Archaic Dairy Program Milks Taxpayers

A recent U.S. Department of Agriculture (USDA) decision is the latest example of how a Depression-era program is not only woefully out of date, but is also damaging to the industry that it regulates.

In late June, USDA announced that it was putting off a decision on making cost adjustments in milk pricing formulas, a decision that will cost manufacturers of dairy products as much as $26 million per month. While the manufacturers have ample reason to be appalled by the unnecessary delay, this politically-calculated decision does serve to demonstrate one crucial commonsense truth: the federal government should have no role in the production, dissemination, or manufacture of milk or dairy products in this country. The time to get rid of the antiquated Federal Milk Marketing Order classified pricing system is long overdue.

The cost adjustment saga began last year when private dairy companies and cooperatives petitioned USDA for an emergency hearing to get a simple update of cost data used to calculate what are known as “make allowances,” which relate to the cost of turning raw milk into a finished dairy product. In January 2006, USDA conducted four days of hearings on whether the cost data from 1997-1999 that is used in formulas being applied today is out of date. The overwhelming preponderance of testimony demonstrated that these formulas were outdated.

Now, in a move obviously aimed at putting a decision off until after this year’s congressional elections, USDA plans to reconvene the public hearing sometime after September 30. This timetable means that implementation of new make allowances will be put off until well into calendar year 2007.

One rationale used for the creation of the Federal Milk Marketing Order system was the supposed need to reduce disorderly marketing conditions. However, this latest episode shows that the Federal Milk Marketing Order system is actually an obstacle to orderly marketing. This Depression-era system is proving to be one of the most disruptive and disjointed schemes ever to be foisted on an industry, an albatross hanging around the neck of the U.S. dairy industry.

Rather than allowing commerce between dairy farmers and dairy manufacturers to flow freely, the milk marketing orders devise and administer a raft of intricate regulations to govern the overall price of milk. The regulations undermine the most basic free market concept of negotiating contractual agreements between buyers and sellers.

The milk marketing orders also impose one of the more illogical pricing mechanisms imaginable — “differential” pricing, which establishes varying minimum price for milk in different regions of the country, based, in part, on how far the manufacturing plants are from Eau Claire, Wisconsin. At the time this scheme was devised, it was justified as necessary to encourage dairy production in different regions because otherwise poor refrigeration and a sluggish and unreliable transportation system would prevent localities far from milk-producing states from receiving a fresh and wholesome product. In the real world of 2006, this rationale is purely laughable.

Consumers in the higher differential regions of the country pay higher prices for milk and dairy products than those consumers closer to Eau Claire. Perversely, the differential system also penalizes dairy farmers in the regions best suited to dairy farming and rewards dairy farmers operating in high-cost inefficient areas that might be far from Eau Claire.

Another senseless feature of milk marketing orders is the setting of different prices for different “classes” of milk, depending upon whether their end use is for fluid milk consumption, cheese, ice cream, or other products. There is no rational justification for this milk classification regulation. Elimination of the system would result in milk marketing being more responsive to consumer demands. Freed from such senseless regulation, processors and manufacturers would pay greater attention to the marketplace and adjust their product ratios accordingly.

Elimination of minimum prices, milk classing and differentials would ultimately result in milk being produced where it can be done most efficiently and competitively and would more likely be processed and manufactured into the products that are what the consumers demand. This would make a lot more sense and be more orderly than the tangled web of mind-numbing pricing schemes embodied in the Federal Milk Marketing Order system.

There is no doubt that USDA’s recent politically-calculated maneuvers are damaging to the dairy industry. That is the bad news. The good news is that this case may help to demonstrate that it is time, after 70 years of government price manipulation, to get the government out of the milk business.