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December 04, 2016
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Hypocrisy in milk pricing

Congress went on its August recess without taking action on the federal Farm Bill—a piece of omnibus legislation that comes around once every five years or so containing policies and programs in a variety of different agricultural areas—which expires on September 30. But for dairy farmers, whether and when the bill passes won’t make much difference anyway. For years they have pressed for a milk pricing system that is set to cover their costs of production. It seems like a no-brainer, given the rate at which dairy farms all over the country, and in our area in particular, are going out of business. But opponents proffer the argument that to do so would involve abandoning free-market discipline, creating all kinds of imbalances.

That argument seems to have prevailed this year again, as we have been presented with yet another do-nothing farm bill as far as dairy farmers are concerned. There’s just one big problem with it: the structure of the current milk pricing formula makes it clear that it’s a giant piece of hypocrisy.

An article by the University of Wisconsin Cooperative Extension explaining milk pricing concepts for dairy farmers contains the following passage regarding “make allowances,” and the federal formulas for setting milk prices containing them: “The resulting purchase prices should financially allow a reasonably efficient plant making the eligible products to pay farmers the announced support price.”

In other words: the formulas are designed to yield a milk price low enough to allow the dairy industry processors who purchase it to make money. In fact, that’s what “make allowance” means: an allowance to cover the processors’ costs of production (including a reasonable rate of return on investment, i.e. profit). Moreover, this guarantee obviously comes at the expense of the farmer: if the only way for the middlemen to make a profit at current retail prices is to make the farmer swallow the loss, well, that’s just too bad.

For those interested in the details, here’s how it works. Milk prices are currently set by so-called federal milk marketing orders. These orders are issued monthly, based on calculations that back-figure an implied value for fluid milk on the basis of the prices of products made from it, like cheese, butter and whey. Let’s pretend it is based just on cheese (the actual formulas use a variety of products). Let’s say cheese has a retail price of $4 a pound. And let’s say it takes 100 pounds of milk to make 10 pounds, or $40 worth, of cheese. If raw milk cost $40/cwt, and that were the processor’s only cost, it would just break even at that price.

But a processor can’t stay in business buying raw milk at $40/cwt and selling the cheese produced from it for $40. Here’s where the make allowance comes in. It’s the amount set to equal the cheese-making costs, other than milk, of “a reasonably efficient” processing plant, which must be subtracted from the $40/cwt price to obtain the price the processors will be asked to pay the farmer for raw milk. In our simplified example, if these costs of milk processing, ex the milk itself, were $2.50 per pound, or $25/cwt, then the price paid to farmers for milk would be reduced accordingly, to only $15/cwt—which might very well not be enough to yield the farmer a living.

It is baked into the cake of the milk pricing formula, in other words, that the middleman’s costs are covered—at the expense of the farmer, who will take the hit if retail prices sink too low. Does this sound familiar, in this country where the riches and benefits are more and more unevenly distributed, with the muscle of corporate money making the difference? Is it just a coincidence that most processors are mid- to large-size corporations, while many dairy farmers are families?

It’s discouraging to see this year’s Farm Bill roll by without an attempt to restore some fairness to the milk pricing system, and by the time the next one comes around, who knows how many more dairy farms will have gone out of business? Still, the idea is so sensible, and the hypocrisy of the current system so profound, that it is worth getting out the word as to why the system needs to be changed in the hopes that sooner or later it can be turned around, both to save the dairy farms and in the interests of good old-fashioned American fairness.