First the Fiscal Cliff, Now the Dairy Cliff

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By James Greiff

You think going over the fiscal cliff might be a big deal? Wait until you get a dose of the dairy cliff.

Sad to say it but the arrival of 2013 may bring a doubling in the price of milk to as much as $6 to $8 a gallon, up from about $3.75. For this, you can thank Congress, which seems to have lost the ability to carry out its most basic functions, starting with passing legislation.

The source of the dairy cliff can be found in the failure of Congress to agree on a new farm bill, which is normally renewed every five years. Not this year, and the deadline for passing a new law expires Jan. 1.

The upshot is that the rules governing dairy price supports will revert to legislation adopted in 1949, forcing the government to purchase milk at elevated prices. With Washington soaking up milk, market prices would follow.

How does a law from 1949 lead to a doubling of milk prices? The law sets a floor for milk prices based on dairy production costs 63 years ago, when farms were much less efficient and mechanized than they are today. Add in adjustments for inflation and a few bells and whistles and out comes a formula that requires Washington to buy milk at roughly twice the current price. That works out to about $40 per hundredweight compared with $18.56 now.

Dairy farmers probably won't mind. But everyone else down the dairy food chain would be affected, from consumers to cheese, butter and yogurt makers, who probably will resort to buying more imported milk to keep their costs in check.

This could all be averted if Congress passed a new farm bill that included a minimum price floor, like the one in the legislation about to expire. In recent years, with commodity prices at or near record highs, this floor has been lower than market prices for milk. Farmers could make more by selling their goods on the open market, and the floor never kicked in.

The deadlock over the farm bill has dragged on for half a year. The Senate passed a bill that included $23 billion of cost savings during the next 10 years. The House version contained $35 billion in savings, though that version never came to a vote because of opposition from members who sought more savings, mainly from the food-stamp portion of the bill.

The threat of reverting to the 1949 law is supposed to work just like the fiscal cliff -- the combined $600 billion in tax increases and spending cuts if Washington can't reach a budget deal before the new year. It seems neither has worked.

There is a lot not to like about the two proposed versions of the farm bill. A better alternative would be to end most government subsidies for the farm industry. But congressional inaction that leads to soaring milk prices is inexcusable.

(James Greiff is a member of Bloomberg View’s editorial board.)

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-0- Dec/28/2012 21:18 GMT