 was expected to cost the government a record high $1.94 billion. Or as Agriculture Secretary John Block put it in his press conference in May, American taxpayers were being charged at the rate of $250,000 an hour to pay for surplus dairy products which American consumers were unwilling to purchase voluntarily.[2]

As a consequence, Block asked Congress to give him the authority to reduce dairy price supports in 1982 by as much as $1.10 per hundred pounds (cwt.) from the current level of $13.10 per cwt., which would be frozen at that level for the rest of the year. This is far more than the Reagan administration ever asked for in the 1981 Farm Bill, let alone the compromise to which it eventually agreed.

Even so, although already a failure at reducing the cost to the government for subsidizing dairy farmers, the 1981 Farm Bill may have a long-range impact. What happened in 1981 was that for the first time since the program began in the 1940s, milk price supports were severed from any connection with “parity,” which is the index for determining price supports based on the relationship of farm prices to prices of non-agricultural goods and services during the pre-World War I period of 1910 to 1914. Instead, the 1981 Farm Bill provided for a series of modest fixed price support increases during each of the next three marketing years. For the rest of the 1982 marketing year, which began in October 1981, the price remained at $13.10 per cwt. where it essentially has been, with one exception, since October of 1980. It would have increased to $13.25 per cwt. in October 1982; $14.00 per cwt. in October 1983; and $14.60 per cwt. in October 1984.[3]

This abandonment of parity is symbolically important because most people, including congressmen, do not understand the concept. It sounds so fair and equitable that setting price supports at some level less than 100 percent of parity seem to imply a sacrifice by farmers. Nothing, of course, could be further from the truth. Parity is an agricultural fable based upon a near-legendary period that no politician living today remembers. According to the accepted folk wisdom, 1910-1940 was a golden age for farmers where crops were plentiful, prices were high, and bankruptcies few. Government price supports for agricultural commodities — dairy or otherwise — were pegged to a percentage of what farm products would purchase in non-farm goods at that time. In reality, parity is simply a crude political semanticism used to mask the manner in which Congress sets the level of federal welfare benefits for farmers, welfare which does not necessarily go to the smallest or poorest farmers. Of the $2 billion paid out in price supports in 1978, USDA studies indicate that almost half of the figure went to the largest 10 percent of farms participating.[4]

Ironically, even though the 1981 Farm Bill eliminates parity for dairy farmers and sets milk price supports in stark dollar amounts, the administration had not set out with that goal in mind. What the administration had backed was the Senate version of the farm bill, passed in September 1981, which provided for milk price supports at a minimum of 70 percent of parity, adjusted on an annual basis.[5] This was a significant improvement but, more importantly, the bill also provided for no increases in price if USDA projections on net purchases of dairy products in the coming year exceeded $750 million. Given what USDA projections were in the fall of 1981, there in fact would have been no increase in October 1982 from the current price of $13.10 per cwt.[6]

The dairy lobby knew that 1981 would involve “give-backs”; and it tried to salvage from the 1981 Farm Bill a guaranteed minimum price support of at least 75 percent parity, which was itself a drop from the 80 percent of parity it had extracted from Congress in 1977 with the eager assistance of the Carter administration. The House Agriculture Committee naturally gave the dairy lobby what it wanted — it always does. But the full House failed to adopt the Committee’s recommendation. The dairy lobby then lowered its sights again and supported a bill, passed by the House, calling for milk price supports at 72.5 percent of parity, with annual increases thereafter as long as the government surplus dairy supplies did not exceed 3.5 billion pounds a year.[7]

The Senate bill would probably have frozen milk price supports at the present level of $13.10 for several years with an adjustment unlikely until October 1983. The practical effect of the House bill would have been an increase in October 1983 of more than $1.00 per cwt. A compromise was arranged in the conference committee; the House conferees agreed to the minimum 70 percent of parity in the Senate bill, and the Senate conferees agreed to drop their provision for eliminating the annual increase if USDA projections for net dairy purchases exceed $750 million for the coming year. The compromise would have cost approximately $150 million more than the original Senate bill approved by the Reagan administration.[8] It was more than the administration was willing to accept. Reagan threatened a veto of the entire farm bill unless the conference committee made changes in the dairy section. The bargaining which ensued produced the modest guaranteed increases in each of the next three years in milk price supports discussed earlier but eliminated the connection between price supports and parity. As a consequence, it is quite likely that dairy price supports, which are presently effectively below 70 percent of parity, will continue to be below 70 percent given the modest, albeit guaranteed, increases scheduled for October 1982 and October 1983, increases which are now jeopardized by the latest Reagan initiative.

Will taxpayers and consumers benefit in any substantial way from Reagan’s newest proposal to reduce dairy price supports? In other words, will reducing price supports actually save the government money, and will consumers pay any less for milk?

Whether the government will save any money obviously depends upon total government expenditures on price supports in 1983 and thereafter. Certainly the government will spend less with price supports at $12.00 per cwt. than it would with $13.10 or higher. But whether it spends more on price supports in 1983 than it does in 1982 is still an open question. Even if Congress skips the October 1982 increase of 15 cents per cwt. and grants the Secretary of Agriculture the authority to reduce price supports to $12.00 per cwt. (or some other figure less than the current $13.10 per cwt.), there are no assurances this will save the government any money. USDA estimates show that a $12.00 per cwt. price support level could save the government as much as a billion dollars in fiscal ‘83.[9] But similar USDA estimates in February 1982 were about $400 million too optimistic by May. Any group making a $400 million mistake in only four months should not find a $1 billion error beyond its capacity.

The reasons why USDA makes such mistakes in forecasting are not difficult to understand. America is blessed with enormously efficient and productive dairy farmers who respond with alacrity to the incentives offered by their government. Consider the reaction of a dairy farmer in early 1981 when asked how he would respond to a dairy price support reduction:

Oh, we would just increase our output to lower our unit cost and to keep up our money flow. Everything we buy will not go down, so we have to have more revenue if we’re going to continue. Your marginal producers may get out, but your professionals, your good operators, will just increase milk output.[10]

Not only is the government going to save very little with surplus dairy purchases, even with lowered price supports, but consumers are going to pay just as much for milk at the supermarket. The reason for this is simple — that is the way government has set things up. The explanation as to why and how things got that way is a bit more complicated.

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Michael McMenamin, a contributing editor of Inquiry magazine, is the co-author ofMilking the Public: Political Scandals of the Dairy Lobby From LBJ to Jimmy Carter (Chicago: Nelson-Hall, 1980). He is a partner in the Cleveland law firm of Walter, Haverfield, Buescher & Chockley.