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Hypocrisy in milk pricing

August 9, 2012

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.