Milking the Public


Congress recently passed, and President Clinton signed into law, severalchanges to federal dairy policy that allow dairy farmers to milk Americanconsumers, especially families with children, of even more of theirhard-earned money. The first change extended the supposedly temporaryNortheast Compact, a government-backed cartel that sets a price floor in NewEngland to keep the cost of milk high. The second altered the formulas bywhich the government sets fluid milk prices in different parts of thecountry, in effect mandating high milk prices.

Under federal dairy policy, the U.S. Department of Agriculture, like Mafiadons, divides the country into territories. Milk processors in eachterritory are required to purchase milk at government established prices --forget competition! Milk processors are required to pay the price mandatedin their territory.

The price in each territory is established by a bizarre federal formula thatresembles old Soviet planning. Processors are charged higher rates for milkprocessed for drinking but charged lower rates for milk used to manufacturecheese, butter, and yogurt. The supposed market prices of certainmanufactured products are used as a price base, on which is added adifferent price differential in each territory to establish the price offluid milk in each region. That's why milk prices can differ by over adollar per gallon between states -- because of federal mandates, not supplyand demand. The bottom line, according to economists Peter Helmberger andYu-Hui Chen, is that this so-called milk marketing orders system alone addsabout $1 billion in costs to consumers of fluid milk.

Over the years more handouts have gone to farmers through the federalCommodity Credit Corporation, which buys up excess butter, cheese, andnonfat dry milk when the price dips below a certain level. Over the years,this price support program has cost American taxpayers plenty, with the CCCin 1983 spending a record $2.6 billion to purchase dairy products.Ironically, the USDA distributes for free the excess cheese it purchases topoorer Americans who can't afford many dairy products because the USDAartificially inflates their prices.

The USDA estimates that American dairy farmers receive as much as $8 billionannually from various government price-distorting mechanisms. But the damagedoesn't stop there. Average milk consumption in the United States is abouthalf the USDA recommended allowance, creating dietary deficiencies incalcium and other nutrients. Writing in the Journal of Consumer Affairs,Dale Heien and Cathy Wessells estimate that if the government dairy programwere scrapped and milk prices allowed to drop, consumption would be aboverecommended levels.

In 1996 Congress mandated that the USDA consolidate marketing orders andrevise its outdated price formulas. It also created the Northeast Compactwhich allowed price floors to be set up in New England until the revisedsystem was put in place. Within a month after the Compact took effect inJuly 1997, the price of milk in Boston went from $2.44 to $2.64 per gallon.In Hartford, it jumped from $2.49 to $2.68 per gallon.

The Compact was supposed to protect small farmers. But in Vermont, thenumber of farms fell by ten percent, with the average number of cows perfarm growing from 74 to 85 -- a 15 percent increase. In other words, fewerbut larger farms! By contrast, during the same period in Pennsylvania (anon-compact state), the number of farms fell by only 3 percent, while thenumber of cows per farm rose only slightly, from 56 to 57.

In 1999 the USDA finally issued its proposed new price differentials, whichwere slightly better than the ones in effect at that time, as well as a farworse formula for calculating future prices. Congress decided to keep thelatter, naturally, but substituted generally higher prices for the proposedreform prices. Further, Congress extended for two more years the NortheastCompact, which will create even greater regional differences.

So, Congress has actually made a horrible dairy policy even worse. It isironic that while Congressmen worry about whether Microsoft or Intel havemonopolies, they have tightened a system that already restrains interstatecommerce more than any private company could or would be allowed to do.