UW-Madison dairy policy analyst, Mark Stephenson, isn’t buying into the Fiscal Cliff situation in Washington D.C. as leading to a doubling of milk prices for both consumers and farmers. He shares his reasoning here.
I’ve been receiving many inquiries about the potential of a January 1 “Dairy Cliff”, so I thought that I would jot down a few ideas about what this potentially means to the industry. This terminology has been used by many folks referring to a fallback to permanent legislation of dairy provisions at the end of the calendar year.
Farm Bills are not permanent legislation. They contain legislation that will be enacted over the life of the bill (usually 5 years) but are scheduled to sunset unless the provisions are renewed for another 5 years or are extended from previous legislation until the next Farm Bill is passed. It is common for New Farm Bills to not be passed on time—in fact, the last two bills were delayed by as much as a year with an extension and continuing resolution for funding. Based on that previous history, this year isn’t much different.
Actually, that isn’t quite true… this year is different in that we haven’t passed anything of substance out of Congress for many months—including a Farm Bill extension. The permanent legislation that the dairy industry would revert to was contained in the Agricultural Act of 1949 and is known as the Dairy Price Support Program (DPSP). This program requires the Secretary of Agriculture to purchase as much cheddar cheese, butter and nonfat dry milk as anyone wants to sell to the Commodity Credit Corporation (CCC) at announced purchase prices.
The Secretary does have authority to move those prices somewhat but they must be set at values consistent with a milk price goal within 75-90% of “parity.” Parity was based on agricultural price relationships of inputs bought and products sold during 1910 to 1914—a time period when agriculture was thought to be in good alignment with non-farm incomes. Today, 75% of parity would be a milk price of more than $38 per hundredweight which is about double our current market levels.
It is important to remember that the original basket of inputs used in the parity calculation contained items like the cost of a mule. Advances in farming technology and management make the direct application of the original rules unwieldy at best and foolish at worst. However, the important question is whether farmers will see nearly $40 milk in the near future.
I have recently been asked questions as to whether consumers would balk at $8 a gallon milk. This number comes from roughly doubling the cost of a gallon of milk at retail. Such a headline is a little reckless in that doubling the farm milk value would not cause a doubling of retail prices. In the first place, processing, distribution and retailing costs are about half of the total cost of today’s gallon of milk and these costs would not change with a change in the farm price of milk. You can add about $1.75 to the cost of a gallon of milk to account for the dairy cliff prices.
While I do think that implementing the permanent legislation is possible, I don’t think that it is probable. There is a still a small possibility that we could get a new Farm Bill attached to fiscal cliff legislation in the next few days. There is a greater likelihood that we will get an extension of the previous Farm Bill until a new one can be passed. Both scenarios would mean that there is not dairy cliff.
On the other hand, if absolutely nothing gets done by January 1, then the Secretary is obligated to implement the permanent legislation. But remember, it could take several weeks to get to the point that USDA is ready to begin purchases of dairy products (its been years since they have bought any product under this program). And let’s not forget that dairy processors have to make the judgement call about selling to the government too. While this would be an attractive price for them, they have to make product to government specifications and purchase special packaging and probably disrupt sales to their regular customers—folks whom they spent years cultivating for sales.
In my opinion, there would be time to pass an extension of the previous Farm Bill during January if we don’t get the new Farm Bill passed in the next few days. While we would be technically under the permanent legislation at that point, it is unlikely that any sales to the government would take place and there would be no disruptions to commercial channels or consumers.
At this point, I think the most likely outcome is an extension of the old Farm Bill either sometime this week or in the first few weeks after the new Congress is seated. If the new Farm Bill is delayed by much, Congress will be scoring new legislation from a new Congressional Budget Office baseline. I don’t know of anyone who expects the baseline to be better than last year’s and it will probably look much worse. That suggests that a new Farm Bill will have to go back to Ag committees in the House and Senate and we will begin all over again looker for deeper cuts to programs.
For the time being, let’s watch to see what happens by the second half of January. If nothing happens by then, we can start contemplating what a $38 price goal would mean. I wouldn’t worry about don’t worry too much about hoarding butter or buying New Zealand cheese for your Super Bowl party. We’ll have plenty of our own at reasonable prices.
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