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Perspectives on Dairy Price Support Policy: Problems, Goals, and Tools
EDITOR’S NOTE: This is the
second in a series of nine articles
about dairy policy options for 1985.
Compiled by Jack Kirkland and
Blair Smith, Extension ag
economists at Penn State, the
articles are written by a variety of
national authorities on dairy policy
issues.
We are printing these articles to
help you better understand and
evaluate the policies and programs
the dairy industry faces. The first
two articles explain the current
situation, while the other seven
review policies and programs that
may be enacted to stabilize the
dairy industry.
We are also printing the series to
help you take a more effective
stand for the program you choose
to support. The 1985 Farm Bill has
the potential of being one of the
most important pieces of
legislation to the dairy sector since
1949. You can influence dairy
policy through your represen
tatives in Congress, your general
farm organization, your milk
marketing cooperative and your
political party.
For further information about
these articles or about dairy
policy, contact your Extension
agent.
BY ANDREW NOVAKOVIC
Cornell University
For the last three years policy
makers and industry participants
have tried to create dairy policy
within a political gridlock. Fun
damental questions lie at the
center of the traffic jam: Do policy
makers pursue individual or
common goals, and which
program will alleviate the
problems plaguing the dairy
sector?
Discussions of policy goals and
the implications of their options
are seldom prominent in dairy
policy debates. Whether or not
they address the goals explicitly or
implicitly in 1985, policy makers
will influence dairy policy that
could determine at how and how
well the dairy sector will adjust to
the technological and economic
changes it will undergo in the
future.
Problems and Goals Prior
to the 1980’s
The architects of New Deal
agricultural policy identified a key
farm problem-low prices. Their
one objective was to raise farm
prices to 100 percent of parity; a
goal originally sought through a
form of production controls. What
emerged by the late 1930 s was a
dairy policy that largely embraced
the goals and enforced the pricing
procedures that cooperatives could
not maintain on their own.
Federal orders enhanced the
bargaining power of farmers and
enforced a more equal distribution
of returns to farmers. Even so,
orders were not able to raise farm
prices and maintain secure
markets to the satisfaction of dairy
farm interests.
The next major attempt to raise
farm prices occurred during World
War II as part of a larger effort to
stimulate food production. After
the war, with the influx of young
men anxious to return to the farm,
it was deemed necessary to
legislate a permanent program
that helped to ensure adequate
returns and secure markets to
existing and new generations of
dairy farmers. The Agricultural
Act of 1949 authorized the
Secretary of Agriculture to support
farm prices at no less than 75
percent of parity and no more than
90 percent of panty. This defined in
practice, if not in principle, the
boundaries of adequate returns
and reasonable prices. Anything
more precise than that was left to
the discretion of the Secretary.
Stable and secure markets were
essentially guaranteed by the
manner in which farm prices were
supported. The USDA buys
manufactured dairy products at
wholesale prices designed to give
manufacturers enough money to
cover their costs and pay farmers
the equivalent of the support price.
In so doing the USDA not only
raises prices but also guarantees a
secure and essentially unlimited
outlet for market surpluses. To be
sure, not every farmer or
processor is guaranteed an outlet
for his or her product, but USDA’s
willingness to purchase any
quantity of Cheddar cheese, butter,
and nonfat dry milk at a given
price comes just one step short of
that.
From 1949 through 1978, under
the traditional purchase program,
annual net removals on a milk
equivalent basis averaged four
percent of total milk marketings.
This implies that the operational
goal of the support program is to
support farm prices slightly above
levels that would perfectly balance
commercial supply and demand,
resulting in a perennial but fairly
small surplus. It is evident that
both price enhancement and
stabilization have been important
goals in the administration of the
price support program, but prior to
1979, price enhancement goals
were clearly tempered by some
sensitivity to market conditions.
Policy goals across agriculture
shifted perceptibly during the
19705. Reliance on intervention
was replaced by faith m demand
induced growth stemming largely
from greater agricultural exports.
Although cash grain farmers
prospered during this period, dairy
farmers fared poorly as feed
prices increased while support
prices increased slowly and
reluctantly. Between 1973 and 1975,
domestic production was less than
commercial disappearance, im
port quotas were greatly expanded
to make up the shortfall, and net
removals averaged only one
percent of production. In 1976,
President Carter fulfilled a
campaign pledge to increase the
support price for milk. Congress
followed by enacting legislation in
1977 and 1979 that required milk
prices to be supported at no less
than 80 percent of parity, with
semi-annual adjustments. Thus,
the course was set for a level of
enhancement unparalleled in the
30-year history of the program.
the shift in the mid-1970s from a
very free, market-oriented policy
to one of enhancing farm milk
prices occurred primarily for
political reasons. Dairy farmers
who felt they had been short
changed during the Nixon ad
ministration convinced President
“In the 5 years we’ve been planting
Hardy, it’s been excellent.
That’s why we keep coming back.”
“We’ve been increasing our use of the end. We like the 802 X and 602 XS,
Hardy over the years, because in five too—excellent standability and dry
years we’ve had no problem at all. The down, and they’re good yielders. When
70IX gives us great yields. And it’s got you’re getting top yields, and a good
nice ears to it, filled out all the way to price, you stay with it!”
Carter and Congress that they
deserved compensating treatment.
High parity prices and cost data
convinced Congress that milk
prices were not keeping up with
production costs. Whatever
relationship these high parity
prices may have had to costs, they
proved to be totally inconsistent
with market supply and demand.
Parity had become unreliable as a
guide for setting support prices.
Current Problems and
Policy Goals
Since 1980 the dairy industry has
struggled to get back to the way
life used to be. Like the kitten in
the tree, getting back down is not
nearly as easy as getting up.
Congress has grappled with and
changed dairy policy each year
since 1980. Each new policy has
been a bit harsher than the prior
one. In April 1981, the semi-annual
price increase required under 1979
legislation was suspended. In
December 1981, support prices
were essentially severed from the
parity standard. Although not
related to parity, small annual
increases in support prices were
permitted in the 1981 Agriculture
and Food Act. In 1982 it became
apparent that even the first small
increase was unwarranted, given
growing surpluses.
See your local Hardy Brand dealer, or contact
For a Hardy Stand use Hardy Brand
Amendments were added to the
Omnibus Budget Reconciliation
Act of 1982 which froze the support
price at the level it had been since
October 1980 and the Secretary
was granted authority to directly
assess farmers to help offset some
of the program costs. Two
assessments of 50 cents per ctw. of
milk marketed were permitted.
The first was nonrefundable; the
second was refundable to farmers
who reduced their markets.
In November 1983, a four-point
compromise, reflecting each of the
major proposals that had been
advanced, was adopted. The Dairy
Production Stabilization Act
combined price cuts, a mandatory
assessment, a mandatory
promotion program funded by
farmer assessments, and a “milk
diversion program” which offered
cash payments to farmers who
agreed to market less milk than
they had during a base period. It
would appear that when surpluses
first began to grow, Congress tried
to do as little as possible, ad
dressing first the principal budget
concerns. By late 1983, Congress
was apparently ready to try a little
bit of everything.
(Turn to Page A 37)