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The Great Milk Fiasco

Mises Daily: Wednesday, November 20, 2002 by

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Roosevelt-era farm policy lives! Consider: dairy farmers in northern New England dumped 80,000 pounds of fresh milk in a protest against low milk prices. The farmers evidently favor the price-support program that ended last year, because it worked as a kind of minimum wage program: keeping their incomes high and competitors out of the market. Now these farmers must face the mean forces of supply and demand, and they don't like it one bit.

Contrast this strange behavior with the largely free-market IT industry.  Imagine if you heard that Dell Computers was tossing marketable computers in the trash to protest falling prices. Would anyone be sympathetic? Of course not. We would think that the company deserves its fate for doing such a ridiculous thing. 

The way to respond to falling prices is to offer a better product more efficiently. The signal of the need to do so is a feature of free enterprise, the system in which the consumer—which is to say, the common person—is king. 

When the opposite behavior takes place, when producers destroy their own property, this is a good clue that market signaling has been short-circuited and that producers are concerned about something besides marketing. Sure enough, interventionism in the milk supply is ubiquitous. 

The culprit is the Northeast Interstate Dairy compact, about which Wisconsin milk producers have been very unhappy. The pact covered the years 1997 through 2001, establishing price floors on milk and "protecting" the farmers against "swings in the price paid for their milk." The farther milk producers are from New England, the less they benefit. 

Ironically, the Compact was passed as part of the 1996 Freedom to Farm Act, which was sold as a plan to phase out taxpayer subsidies over the next seven years.  Senator Herbert Kohl (D-Wisc) may have come to understand that the agreement "essentially forced consumers to pay more for milk [and] generated an average of about $10,500 a year for each farmer."  

Earlier this year, the Act itself was gutted by President Bush's $ 190 billion farm bill, primarily aimed at shoring up Midwestern GOP support for the recent midterm elections.  The subsidy-rich bill restored target price systems abolished by the 1996 Act, and was a miracle of bipartisanship.  Among its supporters were Tim Hutchison (R-Ark) and Senate Agriculture Committee Chairman Tom Harkin, (D-Iowa), who called it “the economic plan for rural America."  

This should come as no surprise, given Harkin's past relationships with Midwestern farm policy beneficiaries, particularly Archer Daniels Midland (ADM).  ADM and its former chairman, Dwayne Andreas, are notorious for showering both parties with up to $ 4.5 million, including bipartisan five-figure donations for Sen. Harkin ($20,000), Sen. Thomas A. Daschle (D-SD, $ 18,500), Sen. Charles E. Grassley (R-IA, $ 17,000) and Rep. Richard A. Gephardt (D-MO, $ 16,000)1.  Of these, only Grassley voted against this summer's $ 190 billion largesse, HR 2646.

In short, subsidies new and old distort market signals by diverting resources—namely, taxpayer funds—to uses other than those market participants communicate via the price mechanism. Federal funds are showered on producers who cannot bring output to market in an efficient, profitable manner.  

Marginal producers that might otherwise have to go out of business due to their inability to compete are maintained.  Other farmers may even see how well the first group does by expanding output of the subsidized crop, and divert their own resources in that direction.  In turn, this further depresses the market price by increasing supply (with demand held constant) and becomes the rationale for the next round of lobbying for greater price supports.  

The recent protest came despite Maine Senator Olympia Snowe's (R) successful effort earlier this year to insure that subsidies would kick in when "the farm price falls below $16.94/100 lbs."  It's easy to imagine FDR smiling down on such combinations of make-work schemes and outright welfare.

Family milk farmers Jill and Don Gage maintain that the Snowe-supported price supports are proving to be insufficient.  "It's better than a kick in the butt. The prices we are getting now we were getting back in the 70s," Gage said. "We never know from paycheck to paycheck what we're getting … without the compact, the prices have dropped, and there's no help for us to get it back."

