$38/cwt. Milk?

Northstar Notes

Not likely, say dairy experts. It’s a matter of semantics and politics.

Published on: December 27, 2012

Media reports are trying to find a fresh angle on the farm-bill-yet-to-be.

The latest, according to the Star Tribune, is how consumers’ milk and dairy product prices are going to double, due to the federal government’s lack of dealing with the ‘fiscal cliff’ and lack of farm bill passage.

According to that news story, which links “twisted consequences of Congress' frayed fiscal cliff negotiations” with “the possibility of dramatically higher prices for dairy products,” the U.S. dairy program would revert to the Agricultural Act of 1949 and a pricing system that requires the federal government to buy and store milk, butter and cheese, and that would cost billions of dollars. And if that were to happen, sources in the story say consumers would see dairy product prices increase 50% or more.

Back in September, Cornell ag economist Andy Novakovic, who has covered the U.S.dairy industry for a few decades, wrote an informational paper on dairy markets and programs, speculating on the possibility of the 1949 scenario if Congress did not pass a new farm bill.

He figured out that farmers would be paid around $38 per hundredweight, based on the 1949 act that requires the USDA secretary to announce a support price for milk of no less than 75% of the parity price for milk (parity was just shy of $52 in August).

His conclusion?

Well, Andy laid out some facts first:

-The law is clear. The ag secretary would have to announce a support price. However, “establishing a genuine support price and corresponding purchase prices for dairy commodities equivalent to $38 or thereabouts for the next 12 months would be like some kind of bad heroin trip for the dairy sector,” Andy notes. “Farmers might revel in euphoria at first but the aftereffect on markets is almost too absurd to imagine.”

-Sure, the secretary can announce that support price, but until USDA announces the purchase prices for dairy commodities and releases the formal invitations for offers at those purchase prices, nothing happens to markets, other than perhaps rampant speculation. Andy notes that it is USDA's purchases of butter, cheese, and nonfat dry milk at specific prices that moves market prices, not a simple declaration by the secretary about the support price for milk.

USDA could take a while to get all that machinery in motion. Meanwhile, Congress could stop posturing, think long-term (what a concept!), and pass a farm bill.

-And then there are the markets. In the past, USDA issued offers to purchase very specific products in specific containers that were manufactured in inspected plants that conform to various government procurement rules. If no manufacturer cares to sell to the USDA, then there is no sale and no corresponding price effect. Andy pointed out that this actually happened in the 1980s and at times in the 1990s.

Based on those facts, and assuming no farm bill would be passed by now, Andy did not expect to see actions taken that would implement the provisions of permanent agricultural support law, including a $38 support price for milk.

When you consider the facts and support price program history, neither do I.