WASHINGTON, Dec. 24, 2012 – Sen. Patrick Leahy, D-Vt., warned the Senate Friday that milk “market chaos will erupt” if Congress fails to stop a permanent 1949 law from taking effect in January, setting off a chain of events that could double the prices of milk and dairy products.
Without a legislative fix before Jan. 1, USDA will be required to implement provisions of laws based on the parity ratio that have been suspended by successive farm bills since the 1960s. “The secretary of agriculture and his staff have been – quite literally – dusting off old paper files and mimeographed notes from the 1940s and 50s to review the Agricultural Act of 1949,” he says.
Because of House inaction on its own farm bill and “obstruction of the Senate bill,” Leahy adds, an “archaic law will force the federal government to spend billions of dollars to buy and store dairy products to help raise the price of fluid milk for dairy farmers.”
The law would require USDA to announce a support price for milk at no less than 75 percent of parity – the ratio of milk prices to production costs in 1910-14. With November parity at $52.10 for 100 pounds of milk, 75 percent would be $39.08, nearly four times the current support rate and about double today’s market price. The goal of the program would be to raise the price paid to the farmer with USDA’s offer to buy butter, cheese and milk powder at specified prices.
Higher prices not only would stimulate milk production but also draw “an influx of imported dairy products as processors in other countries would divert products to the U.S.,” Leahy says. “Economists at the USDA say that implementation of permanent law for dairy would cost at least $12 to $15 billion per year,” he adds, not including the cost of storing the products. “USDA may not have enough storage space, and once USDA fills every warehouse at its storage facility in Kansas City, it will have to bring the rest to Washington and fill every closet at the Department of Agriculture’s sprawling South Building with cheddar cheese and powdered milk.”
Leahy says the House leadership “has driven us straight to the edge of this dairy cliff and now is refusing to turn the wheel or put a foot on the brake. This is a pointless and dangerous game of chicken, dragging all Americans along for the ride. So rather than pass the Senate farm bill that saves $23 billion, the House is choosing to put the secretary of agriculture on a path to having to spend billions of dollars on dairy products, paying to store those products, and driving the price of milk through the ceiling for consumers. This is not even to mention the effects this could have on world prices and the harm it will cause for the vulnerable millions worldwide who rely on dairy products for their basic nutrition. That, in summary, is what the dairy cliff is all about.”
While Secretary of Agriculture Tom Vilsack has said that he will do what the law requires, several procedural steps could postpone or mitigate the market apocalypse Leahy describes. The first step is to announce the support level. The second is to announce the offer prices at which USDA’s Commodity Credit Corporation would buy cheese in barrels and blocks, butter and non-fat dry milk. The third step is to actually invite offers. Until then, “nothing happens to markets, other than perhaps rampant speculation,” says Andrew M. Novakovic, the Cornell agricultural economist who chaired Vilsack’s Dairy Industry Advisory Committee in 2010. “USDA could take a while to get all that machinery in motion,” he writes in a September paper [http://dairy.wisc.edu/PubPod/Pubs/IL12-06.pdf] speculating about the result of congressional inaction.
USDA has not been buying surpluses under the Dairy Product Price Support Program for several years, so it would take some time to gear up. Novakovic suggests that one time-consuming step would be to publish a proposed rule with a comment period on several technical matters. Such a rule also could stall at the Office of Management and Budget, known to move slowly. The animal identification rule that Vilsack announced last week languished in OMB since April.
“If the 1949 act really does come back into effect, I think that between USDA delays and industry sensibility about screwing up commercial markets, there won’t be any wild market effects before Congress comes back to its senses and stops the implementation of a new DPSP,” Novakovic says in an email. “There could be some heavy waves on the beach but no tsunami.”
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