Milk Cartel Economics


If you're wondering why the cost of milk shot up this summer, you can thank Congress.

This past summer the New England Interstate Dairy Compact -- one of the most anti-consumer measures enacted in Washington in years -- went into effect. Because of the compact, milk handlers are now required by law to pay an additional $3.00 per hundredweight for fluid milk. When that price was decreed, it amounted to an estimated 21 percent increase in the bulk price of milk. New England consumers are paying about 25 cents a gallon more for milk at the grocery store.

According to a Burlington (Vt.) Free Press feature story, last July a typical 75-cow Vermont farm collected an additional $1,500 or so from the cartel-required over-order price. That $1,500 will come in very handy for struggling dairy farmers. Proportional benefits will flow to both the smallest and weakest dairy farm and the largest and most profitable one. The owners of a 1,500-head operation will get a compact check for an additional $30,000.

The federal dairy program was created in the 1930s to make sure that milk for local or regional markets was produced by dairies in the region. To keep milk surpluses from driving down prices and putting the least efficient farmers out of business, the Commodity Credit Corporation buys all the butter, cheese and milk powder brought to it by processors who can't sell those products at a higher price in the market.

Federal marketing orders require handlers to pay a different price in each region of the country to keep lowest-cost Minnesota-Wisconsin fluid milk from moving around the country and displacing higher-cost local milk (notably in Florida). Strict import controls keep foreign products from coming in and driving down the price for cheese and butter.

Now on top of all this, the compact is increasing the price of milk in New England. Last July, for instance, a hundredweight of milk cost dairy handlers $16.94, up from $13.94 in June. Out-of-region producers who might want to sell lower-priced milk are thus excluded from the six-state New England market.

With all this government-sanctioned price fixing to confer higher incomes upon dairy farmers, somebody has to produce the money to be distributed. Until this year, in other agricultural programs such as wheat and feed grains, the government (i.e., taxpayers) made subsidy payments to farmers whenever the commodity price dropped below a target price set by Congress. But that turned up as an unacceptably large item in the federal budget and so became politically vulnerable.

When government gets into the price-fixing business, it benefits one politically influential industry -- including the biggest and most prosperous producers in that industry -- at the expense of unorganized and voiceless consumers.

There are two ways out of the budget crunch. The most obvious one is to back the government out of price supports and deficiency payments and let farmers produce and sell in a free market like everybody else. For most crops that was achieved in the 1996 Freedom to Farm Act, which will phase out taxpayer subsidies over the next seven years.

Ironically, the same legislation also established the New England milk cartel, which takes precisely the opposite approach -- it fixes prices above market levels and keeps competition out. Since voluntary price-fixing is always undercut in free markets, an effective cartel requires government-enforced price-fixing. In Vermont, the largest dairy state in New England, the legislature set the penalty for selling a gallon of milk below the cartel price at $10,000 plus loss of license.

When the cartel forces handlers to pay more for fluid milk, who gets stuck with the tab? Farm organizations and their political friends often suggest that the handlers will swallow the higher cost and keep on selling milk at the same prices. Of course they will not. They will increase the price of milk to the consumer.

Consumers, who are unorganized and largely without effective political recourse, will probably pay the higher price of milk. Young mothers on tight budgets who buy milk for their families will notice that they are now paying $2.40 or $2.50 per gallon instead of $2.25, but they will keep on doing it.

By contrast, in the summer of 1996 when gasoline prices jumped 10 percent, there were demands from liberals for a national investigation of the oil industry and demands from conservatives to roll back the federal gasoline tax. Liberals dislike the oil industry, conservatives dislike the tax industry, but nobody dislikes the hardworking dairy farmer.

When government gets into the price-fixing business, it benefits one politically influential industry -- including the biggest and most prosperous producers in that industry -- at the expense of unorganized and voiceless consumers, most of whom are less well-off than the businesses that are receiving benefits from price-fixing, eventually there will be trouble. The politicians who wrote this scheme into law are trusting that those consumers will never find out who is responsible for that extra 25 cents a gallon.

The sad thing is that because of this political overreaching at their neighbors' expense, ordinary New England dairy farmers may end up worse off than they would have been had they chosen to compete in a free market. They'll find out in 1999, when the compact's price-fixing authority is scheduled to expire and the dairy cartel protection evaporates.

John McClaughry

John McClaughry is president of the free-market Ethan Allen Institute in Concord, Vermont, and a frequent contributor to the Cato Institute.