The Madness of American Milk Prices

Consider the illogic of federal dairy policies. They jack up milk prices for millions of families at the same time that other programs, such as food stamps, aim to reduce food costs. And although federal law generally prohibits cartels, a federal dairy cartel enforces high milk prices. If Coke and Pepsi got together and agreed to hike prices, they would be prosecuted. But with milk, raising prices is government policy.

The trouble started in 1930s with "marketing order" regulations. Those rules set minimum prices that dairy processors must pay to dairy farmers in 10 regions of the country. Today, about two–thirds of milk is produced under federal marketing orders, and most of the rest is produced under similar state schemes such as California's.

Marketing orders limit competition, because entrepreneurs are not allowed to supply milk at less than the government prices. The system also restricts milk from lower–cost regions, such as the Midwest, from gaining market share in higher–cost regions, such as the Southeast. Government data show that residents of Cincinnati paid an average $2.68 for a gallon of milk in 2006, while those in New Orleans paid $4.10, and government policy is largely to blame.

On top of marketing orders, Congress added a dairy price–support program in 1949. This program helps to keep prices high by guaranteeing that the government will purchase any amount of cheese, butter, and dry milk from processors at a set minimum price.

In 2002, Congress added an income support program for dairy farmers, which distributes cash payments whenever prices fall below target levels. Perversely, this program causes overproduction and thus downward pressure on prices — in direct opposition to the price support program, which tries to raise milk prices.

To enforce artificially high prices, the government imposes import barriers on milk, butter, cheese, and other products. Without those barriers, consumers could simply purchase lower–priced foreign goods. Imports of cheese, butter, and dried milk are limited to about 5 percent or less of U.S. consumption.

All these policies add up to higher prices. The Organization for Economic Cooperation and Development found that U.S. policies create a 26 percent "implicit tax" on milk consumers. That "milk tax" is regressive, meaning that it harms low–income families the most.

The Government Accountability Office compared U.S. dairy prices to world prices over the period 1998 to 2004. It found that U.S. prices for butter averaged twice the world price, cheese prices were about 50 percent higher, and dry milk prices were 24 percent or more higher.

Dairy entrepreneur Hein Hettinga started a dairy farm and milk bottling plant in Arizona in the 1990s outside of the government system. He sold his milk to Arizona stores and to Costco in California at 20 cents per gallon less than the government–regulated milk.

Established milk businesses were not happy with the new competition, and they spent millions of dollars lobbying Congress to intervene. At the behest of home–state dairy interests, Democrats and Republicans teamed up in 2006 to change the law and crush Hettinga.

Based on his experience, Hettinga lamented, "I had an awakening … it's not totally free enterprise in the United States."

U.S. dairy programs are Byzantine in complexity, but the ultimate effects are to transfer wealth from average families to dairy businesses. In this year's farm bill, let's hope policymakers take the side of average families for a change, and repeal the damaging milk cartel.