First the Fiscal Cliff, Now the Dairy Cliff
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.
To me this is why regulation can be dangerous and why we cannot get a control over the cost of goods via our purchases.