Recently by Marin Bozic

On milk prices and the "fiscal cliff"

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Thumbnail image for Cow Milk Cliff Image.jpegEvery five years, U.S. Congress passes what is called a "Farm Bill". This legislation defines the set of food-related policies such as those that help agricultural producers to manage their risk, and low-income consumers with their food purchases. Like is the case with many other laws, rather than being a permanent law, the Farm Bill is designed in such way to expire after a certain number of years. The latest such legislation, passed in 2008, will expire at the end of 2012.

The idea that major legislation should be designed to have a sunset provision is a recent phenomena. In contrast, major agricultural policies of the 1950s were authorized by the Agriculture Act of 1949 which did not have an expiration date, but was designed to be a "permanent law". Reading the provisions of 1949 Act feels like looking through a window into another universe. Concepts, ideas, policies and rules that were relevant and helpful back then are far from applicable and not even remotely useful today. Similar to the original idea of the "fiscal cliff" - a set of such radical and deleterious changes in spending and taxation designed to encourage both major parties to compromise to avoid it - the "permanent law" was left in place when modern-day farm bills were being enacted. Rather than repealing the 1949 Act, the most recent Farm Bill, like many farm bills before it, just suspended it for the period of five years.

Today, U.S. dairy producers receive milk prices that are determined by market forces. Going forward, their representative organizations have petitioned the U.S. government to abolish all price support programs and help institute programs that would focus on managing very high risk in net revenue margins originating in volatile milk and feed prices. Those principles are embedded in the text of both the House of Representatives and Senate versions of the 2012 Farm Bill, designed to replace the 2008 farm bill whose dairy policy provisions expire at the end of December. Analysis done by leading dairy economists indicate that long-term effects of the proposed new policies are beneficial for consumers, as lower risk in the dairy sector would eventually translate into more affordable dairy products.

However, as "fiscal cliff" negotiations brought the entire Congress to standstill, the new Farm Bill has not been passed on time, creating a real possibility that the 1949 Act may once again be the law of the land. If that were to happen, dairy prices, rather than being an outcome of market supply and demand like they currently are and should be, would effectively be set by the U.S. government, at the level that would more than double the retail prices of milk. However, the artificial price increase would not happen overnight. The nuts-and-bolts of the ancient program insure that some weeks would pass before the Secretary of Agriculture would even be able to complete all logistical work so that the government could start with massive purchases of dairy commodities. Furthermore, at the time of writing this post, dairy futures markets do not indicate that market has any trust that such course of events would actually take place. Whatever may transpire with the "fiscal cliff" in the days and weeks to come, it is to be expected that reasonable legislation will be put in place that protects dairy consumers and continues to base milk price on market forces of supply and demand.

Further reading:
The New York Times, Dec 21, 2012:"With Farm Bill Stalled, Consumers May Face Soaring Milk Prices."

Novakovic, A. (2012, September) "Is Reverting to the 1949 Agricultural Act Really a Possibility for Dairy Price Supports?" Information Letter 12-06, Program on Dairy Markets and Policy.

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