Milk Cartel Economics

On July 1 the New England Interstate Dairy Compact went into full effect. Starting on that date, milk handlers were required by law to pay an additional $3.00 per hundredweight for fluid milk. This amounts to an estimated 21% increase in the bulk price of milk for July.

According to a Burlington Free Press feature story, in July a typical 75-cow Vermont farm will receive an additional $1500 or so from this cartel-required over-order price. This $1500 will come in very handy for struggling dairy farmers. The identical per cwt. benefits will flow to both the smallest and weakest dairy farm, and the largest and most profitable dairy farm. The owners of a 1500 head operation will get a Compact check for an additional $30,000.

The enormously complicated 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 a surplus of milk from driving down the price and putting the least efficient farmers out of business, the Commodity Credit Corporation buys up, at a stated price, 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.

The Federal marketing orders require handlers to pay an additional "Class I differential", different for each region 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 market for cheese and butter.

Now on top of all this, the Compact requires New England handlers to pay an extra $3.00 per cwt. (in July, $16.94 instead of $13.94). Theoretically a New York farm could ship milk to a Boston handler to get the higher cartel price, but the Boston handler will buy from New England producers if the price it must pay is the same. Out of region producers who might want to sell lower-priced milk are excluded from the six-state market.

With all this government-sanctioned price fixing to confer higher incomes upon dairy farmers, somebody has to produce the money to be distributed. Up to 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 this turns up as an unacceptably large item in the federal budget and so became politically vulnerable.

There are two ways out of the budget crunch. The most obvious is to stop spending - 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.

The more devious way out is to find somebody other than the taxpayer to take the hit. That is the route chosen by the promoters of the Dairy Compact, which ironically was approved by Congress as a part of the same farm bill that deregulated most of the rest of agriculture. This cartel scheme simply 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 penalty for selling a gallon of milk below the cartel price is $10,000.

When the Dairy Compact cartel forces handlers to pay $3.00 more per cwt. for fluid milk, who gets stuck with the tab? Farm organizations 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 ultimate fall guy, the consumer.

Consumers, being unorganized and largely unrepresented in political battles, will probably pay the higher price of milk without politically effective complaint. Young mothers who buy milk for their families on tight budgets will notice that they are now paying $2.30 per gallon instead of $2.15, but they will keep on doing it. The appropriation for the Women, Infants and Children (WIC) nutrition program will run out more quickly, and families dependent on food stamps will have to either buy less of milk or of something else.

By contrast, last summer when gasoline prices jumped 10%, 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.

If government price fixing that showers benefits on dairy farmers, rich and poor alike, by extracting higher prices from voiceless consumers, rich and poor alike, is not such a good idea for helping family dairy farms, what is? A few years ago Putney farmer John Nopper offered a clever idea . He proposed that the government require all dairy farmers to make a choice. They could produce for the market like any other business, free of marketing orders and subsidies, or they could become kept farms, controlled and supported by the government to keep the landscape attractive for the tourism and real estate industries and nostalgia buffs. The plan would not soak consumers, it would not shower benefits on the prosperous, and it would be perfectly clear how much the kept farms were costing the taxpayers. This was thought to be far too radical - and perhaps too honest - for further consideration.

If the people of Vermont desire to keep more family farms farming, the legislature could shift farm property taxes to other taxpayers. It has done this repeatedly since 1977 (current use, WFTAP, the 1997 education finance reform bill, etc.)

It could encourage vertical integration, where farmers get a share of the profits from the downstream processing and marketing of dairy products by their cooperatives. It could promote grass-based management, which by reducing the need for costly Midwestern feed has had remarkable success on one Waitsfield farm.

It could deregulate electricity and let farm groups bargain for lower-priced power. It could promote alternatives like organic farming, prime beef, fallow deer, ratites, and specialty crops.

When government gets into the price fixing business to benefit 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 farmers who are receiving the price fixing benefits, eventually there will be trouble. Not only trouble, but anger, resentment, and retaliation against the people and politicians who rigged this consumer-fleecing deal.

The sad thing is that because of this political overreaching at their neighbors' expense, ordinary 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.

July 1997