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No. 362

December 1, 1999

Milking the Sacred Cow

A Case for Eliminating the Federal Dairy Program

by Kevin McNew

Executive Summary

number of marketing orders, recalculate the

Rich in calcium, protein, and vitamins, milk is

price differentials among classes of milk, and

one of the most nutritious items in the American

create a new way of setting price differentials

diet. Unfortunately, most consumers do not realize

that would resemble the failed mechanism used

when they drink milk or scoop up tasty ice cream

in the old Soviet Union. FAIR also created what

that the federal government artificially inflates milk

was supposed to be a temporary Northeast

prices. In 1995 American dairy farmers received as

Compact of six New England states that was

much as $8 billion in assistance through various

allowed to set a floor below which the price of

price-distortion mechanisms.

fluid milk could not drop. Congress considered

Today's dairy policy is an outdated relic of the

letting the compact expand to include Maryland,

original Depression-era legislation. The U.S.

New Jersey, New York, and Pennsylvania and

Department of Agriculture divides the country

allowing the creation of a 16-state Southern

into marketing order regions and establishes

Compact. Federal courts have been brought into

price differentials between classes of milk used

that battle. Further, Congress also considered

for drinking and for making such products as

adopting so-called Option 1-A price differentials

butter and cheese. Processors must purchase

that would be worse than the USDA changes.

milk at those different prices from farm cooper-

Whether the agriculture secretary's new

atives in each region. But those policies actually

approach stands or one of the alternatives is

harm many farmers. The most efficient farmers

adopted, the price of milk will likely remain high,

in some marketing order regions produce more

harming consumers, and price distortions in the

milk than can be sold for high-priced liquid uses,

future could require the federal government to

and thus the excess must be sold for lower-priced

pay out increased subsidies to dairy farmers,

processed uses. Further, the federal government

harming taxpayers. Instead of pursuing a com

-

at various times purchases certain dairy prod-

plex, convoluted, and costly dairy policy,

ucts to help prop up prices.

Congress could help consumers and efficient

Pursuant to the 1996 Federal Agricultural

farmers by eliminating the federal dairy pro-

Improvement Reform (FAIR) Act, the secretary

gram.

of agriculture in 1999 proposed to reduce the

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Kevin McNew is an assistant professor in the department of agricultural and resource economics at the University

of Maryland, College Park.