December 28, 2012

Farmers worry about disruption of ‘milk cliff’ in dairy market

It’s been jokingly called the “milk cliff,” but dairy farmers aren’t laughing.

It’s been jokingly called the “milk cliff,” but dairy farmers aren’t laughing.

On Jan. 1, a federal dairy program expires and dairy prices then revert to a standing 1949 law that could double milk and cheese prices for consumers and school districts – and powerfully disrupt dairy markets.

Sharp price increases won’t happen right away and could quickly be reversed by Congress in the coming weeks.

But if weeks pass without congressional action, the impact would snowball.

And everyone from U.S. agricultural officials to Kansas dairy farmers is scrambling to figure out exactly what it would mean – for farmers, for consumers and for the U.S. Treasury.

“We are definitely in uncharted territory,” said Jackie Klippenstein, vice president for industry and legislative affairs at the giant Kansas City-based dairy cooperative Dairy Farmers of America.

The program, called the Dairy Product Price Support Program, was part of the most recent farm bill. Although the farm bill expired Sept. 30, the dairy program continues until the end of the year.

As part of that program, the federal formula has set the cost of production below the actual cost to produce milk, meaning no federal action is needed. But on Jan. 1, that law expires and the prevailing 63-year-old law requires the government to acquire the milk using an antiquated formula that would set the price that the government must pay at between $37.35 and $44.82 per 100 pounds of milk, roughly twice what it costs dairies to produce milk, even with drought driving up feed prices.

The 1949 law also applies to other commodity foods, such as wheat, corn and grain sorghum. A report by the Congressional Research Service said that the government might be forced to buy wheat at $13.95 a bushel, a 70 percent to 80 percent increase over current near-record-high prices.

Orville Miller, of Miller Dairy in Hutchinson, said he couldn’t believe this situation has even come about.

“It would totally ruin the market,” he said of the looming jump in milk prices. “They’ve pulled some pretty stupid things, but I can’t believe even they would let this go on.”

Worries about the wheat purchases are muted for now because wheat harvest is six months away.

Milk, however, is produced twice daily.

The report said that corn and grain sorghum prices probably would not have to rise because the market price is already high enough under the old formula.

Congressional action would quickly solve the problem.

A new milk pricing program is built into the proposed farm bill. Versions were passed earlier this year by the full U.S. Senate and the U.S. House Agriculture Committee, but the House version stalled in the full House when some conservatives balked at the total cost of the bill, especially the spending on the food stamp program. House leaders promised in September to bring the bill back up after the November election.

This week U.S. Rep. Mike Pompeo, R-Wichita, agreed the expiration of the program will cause trouble for farmers and that Congress must act to provide certainty, but he didn’t express support for the current version of the farm bill.

“Congress must turn what is now mainly a food stamp bill into a consumer and farmer focused bill based on free market principles,” he wrote in an email this week.

U.S. Rep. Tim Huelskamp, R-Fowler, couldn’t be reached for comment. His offices were closed and voicemail wasn’t accepting messages.

U.S. Sen. Pat Roberts, R-Kan., ranking Republican on the Senate’s agriculture committee, said consumers and farmers shouldn’t face this uncertainty.

“I am committed to working with Senate and House leadership to convince them of the need to, at the very least, pass an extension of the current farm bill and prevent uncertainty in the dairy case and on the farm,” he wrote in an e-mail this week.

The U.S. Department of Agriculture will follow the law, as required, U.S. Sec. of Agriculture Tom Vilsack said in a call with reporters this month, but he said it would take “a while” to develop the rules needed to administer the law. But once they are written, the government will start buying milk at the higher prices, he said.

As prices rise, U.S. dairy exports will dry up and foreign countries will start selling more dairy products in the United States.

Food processors will start re-writing formulas to reduce or eliminate dairy products, he said.

“This is a bad outcome,” Vilsack said.

“The best outcome would be for Congress to do its job in the remaining time this year to pass a five-year bill and make it a priority,” he added. “That’s the best outcome. The worst outcome would be for Congress to do nothing and for permanent law to come into effect.”

With Americans’ consumption of milk already trending down, those in the dairy industry fear what might happen if consumers go to the store to find milk selling for $6 or $7 a gallon.

Jim Mitchell, a 63-year-old artist from Milwaukee, said his family of four goes through at least a gallon of milk a day but might switch to soy or almond milk.

"They’re usually more expensive," he said, "but if milk goes to $6 a gallon, all of a sudden they’d be affordable."

"Or we might have to buy our own cow," his wife, Melissa, joked.

Dairy producers who are currently experiencing tight margins or even losses acknowledge they would see windfall, at first. But, they said, customers would soon adjust by buying less, and that would cause a huge disruption in the market.

“We are going to have consumer backlash and it’s not the fault of the dairyman,” said Byron Lehman, a Harvey County dairy farmer. “And once you lose those people, they’re going to change their buying habits.”

Contributing: the Associated Press

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