It’s the end of the year, and Congress is fighting over a farm bill again, which can mean only one thing: ’tis the season for warnings that Americans could wake up in 2014 and suddenly be paying eight bucks for a gallon of milk. But while the prospect of milk doubling in price overnight makes for an attention-getting headline, it’s not what’s going to happen.
First, a quick history lesson: the U.S. Department of Agriculture (USDA) is required to buy butter, cheese and powdered milk to set a floor for milk prices. It acts kind of like the Federal Reserve, except instead of setting interest rates, the agency’s actions impact what we pay for a gallon of milk. The formula was adjusted over the years to balance what farmers make with how much consumers pay, and today’s rate expires with the current farm-bill extension at the end of the year.
If Congress does nothing, the status quo will revert back to the original 1949 law — which was based on a complex formula dating back to the pre–World War I era, when the earnings of rural farmers and city dwellers were much closer than they are today, says Marin Bozic, an assistant professor in dairy-foods-marketing economics at the University of Minnesota.
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This means the USDA would have to pay dairy farmers about twice as much as it does now. But that doesn’t mean $8 milk for a few reasons:
Congress will probably get its act together. We’ve been down this road before, and dire predictions of $8 milk came to naught. “This is Groundhog Day,” Bozic says. “We woke up, and there’s the same song on the radio. If we don’t get the new farm bill, we’ll get an extension.” Lawmakers can’t agree on much, but nobody wants to be responsible — or even perceived as being responsible — for an increase in dairy prices.
The USDA could drag its feet. “It is USDA’s purchases … that moves market prices, not a simple declaration by the secretary,” Cornell University agricultural-economics professor Andrew M. Novakovic wrote last year when Congress was wrangling over the farm bill. In practical terms, this means the agency could dawdle getting its ducks in a row. “USDA could take a while to get all that machinery in motion, while Congress presumably came to its senses and retroactively stopped it all,” he wrote.
There are commercial barriers. “I think that if it was much over a month you’d start to see some folks beginning to sell product to the government. But it would probably take at least that long,” University of Wisconsin at Madison director of dairy-policy analysis Mark Stephenson tells US News and World Report. Farmers would have to wait until their contracts with private-sector companies ran out before they could sell to the government, US News points out, and it would take a while to turn huge amounts of milk into butter, cheese and powdered milk if processors get inundated.
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Selling to Uncle Sam takes preparation. Even in the unlikely event that Congress doesn’t pass a new farm bill or an extension, it could be even longer — March or April — before the needle moves on milk prices, Bozic says. The USDA requires very precise specifications in packaging and labeling. “Nobody is preparing for this,” Bozic says, and it would probably take around six weeks for producers to start getting government-approved packaging materials. “We’re not talking hours and days here,” he says.
It’s not a straight pass-through. Only about 55% of what we pay to buy milk in grocery stores reflects the wholesale price, Bozic says. The rest is packaging, marketing, distribution and so on. So, even under a worst-case scenario in which the government paid twice as much to dairy farmers as they do now, we’d be talking about $5.25 milk, not $8. But even that is highly unlikely, he says.