The Folly of US Dairy Policy
Joseph V. Balagtas
The federal government has created an array of policies — production controls, subsidies, and marketing orders — that increase the price of milk for US consumers and increase the income of milk producers. This paper examines the economic and budgetary impact of these programs and offers policy alternatives. The findings include:
1) Milk marketing orders (MMOs) raise milk prices for consumers: MMOs are federal and state laws that set minimum prices for milk and prohibit milk export between regions of the United States. The result costs consumers $420 million per year and raises dairy farm income by $293 million. The excess cost of $127 million is simply economic waste, depriving the economy of growth and jobs.
2) Milk subsidy programs cost taxpayers $1.3 billion per year: The federal government operates two subsidy programs: the Dairy Price Support Program (DPSP) and the Milk Income Loss Contract (MILC) program. The DPSP uses the government purchase of cheese, butter, and nonfat dry milk to increase prices for dairy products. This program cost taxpayers an average of $384 million per year between 2006 and 2010. Dairy prices were high during these years; if they drop significantly, taxpayers will pay hundreds of millions more. The MILC program pays dairy farmers in every month that US milk prices fall below a specified target price. This program cost taxpayers $757 million in 2009 and an estimated $225 million in 2010. Using historical price and production information, Balagtas calculates that eliminating the MILC program would save taxpayers an average of $913 million per year.
3) These programs hurt large, efficient dairy farmers and limit innovation: The MILC program has per-farm payment limits that effectively support small, inefficient farms. MILC payments average 4 percent of farm income in Wisconsin, where farms are small, but less than 1 percent in California, where farms are large. The DPSP hurts the development of innovative dairy-based products because it encourages the production of fluid milk. As a result, dairy farmers in Australia and New Zealand lead in selling milk protein concentrate — a protein source in nutrition products — to the United States.
4) These programs should be repealed: These programs serve little purpose other than to artificially increase dairy farm income. Private-sector financial instruments — such as long-term forward-priced marketing contracts, derivatives, and insurance — could be used to smooth farm income and reduce the risk of serious deprivation and loss. MMO repeal would also lower the price of fluid milk for consumers while encouraging some dairy farmers to produce innovative nonmilk dairy-based products.