Welcome to the uncertain world of the small business owner, Mrs. Gage.  With milk prices dropping some $4–7 per hundred pounds2 since the halcyon days of the NIDC, "we need more income and pretty quick, here - it's been 13 months of way too low milk prices," said Egide Dostie II, at whose farm the protest was held recently.  Protest logistics included making sure that "the milk will be hauled to the farm in a large milk transport container truck and then unloaded into the farm's liquid manure pit."  As symbolic gestures go, it may be indicative of the regard the recipients of USDA price support checks have for the taxpayers. 

Some milk farmers can take solace in the Kennebec Journal's August 17th advice to grow milk organically, since "the premium paid for organic milk can mean a farm's survival."  Like third-generation Montana grain farmer Bruce Nelson, Maine milk farmers have "become as dependent as anyone … through no fault of our own," per a New York Times article that goes on to detail the effects of federal subsidies in Chouteau County, Montana.  

As with the Maine farmers, whose protest does in fact decrease the supply of available output, Montana farmers are being encouraged to take good ground out of production and be paid for doing so. The New Deal lives and breathes!  

Ludwig von Mises pointed out in Human Action that "the fables of the welfare school are characterized by their complete failure to grasp the problems of capital."3   Almost predictably, the recipients of this farm welfare do not necessarily sink all the funds back into the intended agricultural endeavors.  According to Roger Axtman, the last farm implements dealer left in Chouteau County: "what do they do with the money? Well, some of them buy the Winnebago and hit the road. They don't buy a new tractor from me."  Some may feel sorry for this vendor and his customers, the farmers who "sit here and they tell me how much they hate taking the cheese checks from the government."

Somehow it's doubtful that the farmers hate the "cheese checks" as much as the taxpayers do—especially when they are thanked for their involuntary gift in the form of artificially inflated milk prices.  Even former agriculture secretary Dan Glickman admitted along the way that "farming has become largely an income transfer program," as "the government's role in requiring the farmer to do something in return has been largely eliminated by Congress."

Taxpayers may also wish to remember that while the Maine farmers dump their milk in the manure in the name of prices that are "too low", our friends in Congress continue to throw money—some $ 242 billion thus far—at the WIC program.  WIC specifically targets milk and other food staples, as a consumer good far too expensive for anyone whose income is less than 185% of the congressionally-defined "poverty level" (currently $18,104 for a family of four).  

The situation bemoaned by the farmers from Maine to Montana and back to the Midwest, is roughly the equivalent of annualizing an accountant's income based on what he makes from January through April. The miracle of the USDA's parity pricing is that the level to which farmer's incomes magically seem to return is based on farm prices circa 1914, a record period for the price of farm crops relative to all other documented goods.  

Parity and fairness are the two watchwords when discussing farm subsidies, and we find ourselves up against the old conflict.  Not surprisingly, Mises had a strong grasp of the likely outcome when he wrote, "what those people who ask for equality have in mind is always an increase in their own power to consume."4 

Maine farmers refuse to accept the outcomes of a free market and instead demand "a fair price."But this leaves the rest of us with the unspoken question: what are the Maine farmers, and their allies in the Midwestern farm lobby, prepared to do to freedom in the name of fairness?  Eighty-eight years of transfer payments to politically connected farmers, may provide a clue as to what we can expect.  

Imagine if, instead, the milk industry did in fact begin to resemble the IT industry, and the price for milk continued to drop as successful, efficient producers competed to provide the best quality and quantity to the sovereign consumer, at the best price.  Impossible?  Tell Dell and Microsoft, whose owners have become billionaires by best serving the buying public.  It's long past time to end decades of farm subsidies and liquidate the inefficient producers, so that our economy can more closely resemble one of free exchange.    

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Robbie Blevins runs an accounting consultancy in the DC suburbs. rblevins1222@aol.com

1White, Ben, “ADM's Largess Preserved Ethanol Break, Study Says”, Washington Post, June 11, 1998.

2Estimates in the size of the post-Compact drop range from "$16.30 to $12.10" to "$17 to $10-12" per hundred pounds.

3Mises, Human Action, p 744.

4Ibid.