Yes, $8 Milk Prices Could Happen Thanks to Congress and the Farm Bill

Call it the "Milk Cliff" or "Dairy Cliff" or "Cow-a-Bunga-Maggedon."

Due to an outdated price support law from the Truman administration, upcoming holiday breaks and recent recesses would have one significant consequence if Congress can't reach an important bipartisan agreement by January 1: $8 milk prices.

You see, due to permanent legislation from 1949, American dairy farmers have an outrageous incentive kick in on Jan. 1 without Congressional action. Without an updated bill, the U.S. government would purchase dairy products from producers at nearly double the current market rate.

Members of the House of Representatives and Senate have wrangled for several months. Though talks have progressed in the last two weeks, without an extension or overhaul of the 2008 farm bill, dairy subsidies could expire on New Year's Day and send the price of a gallon of milk to record highs.

Americans could see steep rises other commodities as well, including corn, soybeans, and wheat.

So why hasn't the Farm Bill passed yet? The reasons will surprise you...

An Outdated, Ill-Fashioned Law

More than 60 years ago, the U.S. dairy industry was far smaller and less efficient than today. The industry relied on significant price supports from the U.S. government.

The 1949 policy is based on parity pricing and calls for a minimum milk price relative to a 60-year-old formula to calculate production costs.

Agricultural innovation and economies of scale have since taken hold of the dairy industry. The ever-bureaucratic government, unable to rescind outdated laws and always seeking to curry favor with special interests, left this law on the books for decades.

In the event that U.S. policy returns to this law, the U.S. government would step in and offer to purchase milk, butter, and cheese from farmers at double the current market rate. Farmers would have the ability to either sell their products at a market rate or at a U.S. Department of Agriculture (USDA) rate. Currently, producers sell milk for an average of $19 to $20 per hundredweight (approximately 12 gallons). But reverting to 1949 farm policy would move the support price to $38, the USDA support level.

In October, the U.S. average price for a gallon of milk sat at $3.46, according to data from the Bureau of Labor Statistics. But an increase driven by USDA incentives could lead to an immediate jump of $2 to $3 per gallon.

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Thanks to the USDA purchasing rule, the federal government, which is ill-equipped to handle vast quantities of dairy products, would become the owner of these products. Consumers could expect not only higher prices due to the government price hike, but also shortages in the grocery store.

With prices spiking to $7 or $8 a gallon, there would be a rather drastic impact on demand.

The Executive Office of the President predicts that a steep cost increase up the supply curve would lead to a decline in domestic demand of roughly "9%, and exports, which have seen much growth over the past decade, would likely disappear as the cost of U.S. dairy products would become prohibitively expensive." This would be a staggering decrease for a sector that increased production by 18% from 2003 to 2012.

Such a steep drop in demand would then send a ripple effect across the U.S. dairy supply chains, leading to production stoppages, a decline in dairy cows, and even tighter supply in the future.

But Congress continues to bicker.

Why the Farm Bill Has Stalled

The farm bill has stalled due to two main factors...

First: the U.S. food stamps program.

On Nov. 1, SNAP, the Supplemental Nutrition Assistance Program, reached rolls of 47.6 million or nearly one in six Americans. With food stamp usage exploding from 28.2 million in 2008 to 46.6 million in 2012, Republicans want to reduce benefits by at least 3.8 million by the end of 2014.

Democrats aren't having it.

In total the U.S. food stamp program costs American taxpayers $80 billion each year. The House, run by Republicans, recently passed legislation to cut nearly $4 billion per year, or 5%, and demands changes in eligibility and work requirements. The Senate, run by Democrats, has proposed a cut of just $400 million.

Despite the cuts, food stamp fraud is up dramatically, and Congress allowed merchants with no business receiving food stamps for payments - like gas stations and convenience stores - to accept these program dollars. Rather than focus on providing food to the people who really need it, Congress has allowed the system to cater to food and agribusiness firms.

Which brings us to the second major force stalling the farm bill: Lobbying.

Cotton and rice lobbyists have been fighting with representatives of the corn and soybean over subsidies and insurance payments for several years. Now, it's possible that just one commodity category's lobbying arm could kill this bill or simply aim for a two-year extension on the current laws. That would only kick the can, and the "Dairy Cliff," down the road.

Seems like a theme in Washington...

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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