Milk Subsidies Need to go Over the Fiscal Cliff

Rich and Happie Larson's brood goes through 14 gallons of milk per week, minimum.

So the prospect of starting 2013 paying as much as $8 per gallon for milk would have far-reaching consequences for the Davis County family, which has 11 children at home.

"That's over $110 a week just on milk. I love my kids and they need to eat well, but if you have to choose between a gallon of milk and a nice dinner with meat for my family, I'm going to choose the nice dinner with meat," Happie Larson said.

The farm bill expired three months ago. Unless Congress passes legislation renewing federal support for agriculture programs, milk prices could spike to between $6 and $8 per gallon, according to some estimates.

This is exactly what is needed to stabilize the milk market. The problem with subsidies (or one of many) is that they suppress natural cues to producers to alter the volume of goods produced for the market. This natural action tells producers if they are over- or under-producing, and is what sets the market price. Subsidies suppress this natural signal and cause production to remain high well after demand drops. 

It must be those mean capitalists driving up costs to increase profits...

Fifth-generation Weber County dairy farmer Ron Gibson is of two minds about the possibilities.

"It's really a double-edged sword. It would be nice to have $8 a gallon for milk. (Consumers) can't afford to do that long term," Gibson said. "The bigger concern we have is that it could kill demand for our product. How many people will quit buying milk and start buying something else?"

We need this natural market reaction so that firms will look at the market and decide whether to continue producing milk or exit the market. 

Milk is just part of the dairy market. If the price of milk goes up, so goes the price of cheese, ice cream, sour cream and other dairy products, he said.

The dairy industry has worked hard to partner with the food service industry to encourage restaurant chains to use more cheese on home-delivered pizza or sandwiches.

Higher prices could result in the various chains cutting back on their orders, which would further pinch dairy farmers who are already struggling with higher feed prices due to the drought, Gibson said.

Higher prices are exactly what we need to stabilize the milk market, or the intervention into the sugar industry could have long term effects similar to the Great Sugar Shaft. How long since you had a Coca Cola with real sugar?

Congress is at an impasse over how much to cut food stamps, how much the government should subsidize crops and debate over how dairy prices should be stabilized.

Or we can continue a policy of market intervention insanity that could lead to the following:

Unless Congress resolves the stalemate over the farm bill by the end of the year, the federal government would have to follow a 1949 law that would require the U.S. Department of Agriculture to buy milk at roughly twice the current market price to maintain a stable market.

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