Next Step for the Dairy Cartel

On May 3 New England's dairy farmers took the next logical step on their seemingly inevitable march toward a supply management system. On that day the New England Interstate Dairy Compact Commission voted to adopt an incentive system to pay farmers for not making more milk.

Over the past seventy years many thousands of Vermont's small dairy farms have winked out. Sometimes a farm's disappearance has been due to the lack of a new generation to carry on the family enterprise. But the most common reason is that the less efficient, less capitalized farmer can no longer pay his bills and make a profit at the price the market offers for his milk.

There has never been, since 1935, a "free" market in any sense. The federal government has enacted a host of protective devices to put a floor under fluid milk prices. For example, the government has long maintained major barriers to the marketing of reconstituted milk. Large Midwestern dairy factories using new technology could flood the country with low-cost aseptically packaged milk concentrate. Because there would be no need to ship refrigerated trucks of perishable fluid from farm to plant to grocery, the price of milk in many parts of the country would drop dramatically. Government barriers make this almost impossible.

The Federal government also has an elaborate system of marketing orders and regional fluid milk differentials not only to prop up the price, but to ensure the continuation of dairy farms, however inefficient, in every state of the union. That's why the nation's most expensive milk is produced in Florida, when the Florida market could be far more efficiently served by cheaper Midwestern milk. In 1996 Congress ratified the six-state producer cartel called the Compact. The cartel tells New England milk handlers that they must pay farmers $1.23 per hundredweight (11 cents per gallon in bulk) over the regional federal floor price. Last year this made New England's 4000 dairy farmers $33 million richer. It also made New England's millions of milk drinkers correspondingly poorer, but they aren't organized to make any effective protest. New England schools discovered that the higher cartel price for milk was eating into their school lunch budgets. So the Compact agreed to make payments to the six state departments of education to offset the higher costs. Of course, the Compact is not compensating welfare mothers, food stamp families, or working people who are required to pay higher milk prices. If the Compact compensated everybody who is paying higher milk prices, there wouldn't be any money left over to hand out to farmers.

The May 3 Compact Commission vote puts out to farmer referendum a proposal to pay farmers for not producing more milk. If 60% of all farmers agree, five cents of the compact premium would be distributed to farmers whose production is increasing no more than one percent per year. In other words, part of the higher price the Compact extracts from consumers at the checkout counter would be used to pay farmers to not produce more milk which, absent the web of government price regulation, would reduce prices to consumers. Supply management is popular with small farmers who don't want to expand, or who lack the credit or management skills to expand. One Highgate farmer was quoted in an article in the April 23 Times Argus as saying "If there's more money to be made in milking less cows, that's what the majority of farmers would want to do." Probably so. For some farmers the ultimate goal is a New Deal-style program which would pay farmers a lot of money for producing nothing at all.

Like it or not, small dairy farms are becoming less and less viable, unless they have off-farm or non-milk income, a contract buyer, a specialty product, or lottery winnings. The dynamics of the national dairy market are shouting "get big or get out" more loudly than ever.

The final chapter in this epic, after incentives fail, will be Quebec-style supply management. Every farm will have a government-determined production quota. No farmer can increase production without buying a quota from another farmer going out. No milk can enter the region. The government will fix the price high enough to make all existing farmers financially comfortable.

Can Vermont's non-competitive small farms be saved? Switzerland saved its inefficient farms by simply paying them tax dollars to keep farming, on the theory that their production is important to national security, their work is important to the landscape, and their children are better off in Valais or Obwalden than at loose ends in Zurich. Vermont farmers despise such "welfare payments" as incompatible with their independent status. Instead, they want to extract the same amount of subsidy through a complicated price-control and trade barrier mechanism, backed by the government's coercive power. This scheme invisibly taxes milk drinkers to boost producer incomes. In the long run this is not likely to succeed.

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May 2000