Draft Dairy Reforms Would Hurt Consumers, Add Bureaucracy and Increase Taxes | Citizens Against Government Waste

Draft Dairy Reforms Would Hurt Consumers, Add Bureaucracy and Increase Taxes

The WasteWatcher

Draft legislation by House Agriculture Committee Ranking Member Collin Peterson (D-Minn.) proposes new dairy programs that will cost thousands of jobs and increase the price of milk and other dairy products. With high unemployment levels and families struggling to make ends meet, this is not what the nation needs.

U.S. dairy policy dates from the 1930s and remains loaded with Depression-era regulations that fail to serve taxpayers or the dairy industry. One relic is the 1930s-era Federal Milk Marketing Order (FMMO) system that prices fluid milk depending on its end uses and where in the country it is produced. The historical rationale for the system -- that metropolitan areas needed assurances of a local supply of fresh milk -- is long gone; it exists primarily to perpetuate the interests of its stakeholders.

Rep. Peterson’s bill, which is the legislative doppelganger of proposals being circulated by the same dairy co-ops who would benefit the most from the changes, not only fails to bring dairy policy into the twenty-first century, it makes it worse. In addition to making a complicated system even more convoluted, the so-called reform was designed to significantly raise milk prices. Ironically, Rep. Peterson’s draft bill is beginning to draw opposition from some dairy interests, in part because some feel it is insufficiently generous.

Even though U.S. Department of Agriculture (USDA) nutrition programs would help fewer people because milk prices will increase, don’t count on bureaucrats to complain. The USDA’s Agricultural Marketing Service, which administers the FMMO system, employs more than 350 people in 14 field offices at an annual cost of $48 million. Look for those numbers to go up if Rep. Peterson’s bill becomes law. Instead of potential savings of nearly $500 million over 10 years by eliminating redundant milk pricing regulations, the bill would spend that amount and much more.

The most onerous provision of Rep. Peterson’s bill is a new mandatory Dairy Market Stabilization Program (DMSP). The DMSP would increase dairy prices by limiting supply and attempting to increase demand. The supply would be limited through a new tax on farmers when they produce more than government-regulated quotas. A decline in dairy farmer profits would lead to an assessment on high-producing dairy farmers; half of the proceeds from those assessments would be turned over to a board of co-op representatives, who would increase demand by buying dairy products for government programs and engaging in promotional activities.

Less supply and more demand means that farm milk prices will increase, thereby restoring lost profits. In addition to being a gross intrusion into dairy markets, the DMSP penalizes farmers who have been expanding and growing their businesses, discourages innovation, and dings consumers, who will pay higher prices for fluid milk and dairy products. The co-ops have complained when opponents of the DMSP label this “assessment” as a tax; but when half of the revenues would go directly to the Treasury, by any measurement, that is a tax. The Congressional Budget Office (CBO) estimates that the DMSP will raise more than $1.1 billion over 10 years.

Consumer Prices and Nutrition Program Costs Will Rise

Experience in the European Union and Canada shows that “supply management” programs like the DMSP restrict growth, tamp down exports, and encourage imports. Since adopting milk quotas in the 1970s, Canada’s milk production has been essentially flat. However, according to the USDA’s most recent Census of Agriculture report, U.S. dairy production is up by 60 percent since the mid 1970s, mostly due to exports. Canadians also pay significantly more for their dairy products and milk than Americans.

The U.S. dairy market is mature and per capita consumption of fluid milk has steadily declined for 35 years, yet Rep. Peterson’s solution to declining sales is to rig artificially higher milk prices. The USDA will find itself in the uncomfortable position of encouraging milk consumption to fight calcium deficiencies while at the same time managing a program that increases the costs of dairy products to consumers and government nutrition programs.

Since it would periodically render the price of U.S. dairy products noncompetitive on world markets, the DMSP will cripple an industry whose exports grew from $1 billion in 2000 to $3.5 billion in 2010. The export outlook for dairy is currently excellent, but that window of opportunity will not stay open forever; U.S. competitors will fill the need if dairy reform proposals essentially mandate that the government can turn the domestic dairy industry’s milk spigot off. The dairy industry provides thousands of good jobs -- and thousands will be lost if DMSP raises milk prices as intended.

Significant milk price increases will affect all consumers, including millions of families and individuals on limited incomes in government nutrition programs, because retail milk prices follow farm milk prices. In addition, USDA adjusts the school milk subsidy annually to reflect increases in the Producer Price Index.

There has been a litany of similar “reform” efforts by Congress since the early 1980s – all of which have been versions of new taxes to offset dairy programs costs, curbs on production, or subsidies to farmers to produces less. None have worked, and all were quickly disbanded. In addition, the European Union and New Zealand are abandoning programs that simply did not work and compromised their ability to compete in the global dairy market.

Dairy co-ops, like other special interests, are proposing self-serving legislation. However, members of Congress should know better. Instead, lawmakers should support dairy reform plans that create jobs, reduce needless regulations, limit government revenues and encourage free markets, the exact opposite of the effect of Rep. Peterson’s bill.

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