I just learned today from Downsize DC that the government puts an adjustable price floor on milk. I had no idea. I suppose that's because I'm not involved in dairy farming or production.
The idiocy of central planning knows know bounds. Apparently this has been going on for decades. It's known as the Eau Claire Rule:Milking Us Dry
The politicians keep making big claims about how their big plans are going to achieve big results for the economy. Those tempted to believe these claims may first want to consider how well the government does with their smaller schemes. For instance . . .
Did you know that the government sets minimum prices for milk? They claim that unregulated milk prices would fluctuate wildly, but consider these wild price fluctuations . . .
The 2008 producer's minimum price of milk approached $21 per hundredweight, about five dollars more than the cost of production. This month, it's below $9.43, falling more than $6 in two months.
How are such wild fluctuations possible given that we have government regulations designed to prevent them?
Well, reality always makes itself felt despite the best laid plans of social engineers. We're in a recession, so demand for milk is low. But prices are also down because the government's strange formula for determining the price spurred over-production last year.
At the same time, droughts in California escalated feed prices, increasing the cost of milk production. Now, the government's formula for setting the "minimum price" of milk is far below the cost of production. As a result, dairy cattle are being sold for hamburger in record numbers - at a loss!
Today, the government's fixed price is encouraging under-production. But over-production, and high prices, have been the rule for decades. It's estimated that government price-fixing has historically kept the cost of drinking milk 20% above market value, imposing a huge tax amounting to hundreds of dollars a year on low-income families.
But the government's price-fixing applies only to Grade A milk, which must be safe enough to drink. Grade B milk is safe for manufactured foods, is cheaper to produce, and has no fixed price. So . . .
When farmers found that it was more profitable to produce Grade A milk because of the fixed price they overproduced the Grade A variety, which then supplanted Grade B for use in manufactured foods. This made processed foods more expensive, not more safe. This is another tax we all pay, and which hurts low-income families the most.
Aren't you glad we have the government to protect us from the free market?
There are simply too many things that determine prices - factors that price-fixing boards can neither predict nor control. Their ignorance of these factors must always be vastly larger than their knowledge. This means their price fixing schemes can never work.
Sadly, the milk example only scratches the surface. For every regulation intended to help the small producer, there's another that increases their costs while benefiting big Agri-Business. The National Animal Identification System is yet another example.
Indeed, 90% of dairy farms have disappeared over the past 40 years, and this year's low prices will run more dairies out of business, creating even more unemployment during a recession.
This is the nature of price-fixing, and of regulation in general. Such schemes protect some businesses some of the time, gouge most consumers most of the time, and make the economy less productive all of the time. Everyone suffers, especially the poor.
Do you still want to trust the big claims being made about the politicians' big plans to save the economy? If they've made such a mess of the milk industry, just imagine what they're doing to the economy as a whole.
Tell Congress that you don't trust their plans. Use our quick and easy Educate the Powerful System to send a message on our Reduce Regulations campaign.
Tell Congress you want fewer regulations and price fixing schemes, not more. You can paste this Dispatch into the personal comments as back-up for your request.
Thank-you for being a DC Downsizer.
Assistant to the President
And another one on attempts to reform it, this one from January 1998:The Wall Street Journal Interactive Edition -- November 25, 1997
Byzantine Method of Pricing Milk Won't Be Simplified Anytime Soon
By SCOTT KILMAN Staff Reporter of THE WALL STREET JOURNAL
Milk drinkers got some good news earlier this month, when a federal judge threw out one of the strangest federal regulations on the books. Known as the Eau Claire rule, it allowed dairy farmers to collect a bonus for their milk based on how far their cows were from the Wisconsin city.
But consumers haven't won yet. Dairy farmers in about half the country are trying to outmaneuver the judge, and the U.S. Agriculture Department has requested a stay of the order while it appeals. "There will be chaos here if the judge's order stands," says Tom Thompson, a dairy farmer who is president of Georgia Milk Producers Inc.
In most of the country, prices for milk have been more heavily regulated than those for any other U.S. farm product. (Some states, such as California, opted out of the federal price scheme years ago.)
But a side effect has been the creation of an enormous bureaucracy. Administering the Eau Claire rule and other milk-price regulations takes a staff of about 500 at the Agriculture Department, almost as many people as the Office of Management and Budget uses to oversee all of federal spending. The rules cost consumers $1.7 billion some years, Agriculture Department studies show.
Now, in the wake of U.S. District Judge David S. Doty's ruling, some state lobbyists and lawmakers are scrambling to save local dairy farmers by forming regional pacts that would essentially keep out cheaper milk from elsewhere and drive the retail price even higher than the federal rules did.
"This is a nightmare," says John M. Schnittker, an economist at the Washington consumer advocacy group, Public Voice for Food & Health Policy. "Instead of our best chance at milk reform ever, we're getting cartels that will make things even worse."
