Lost in the "fiscal cliff" debate is [a] debate about a new farm bill.
Lacking new farm legislation, some people think the prices of milk, cheese and ice cream will double or triple next year. And given the fiscal-cliff standoff, Washington isn't inspiring a lot of confidence in its ability to address such pocketbook issues.
But others say that even if legislators fail to act on the farm bill, a spike in dairy prices next year is highly unlikely.
On Tuesday, federal price supports for milk revert to standards set in 1949. That's because the farm bill and its modern price supports were allowed to expire this year. Based on the decades-old law, a gallon of milk that sells for $3.50 today should almost double to about $7.
Higher prices would be based on what dairy-farm production costs were in 1949, when milk production was almost all done by hand. Because of adjustments for inflation and other technical formulas, the government would be forced by law to buy milk at roughly twice the current market prices to maintain a stable milk market.
"Does that mean that milk prices on Jan. 1 will jump immediately? Absolutely not," said Cameron Thraen, associate professor of dairy markets and policy at Ohio State University and an economist for OSU Extension.
During a Dec. 20 conference call, Agriculture Secretary Tom Vilsack told reporters, "The first thing that will happen is the United States government will get in the business of providing additional support and will likely end up purchasing a great deal of product."
The government would use taxpayer money to buy the three milk products mandated by the decades-old law -- cheddar cheese, butter and nonfat dry milk. These purchases would lower supplies of these products and push up their prices, along with the price of milk.
"That will ultimately translate into importers being very interested in entering our market," Vilsack said. "It will trigger, at some point in time, more-costly milk products in grocery stores."
Should consumers be concerned? "No, because there are always substantial inventory available," Thraen said. "Product that's already been bought and sitting on the shelves in the grocery store, those prices aren't going to double and triple."
What about dairy farmers?
"Everyone's in limbo," said Chuck Moellendick, a dairy farmer in Pleasantville in Fairfield County. "We do not know what will happen."
At first, farmers would experience a financial windfall, as they rush to sell dairy products to the government at higher prices than those they would get on the commercial market. But that would come at a price.
Farmers " recognize that this could create such chaos in their markets, it could take them years to recover," Thraen said.
And the dairy industry? Chaos in dairy markets could undo decades of productivity improvements by dairy farmers and product innovations by processors.
"It's a very delicate balance to make sure we have the right system in place to ensure the supply of milk is readily available," said Scott Higgins, CEO of the Ohio Dairy Producers Association.
Drastically higher milk prices also could curtail dairy exports, which have grown to 13 percent of U.S. milk production.
"We have been growing our dairy industry in the United States over the last couple of decades primarily through exports," said Jerry Slominski, senior vice president for legislative affairs at the International Dairy Foods Association.
"Fluid milk consumption has been declining. Increasing the price on fluid milk would exacerbate that decline," Slominski said. And if milk prices rose to meet 1949 levels, milk imports would flood the U.S. market, reversing the exporting trend, he said.
Warren Taylor, owner of Snowville Creamery in Pomeroy, a small, independent dairy that processes and distributes milk for local farmers, sees no likelihood of a spike in milk prices. The nation's largest milk processors are powerful and wouldn't pay farmers double or triple the price for their milk, Taylor said. Instead, dairy farmers, milk processors and consumers are counting on Congress to solve the looming problem by extending the recently expired farm bill or tucking a new farm bill into another piece of legislation that is sure to be approved by legislators.
"I'm anticipating Congress doing the right thing," Higgins said.
And even if legislators fail to take up a farm bill early next year, it could take months for the Agriculture Department to develop a program to buy milk products to raise prices.
But if that program starts, taxpayers should be concerned.
"You're telling me as a taxpayer, I'm going to have to buy and store butter for $4 a pound?" said Thraen, the economist.
Butter now is trading at $1.60 a pound on the wholesale market. "No, thank you," he said.
Information from The New York Times was included in this story.
Distributed by MCT Information Services
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