Wednesday, April 23, 2014
If Congress fails to pass a farm bill by the end of the year, it will set off a cascade of events that could send milk prices in Maine as high as $6 a gallon, dairy industry and economic experts said.
Bottles of milk are lined up at Smiling Hill Farm in Westbrook on Thursday. The dairy version of a fiscal cliff looms, industry and economic experts say.
John Ewing/Staff Photographer
The prices of butter, cheese and ice cream also could increase significantly, they said.
However, they said that price increases would happen gradually, and only if the farm bill issue remains unresolved for an extended period.
There is a great deal of uncertainty about exactly how long it would take for dairy prices to increase if Congress fails to pass a farm bill or extend the current one, said Brian Gould, a professor in the Department of Agricultural and Applied Economics at the University of Wisconsin in Madison.
“We’ve never been in this situation before, so I don’t know what the dynamics are going to be,” Gould said.
The expected price increases would result from the dairy industry version of a fiscal cliff, he said.
The Agricultural Adjustment Act of 1938, which is still in effect today, states that unless a farm bill is enacted to supersede it, the federal government must agree to purchase certain agricultural products from their producers at set prices that are significantly higher than their current market value. The law’s effects are intentionally dire to ensure that Congress always passes a farm bill.
The higher prices for each agricultural product are based on a benchmark known as “parity” that is roughly equivalent to the market value of that product from 1909 to 1914, a time period in which farms prospered and prices were historically high.
The 1938 law remains on the books as a deterrent to letting the current farm bill expire without passing a new one. The current farm bill was passed in 2008, and expired in 2012, but was extended another year by Congress when a proposed 2012 update to the bill failed.
Each farm product covered by the law has its own parity price, Gould said. In the case of milk, the parity price is $49.60 per hundredweight, which is roughly 12 gallons, he said.
The 1938 law requires the federal government to purchase milk from farmers at no less than 75 percent of the parity price, which would be $37.20 per hundredweight, he said.
That’s nearly twice the current wholesale price of $21.30 per hundredweight of raw milk, Gould said.
It’s possible that the commercial market would have to match that higher government price in order to keep store shelves stocked with dairy products, he said.
However, that price only accounts for about half of what consumers pay at the grocery store for milk, he said. The rest of the cost, such as pasteurization, bottling, distribution and retail sales, would not change unless retailers exploited the crisis as an opportunity to boost their profits.
“It could go up dramatically, but not as much as at the farm,” Gould said.
The most likely scenario is that milk prices would top out at about 50 percent higher than they are today, said Gould, who recently completed a study of the likely economic impact of failing to pass a farm bill.
On Friday, milk prices in Portland ranged from about $3.50 to $4.50 per gallon at major grocery chains. Based on the average price of $4 per gallon, a 50 percent price increase would bring that average to $6 a gallon.
Shaw’s grocery store shoppers Barbara Cobb and Nancy McKeil said that price would be prohibitively expensive for them.
“I guess we would have to switch to powdered milk,” said Cobb, who lives in Portland.
“Or buy our own cow,” said McKeil, also of Portland.
Gould estimated that butter prices also could increase by as much as 50 percent, while cheese prices would increase by about 30 percent and ice cream would go up about 15 percent.
The more highly processed a dairy product is, the less its price would be affected by what the farmer is paid for the milk, he said.
According to a May 2013 study by the U.S. Department of Agriculture, the amount of dairy products consumed by the average American each day is equivalent to about 1.5 cups of milk, including 0.6 cups of liquid milk.
The total U.S. dairy consumption for a year is roughly equivalent to 550 cups, or 34.4 gallons, of milk per capita.
Given that high demand, reverting to the 1938 law might sound like a bonanza for dairy farmers, but Warren Knight of Smiling Hill Farm in Westbrook said he has no desire to see the farm bill fail.
“There are a lot of things in there that farmers count on,” he said.
Those things include government-backed insurance against failed crops, Knight said. Without that insurance, farmers might not be able to obtain short-term loans to buy seed or feed. That could put some farms out of business, he said.
“It can have tremendous implications for farmers,” Knight said.
It’s possible that dairy farmers would opt not to sell their products to the government at the higher price, Gould said, especially if they believed a solution to the farm bill crisis was close at hand.
Selling to the government would require a great deal of paperwork and some retooling of processing and packaging plants to meet specific federal requirements, he said.
“Believe me, the dairy industry does not want to sell to the feds,” Gould said.
For that reason, retail prices likely would begin to climb only if the impasse in Congress dragged on for weeks or months, he said.
The House and the Senate have each passed separate farm bills, and a conference committee is now trying to negotiate a compromise before the January deadline. Democrats and Republicans disagree on two key sticking points: How much to cut from the Supplemental Nutrition Assistance Program, often referred to as food stamps, and from a program that provides certain direct subsidies to farmers. Both programs have historically been included in the farm bill.
It is uncertain whether the committee will work out a deal by the end of next week, when the House hopes to adjourn for the holidays.
Maine Sens. Angus King, an independent, and Susan Collins, a Republican, both voted for the Senate version of the farm bill.
Maine Reps. Chellie Pingree and Mike Michaud, both Democrats, joined other members of their party in voting against the House version, in large part because of opposition to House Republicans’ decision to separate food stamps from the farm bill. House Republicans eventually passed a separate food stamps bill that would cut $40 billion over 10 years, compared to a proposed $4 billion cut in the Senate bill.
American Dairy Products Association board member Gary Cartwright said he believes Congress ultimately will pass a farm bill, but he is uncertain how much pain the average consumer will have to endure before that happens.
Cartwright, a professor of food, bioprocessing and nutrition at North Carolina State University in Raleigh, N.C., estimates that the average price of a gallon of milk would increase by about $1.60 if Congress fails to act, slightly less than Gould’s estimate.
Still, Cartwright said that increase would be sufficient to make U.S. consumers angry.
“If your milk goes up $1.60 across the board, people are not going to be happy about it,” he said.
Staff Writer Kevin Miller contributed to this story.
J. Craig Anderson can be contacted at 207-791-6390 or: