TCS Daily


The Calcium Cartel

By Chris Edwards - July 20, 2007 12:00 AM

As Congress considers a major farm bill, it has an opportunity to cut wasteful subsidy programs and cut food prices for average families. Dairy programs would be a great place to start, since milk prices have soared in recent months.

Consider the illogic of federal dairy policies. They jack up milk prices for millions of families at the same time that other programs, such as food stamps, aim to reduce food costs. And although federal law generally prohibits cartels, a federal dairy cartel enforces high milk prices. If Coke and Pepsi got together and agreed to hike prices, they would be prosecuted. But with milk, raising prices is official government policy.

The trouble started in 1930s with "marketing order" regulations. Those rules set minimum prices that dairy processors must pay to dairy farmers in 10 regions of the country. Today, about two-thirds of milk is produced under federal marketing orders, and most of the rest is produced under similar state schemes such as California's.

Marketing orders limit competition, because entrepreneurs are not allowed to supply milk at less than the government prices. The system also restricts milk from lower-cost regions, such as the Midwest, from gaining market share in higher-cost regions, such as the Southeast. Government data show that residents of Cincinnati paid an average $2.68 for a gallon of milk in 2006, while those in New Orleans paid $4.10 and government policy is largely to blame.

On top of marketing orders, Congress added a dairy price support program in 1949. This program helps to keep prices high by guaranteeing that the government will purchase any amount of cheese, butter, and dry milk from processors at a set minimum price.

In 2002, Congress added an income support program for dairy farmers, which distributes cash payments whenever prices fall below target levels. Perversely, this program causes overproduction and thus downward pressure on prices -- in direct opposition to the price support program, which tries to raise milk prices.

To enforce artificially high prices, the government imposes import barriers on milk, butter, cheese, and other products. Without those barriers, consumers could simply purchase lower-priced foreign goods. Imports of cheese, butter, and dried milk are limited to about five percent or less of U.S. consumption.

All these policies add up to higher prices. The Organization for Economic Cooperation and Development found that U.S. policies create a 26 percent "implicit tax" on milk consumers. That "milk tax" is regressive, meaning that it harms low-income families the most.

The Government Accountability Office compared U.S. dairy prices to world prices over the period 1998 to 2004. It found that U.S. prices for butter averaged twice the world price, cheese prices were about 50 percent higher, and dry milk prices were 24 percent or more higher.

The irrationality of federal dairy polices were driven home in a legislative battle last year. Dairy entrepreneur Hein Hettinga started a dairy farm and milk bottling plant in Arizona in the 1990s outside of the government system. He sold his milk to Arizona stores and to Costco in California at 20 cents per gallon less than the government-regulated milk.

His low prices were popular, and his business expanded rapidly. Costco executives supported him because they believed that consumers were being "gouged" by the government system.

However, established milk businesses were not happy with the new competition and they spent millions of dollars lobbying Congress to intervene. At the behest of home-state dairy interests, Democrats and Republicans teamed up in 2006 to change the law and crush Hettinga.

Based on his experience, Hettinga lamented, "I had an awakening . . . it's not totally free enterprise in the United States." Sadly, that lack of free enterprise keeps milk prices high and it has created a U.S. dairy industry that lags behind innovations in countries with less regulated industries such as New Zealand.

U.S. dairy programs are byzantine in complexity, but the ultimate effects are to transfer wealth from average families to dairy businesses. In this year's farm bill, let's hope policymakers take the side of average families for a change, and repeal the damaging milk cartel.

Chris Edwards is director of tax policy at the Cato Institute, and his research can be found at http://www.cato.org/downsizing/agriculture.


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14 Comments

the primary purpose of govt
is to take money from those who don't have political power, and to give it to those who do.

Everything else is at best, secondary.

The Calcium Cartel
This has little to do with Government Regulation, but more to do with the leap into Ethanol which everyone is embracing. More than jut milk prices have gone up because of the embrace of flawed policy on the energy front. Anything that uses a corn product has gone up including tortillas in Mexaco. This will affect anything sweetened with corn syrup, any animal product that is fed corn (poultry,swine and beef), breakfast cereals, and cornchips to name a few. If we could drill for oil where we have oil and increas refinery production with out the whinning, we wouldn't have this problem This is more management by "Created Crisis" from the left. They shutdown domestic oil production with their flawed enviro policies and the rush is on to a green product. Flawed policy from flawed science.

Their 'regulation' of the dairy industry necessitates the subsidies...
My father used to be in the dairy business & would have been able to afford to sell milk cheaper if not for the government requirements for dairies. Farmers had to keep buying new equipment to comply with government's standards which kept changing. This got expensive & put many farmers out of business. If there weren't any government controls a farmer might be able to sell fresh raw milk directly to the consumer for around a dollar or two a gallon without losing money on the deal. When milk leaves the farm, the processor pasturizes & possibly other things to meet govt. requirements before being bottled & distributed to stores where it's sold to consumers. These 'middlemen' each add to the cost of a gallon of milk. Milk could be cheaper if farmers could sell direct to consumers. If the farmers was getting what people pay in the grocery store for milk they wouldn't need subsidizing.

Without the subsidies
many would not have even started milking.

What other farming business provided a bi-weekly paycheck? Milk had to be picked up every other day and payments were made usually every two weeks.

There were many in the dairy business who should not have been in the business. They were not good with the cows or with the requirements for keeping the product clean.

We used to drink our own milk, but there were neighbors whose milk I would not drink.

The best farmers can do is to vertically integrate. Start selling raw milk cheese like the dairy in Colorado City, AZ or make very good ice cream.

As the USA gains more immigrants from around the world, many don't have the gene to digest fresh milk and need to eat processed products like cheese or yogurt.

It isn't a cheap business for beginners to get into...
Unless your family already owns land & dairy cows getting into the dairy business would cost considerably more than the subsidies would cover. My dad was always having to buy additional equipment to keep current with government regs. The milk had to be kept cold in addition to being clean. It got poured into the cooler as soon as the milkers were detached from the cows. It's against the law to sell raw milk unless labelled 'pet food', milk for human consuption is required to be pasturized before it can be sold. Some milk is sold to facilities that produce cheese & yogurt so people can use those foods if they can't digest milk. We used to get our milk straight from the cooler & nobody got sick from drinking it. Saying there were many in the dairy business who should not have been in the business doesn't make sense as they would have had to be in some business to earn a living. Farming is better than having them be on welfare, at least it's a productive way to earn a living.

ethanol is another example of this priniciple.
govt takes from those who make, and gives to those who whine.

govt regulations make every business more expensive
by your logic, govt should set the price for everything.

One cow, one Surge bucket
That's how my dad started.

You have a few good points
It all sounds good and well to say "get rid of the subsidies" but that simply will not work without other drastic changes. In the milk industry, for instance, many larger operations pasturize on location. If certain standards were made and then left alone without change, these guys could indeed make a living selling milk directly to the stores and the consumer, at $2-$2.50 a gallon, without subsidies. Set the standards, so the milk producer has a set and know equipment need and maintenence costs, then get out of the way as dairy's, large and small, crop up all over the place. But you first must end the rediculous part of the government regs and constant changes, then end the subsidies.

That is largely the same with every farm crop. I agree with the idea of doing away with subsidies, but only if the farmer's are given a real chance to compete.

OSHA and manure
OSHA issued a warning to farmers that manure covered concrete was slippery.

No s**t!

Milk Prices
The big winner of America's questionable policy of producing ethanol from crops, is the New Zealand dairy farmer. His prices look like going from NZD4.10 per kilogram milk solids to something in the vicinity of NZD6.65. And this has happenned as the USD crossrate has risen from .60 to .80.
By milk solids I mean the aggregate of butterfat and protein in the milk.
Selective breeding by artificial insemination and huge research into various grass species, animal health concerns, and a rigorous overview of the governance of dairy companies has boosted the country's dairy production.

You might be able to find a farmer who'll sell cheaper that govt prices...
Just because the government sets the price of something doesn't mean it's totally impossible to find somebody who will sell it to you cheaper than that! Try asking around smaller dairies or maybe goat dairies. I don't recommend buying one cow & one bucket as you might find that to be more expensive than buying grocery store milk at whatever price the government has set it at.

We used to sell raw milk direct to consumer.
But in many states it is illegal.

govt regulations aren't a problem, so long as you are with great effort, able to find a way around t
...

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