The establishment of federally regulated minimum prices dates back to the 1930s, when dairy farmers had little market power. Unlike corn farmers, who can store their products until prices rise, dairy farmers must sell their daily production whatever the price. So the government created a formula for determining a minimum price that processors had to pay dairy farmers.
The Eau Claire bonus materialized in the 1960s when refrigerated trucks began making it possible to haul milk greater distances. Farmer-owned cooperatives in the upper Midwest thought the increase would make it more economical for them to ship their milk to regions suffering shortages. It became known as the Eau Claire rule because that city was in the heart of the Milk Belt.
Instead, the rule made dairy farming economical in places far from the Milk Belt. As a result, Wisconsin, whose cool climate makes cows more efficient at producing milk than they are in many other areas, is no longer the biggest milking state. A group of upper Midwest dairy farmers filed the suit that led to Judge Doty's decision knocking out the Eau Claire rule.
In fact, local dairies aren't necessary anymore. Megafarms are springing up in such places as New Mexico and Idaho that produce milk far more cheaply than the postcard-pretty Vermont dairy farm. In addition, processors are experimenting with filters to remove the water from milk, which makes shipping it cross-country cheaper.
But even before Judge Doty made his ruling, one region of the country -- New England -- had moved to protect its dairy farmers from competitors elsewhere. Sen. Patrick Leahy (D., Vt.) helped tag onto the 1996 farm bill approval for a six-state New England milk-price compact. Because the compact essentially flouts the constitutional protection of interstate commerce, it required congressional approval. Called the Northeast Interstate Dairy Compact, it insures that cheap Midwest milk doesn't undercut local producers' prices by pricing all milk the same.
Beginning in July, the commission set the minimum price to farmers for beverage-grade milk at $1.46 a gallon, a level that has been 5% to 22% higher than the federally mandated minimum price, which is recalculated monthly.
For the average Vermont dairy farmer, the compact is putting about $1,000 more a month into the bank. New England shoppers, meanwhile, are paying collectively about $5 million more for milk monthly, Public Voice figures. Several supermarket chains raised their retail milk prices 20 cents a gallon over the summer.
Now, state lawmakers and milk lobbyists elsewhere are rushing to follow New England's example. Arkansas, Louisiana and North Carolina have passed enabling legislation to form a Southeast compact, and similar bills are percolating in most of the rest of the Southern capitals. Farmers in New York, New Jersey and Pennsylvania are lobbying their state houses.
But it seems that no amount of price regulation can save inefficient operations forever. The number of U.S. dairy-farm operators has dropped 44% over the past decade to 126,800. New technologies -- such as genetically engineered hormones that stimulate milk production -- are making cows far more productive. But U.S. milk consumption is stagnant -- one reason the industry launched its expensive milk-mustache ad campaign several years back. In any case, the next regional dairy compact presented for congressional approval will undergo more scrutiny. Some lawmakers are angry about the first one. "It's an abomination," says Rep. Bob Goodlatte, a Virginia Republican. "A lot of members didn't know what was going on."
Price differentials were developed in the 1960s when the heart of dairy production was in Wisconsin and Minnesota. The "Eau Claire rule" increased the price of Class I (beverage grade) milk according to the distance from Eau Claire, Wis., that it was sold.
Then, early last November, U.S. District Judge David Doty in Minnesota said USDA could no longer enforce the pricing system.
When chaos began setting in and faced with numerous appeals, Judge Doty in December stayed his own ruling until Feb. 15 - in effect giving USDA two months to come up with a replacement for Class I differentials. As of presstime, no plan had been proposed.
Despite being one of the organizations requesting a stay, the International Dairy Foods Assn. says, "The judge was correct in recognizing the unfair and archaic milk pricing system in this country. The secretary (of Agriculture) should hold emergency meetings to deal with this issue."
So now USDA has one short-term headache and two longer term ones. Regardless of Judge Doty's decision, the 1996 Federal Agriculture Improvement and Reform Act calls for the Dept. of Agriculture to gradually remove dairy price supports and to reform the milk marketing order system.
The Federal Milk Marketing Orders, a Depression-era system to assure a local milk supply in all areas of the United States and to pay producers a "pooled" price regardless of milk classification, must be reduced from the current 32 orders (geographic regions) to between 10 and 14 by April 1999.
"Reform of Federal Milk Marketing Orders is essential to allow the dairy industry to continue to move toward more market-based pricing and to build stronger markets for its products," says Connie Tipton, IDFA sr. v.p. "It will also allow for more innovation in product development and product use.
"In addition," she continues, "government definition of pricing based on product utilization could limit new product ideas. In the end, we believe producers, processors and consumers will all prosper through less regulation and more attention to the marketplace."