Cato Policy Analysis No. 57 July 30, 1985

Policy Analysis

Dairy Policy and Public Interest:
The Economic Legacies

by James F. Thompson and W. Frank Edwards

James F. Thompson and W. Frank Edwards are professors of economics at Murray State University.


Executive Summary

Current U.S. dairy policy has evolved from legislation passed during the 1920s and 1930s. In 1922, Congress passed the immensely influential Capper-Volstead Act, with the apparent legislative intent of allowing farmers to form associations that gave them the advantages of corporate structure free from the threat of prosecution under the Sherman Antitrust Act.[1] Congress had perceived an imbalance of market power and wished to permit farmers to organize into cooperatives, so as to equalize their economic power vis-a-vis the corporations with which they did business. Rep. Andrew Volstead described the farmers' predicament:

Business men can combine by putting their money into corporations, but it is impractical for farmers to combine their farms into similar corporate forms The object of this bill is to modify the laws under which business organizations are now formed, so that farmers may take advantage of the form of organization that is used by business concerns.[2]

Congress did not anticipate, however, that the cooperatives could develop such a degree of market power that competition and consumer interest would be adversely affected. It is clear from congressional testimony that farm interests hoped to increase the percentage of the farm-commodity dollar going into the farmers' pockets, but Congress did not expect that this increase would be accomplished by raising retail prices or by the use of market power. Rather, it was to be accomplished through the efficiencies of vertical integration into marketing and distribution.[3]

By 1928, farmers' organizations had begun developing means to control the total production of milk in their markets. These efforts were largely unsuccessful because the cooperatives were unable to induce all the farmers in a region to join them; therefore, when the cooperative succeeded in raising the price of milk, the production of nonmembers would increase, dragging the price back down. This caused the cooperatives to turn to the federal government for help. Between 1929 and 1932, programs were introduced that aimed at assisting the farm sector in general and dairy producers in particular through various schemes of export promotion, import restriction, and production allotments. But by 1932 no significant action had been taken, and the continuous decline in dairy and other farm prices forced a shift in the legislative goals of farm groups. The result was the Agricultural Adjustment Act of 1933, which attempted, through processing taxes, allotment plans, and licenses and marketing agreements, to put agriculture back on a sound basis.[4]

The processing tax permitted the assessment of taxes on processors of agricultural products. The tax was regulated by the secretary of agriculture in amounts sufficient to pay for untilled land leased from farmers. The objective was to reduce production. For its part, the allotment plan also included a tax on processors for the purpose of supporting the price of farm products at a 1909-14 parity price level. The third major provision, licenses and marketing agreements, is vague, but it gave the secretary of agriculture broad powers to approve agreements and issue licenses "to effectuate the purposes' of the allotment program.[5] The bill did not set out clearly what provisions would be contained in those agreements and how they might further the purpose of the act. Partly because competitive price cutting was viewed in the early 1930s as an unfair trade practice, the foundation was laid for the evolution of licenses into price-fixing devices. Thereafter, with the passage of a series of amendments in 1935, the marketing order system, essentially as it is known today, was authorized. The key features of the order system--voting by producers, fixing of minimum prices, bloc voting, payments to cooperatives, and the various provisions for price differentials, both seasonal and geographical--were all provided for in the 1935 act.[6]

In addition to the Capper-Volstead Act and the various agricultural adjustment acts, another important type of market intervention whose roots can be traced to the conditions of the depression era is the price-support program. Price-support operations have been carried out for certain commodities by the Commodity Credit Corporation (CCC) since the passage of the Agricultural Adjustment Act of 1933. Through the years, CCC purchases of dairy products periodically reached high levels and were often blamed for artificially raising dairy prices.[7]

The CCC offers to buy carlots of butter, cheese, and nonfat dry milk at announced prices. Thus, when necessary, the CCC removes milk from the market by purchasing dairy products that cannot be sold in commercial markets at prices that correspond to the support price for manufacturing milk. The effect, of course, is to put a floor under the price of manufacturing milk and indirectly under virtually all dairy products. Table 1 shows the pattern of purchases by the CCC since the 1967-68 marketing year. Clearly, this pattern has been highly variable, with the low point in 1973-74 and the high point in 1982-83.

Table 1
Milk Production and Government Purchases under the Price-Support Programs
Marketing Year Total Production(Billions of Lbs Net Purchases, Mild-Equivalent(Billions of Lbs Net Expenditures on Price-Support and Related Programs($ Millions) Production Purchased(%)
1967-68 118.2 7.0 417.7 5.9
1968-69 116.6 4.8 329.6 4.1
1969-70 116.2 4.4 273.1 3.8
1970-71 117.4 7.1 383.5 6.0
1971-72 119.4 6.6 369.9 5.5
1972-73 119.1 4.9 264.6 4.1
1973-74 114.9 0.7 77.0 0.6
1974-75 115.6 2.4 318.7 2.1
1975-76 116.4 0.9 258.9 0.8
1976-77 120.9 3.4 302.4 2.8
1977-78 122.0 3.2 451.4 2.6
1978-79 122.8 1.1 250.6 0.9
1979-80 127.0 8.2 1,279l8 6.5
1980-81 131.6 12.7 1,974.8 9.7
1981-82 135.0 13.8 2,239.2 10.2
1982-83 139.0 16.6 2,600.4 11.9
1983-84 137.4 10.4 1,597.5 7.6
Summation 2,089.5 108.2 13,389.1 5.2

Source: Harlan J. Emery et al., Dairy Price Support and Related Programs 1949-1968, Department of Agriculture Agricultural Stabilization and Conservation Service, Agricultural Economic Report 165 (Washington: Government Printing Office, July 1969); ASCS Commodity Fact Sheets (various issues).

Government purchases in recent years, however, have tended to be considerably higher than in years prior to the 1979-80 marketing year. Since 1967-68, American taxpayers, through the CCC, have subsidized the dairy industry by purchasing 108.2 billion pounds of milk-equivalent dairy products at a total expense of $13.4 billion. Of course, this $13.4 billion subsidy is only a part of the social cost of the price-support program. There is also the cost of administering the program at both the federal and state levels. If the price-support program results in consumer prices that are higher over the long run than they would be in a free market, then the social cost is still greater.

Along with federal legislation, statutes to effect the same general objectives have been enacted in several states. In April 1933, New York became the first to pass a state law regulating minimum producer, wholesale, and retail milk prices, and 25 other states had taken similar action by the end of the 1930s. Most of the states regarded milk-price fixing as a temporary measure to relieve economically depressed farmers. At least 10 wrote clauses into their original bills that fixed a date beyond which the law could not be extended without legislative review and renewal. Milk control was a controversial subject in several states, and some state supreme courts declared the laws unconstitutional. By mid-1943, 11 of the original 26 states had revoked the authority to control retail milk prices.[8]

Through subsequent years, state regulation has gradually evolved into two major categories: (1) state laws that fix minimum prices at the retail level and (2) state laws that regulate such trade practices as sales below cost, discriminatory pricing, and milk promotion. State laws vary considerably in how they set prices, which trade practices they regulate, and so on. Five states regulate minimum retail prices, 33 regulate selected trade practices, several do both, and 12 states do neither.

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